<PAGE> 1
[TARGET LOGO]
TARGET PERSONALIZED INVESTING
FOR THOSE FOCUSED ON SUCCESS
THE TARGET
PORTFOLIO TRUST
PROSPECTUS: MAY 1, 1999
(Revised on May 27, 1999)
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Trust's shares, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[PRUDENTIAL INVESTMENTS LOGO]
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TABLE OF CONTENTS
1 Risk/Return Summary
1 Investment Objectives and Principal Strategies
4 Principal Risks
8 Evaluating Performance
18 Fees and Expenses
22 How the Portfolios Invest
22 Investment Objectives and Policies
29 Other Investments
31 Derivative Strategies
33 Additional Strategies
34 Investment Risks
40 How the Trust is Managed
40 Board of Trustees
40 Manager
41 Advisers and Portfolio Managers
46 Distributor
46 Year 2000 Readiness Disclosure
47 Portfolio Distributions and Tax Issues
47 Distributions
48 Tax Issues
50 If You Sell or Exchange Your Shares
51 How to Buy, Sell and Exchange Shares of the Trust
51 Introduction
54 How to Buy Shares
56 How to Sell Your Shares
57 How to Exchange Your Shares
59 Financial Highlights
69 Appendix I -- Description of Security Ratings
72 Appendix II -- Exemptions
For More Information (Back Cover)
The Target Portfolio Trust [TELEPHONE GRAPHIC](800) 225-1852
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RISK/RETURN SUMMARY
This section highlights key information about the investment portfolios (the
Portfolios) of THE TARGET PORTFOLIO TRUST (the Trust). Additional information
follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives and principal strategies for
each of the Portfolios. While we make every effort to achieve the investment
objective for each Portfolio, we can't guarantee success.
EQUITY PORTFOLIOS
LARGE CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is LONG-TERM CAPITAL APPRECIATION. This
means that we seek investments that will increase in value. To achieve our
investment objective, we purchase STOCKS OF LARGE COMPANIES we believe will
experience earnings growth at a rate faster than that of the Standard & Poor's
500(R) Stock Index (S&P 500).
LARGE CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN consisting of CAPITAL
APPRECIATION and DIVIDEND INCOME. This means that we seek investments that will
increase in value as well as pay the Portfolio dividends. To achieve our
objective, we invest in LARGE COMPANY STOCKS that we believe are undervalued,
given the company's sales, earnings, book value, cash flow and recent
performance.
SMALL CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is MAXIMUM CAPITAL APPRECIATION. This means
that we seek investments that will increase in value. To achieve our objective,
we invest in the STOCKS OF SMALL COMPANIES that we believe will experience
earnings growth at a rate faster than that of the U.S. economy in general.
SMALL CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is ABOVE-AVERAGE CAPITAL APPRECIATION. This
means that we seek investments that will increase in value. To achieve our
objective, we invest in STOCKS OF SMALL COMPANIES that we believe are
undervalued, given the company's sales, earnings, book value, cash flow and
recent performance.
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RISK/RETURN SUMMARY
INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's investment objective is CAPITAL APPRECIATION. This means that we
seek investments that will increase in value. To achieve this objective, we
purchase STOCKS OF FOREIGN COMPANIES. These companies may be based in developed
as well as developing countries. We may also invest in American Depositary
Receipts, American Depositary Shares, Global Depositary Receipts and European
Depositary Receipts, which are certificates representing an equity investment in
a foreign company.
INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO
The Portfolio's investment objective is HIGH TOTAL RETURN. This means that we
seek investments that will increase in value as well as pay income. To achieve
this objective, we invest primarily in HIGH GRADE FOREIGN DEBT OBLIGATIONS
issued by foreign governments, their agencies and instrumentalities, foreign
companies and financial institutions and by supranational organizations. These
obligations may include mortgage-related securities, including collateralized
mortgage obligations and stripped mortgage-backed securities. We may also invest
in asset-backed securities like automobile loans and credit card receivables. We
may also invest up to 25% of the Portfolio's assets in HIGH YIELD DEBT
OBLIGATIONS -- also known as "JUNK BONDS". The Portfolio is a NONDIVERSIFIED
FUND that generally may invest a higher percentage of its assets in the
securities of fewer issuers than a diversified fund.
2 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800)225-1852
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RISK/RETURN SUMMARY
TOTAL RETURN BOND PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN consisting of CURRENT
INCOME AND CAPITAL APPRECIATION. This means that we seek investments that will
pay income as well as increase in value. To achieve this objective, we invest in
DEBT OBLIGATIONS issued or guaranteed by the U.S. GOVERNMENT and its agencies,
as well as debt obligations issued by U.S. COMPANIES, FOREIGN COMPANIES AND
FOREIGN GOVERNMENTS and their agencies. The Portfolio may invest in
MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S. government entities,
and up to 25% of its assets in privately issued mortgage-related securities (not
issued or guaranteed by the U.S. Government). These investments may include
collateralized mortgage obligations and stripped mortgage-backed securities. We
may also invest in ASSET-BACKED SECURITIES like automobile loans and credit card
receivables. We normally invest at least 90% of the Portfolio's assets in
"investment grade" debt obligations -- rated at least BBB by Standard & Poor's
Ratings Group (S&P), Baa by Moody's Investors Service (Moody's), or the
equivalent by another major rating service -- and unrated debt obligations that
we believe are comparable in quality. However, we may invest up to 10% of the
Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS ("JUNK BONDS"). The
dollar-weighted average maturity of the Portfolio will be between four and
fifteen years.
INTERMEDIATE-TERM BOND PORTFOLIO
The Portfolio's investment objective is CURRENT INCOME and REASONABLE STABILITY
OF PRINCIPAL. To achieve this objective, we invest in DEBT OBLIGATIONS issued or
guaranteed by the U.S. GOVERNMENT and its agencies, as well as DEBT OBLIGATIONS
ISSUED BY U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS. The
Portfolio may invest in MORTGAGE-RELATED SECURITIES issued or guaranteed by U.S.
government entities, and up to 25% of its assets in privately issued
mortgage-related securities (not issued or guaranteed by the U.S. Government).
These investments may include collateralized mortgage obligations and stripped
mortgage-backed securities. We may also invest in ASSET-BACKED SECURITIES like
automobile loans and credit card receivables. We normally invest at least 90% of
the Portfolio's assets in "investment grade" debt obligations and unrated debt
obligations that we believe are comparable in quality. However, we may invest up
to 10% of the Portfolio's assets in HIGH YIELD DEBT OBLIGATIONS ("JUNK BONDS").
The dollar-weighted average maturity of the Portfolio will be between three and
ten years.
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RISK/RETURN SUMMARY
MORTGAGE BACKED SECURITIES PORTFOLIO
The Portfolio's primary investment objective is HIGH CURRENT INCOME and its
secondary investment objective is CAPITAL APPRECIATION, each to the extent
consistent with the PROTECTION OF CAPITAL. This means we seek investments that
will pay income and also increase in value, while attempting to reduce
volatility. To achieve these objectives, we normally invest primarily in
MORTGAGE-BACKED DEBT SECURITIES. These securities will usually be
mortgage-related securities issued or guaranteed by U.S. governmental agencies.
However, we may invest up to 25% of the Portfolio's total assets in privately
issued mortgage-related securities. Our investments in mortgage-related
securities may include collateralized mortgage obligations and stripped
mortgage-backed securities. We may also invest in ASSET-BACKED SECURITIES like
automobile loans and credit card receivables. We normally purchase debt
obligations that are rated at least A by Moody's or S&P, or the equivalent by
another major rating service, and unrated bonds we believe are comparable in
quality.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The Portfolio's investment objective is MAXIMUM CURRENT INCOME consistent with
the maintenance of LIQUIDITY and the PRESERVATION OF CAPITAL. To achieve this
objective, we invest primarily in SECURITIES ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT that mature in 13 months or less. While we make every effort to
achieve our investment objective and maintain a net asset value of $1 per share,
we can't guarantee that we will be successful. So far, the Portfolio's net asset
value per share has never deviated from $1.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Like any mutual
fund, an investment in a Portfolio could lose value, and you could lose money.
The following summarizes the principal risks of investing in the Portfolios.
EQUITY PORTFOLIOS
Since these Portfolios invest primarily in common stocks, there is the risk
that the price of a particular stock owned by a Portfolio could go down.
Generally, the stock price of large companies is more stable than the stock
price of smaller companies, but this is not always the case. In addition to an
4 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800)225-1852
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RISK/RETURN SUMMARY
individual stock losing value, the value of a market sector or of the equity
markets as a whole could go down. In addition, different parts of a market can
react differently to adverse issuer, market, regulatory, political and economic
developments. Also, since some of the Portfolios focus on either a growth or
value style, there is the risk that a particular style may be out of favor for a
period of time.
The SMALL CAPITALIZATION GROWTH and SMALL CAPITALIZATION VALUE PORTFOLIOS
invest primarily in stocks of smaller companies with a market capitalization of
under $1.5 billion. These companies usually offer a smaller range of products
and services than larger companies. They may also have limited financial
resources and may lack management depth. As a result, stocks issued by smaller
companies tend to fluctuate in value more than the stocks of larger, more
established companies.
The INTERNATIONAL EQUITY PORTFOLIO invests primarily in stocks of foreign
companies. Investing in foreign securities presents additional risks. See
"Investments in Foreign Securities" below.
INCOME PORTFOLIOS
The debt obligations in which these Portfolios invest are generally subject to
the risk that the issuer may be unable to make principal and interest payments
when they are due. There is also the risk that the securities could lose value
because of interest rate changes or a loss of confidence in the ability of the
borrower to pay back debt. Debt obligations are also subject to market risk,
which is the possibility that the market value of an investment may move up or
down and that its movement may occur quickly or unpredictably. Market risk may
affect an industry, a sector or the entire market. Debt obligations with longer
maturities typically offer higher yields, but are subject to greater price
shifts as a result of interest rate changes than debt obligations with shorter
maturities. The prices of debt obligations and a Portfolio's net asset value (or
share price) generally move in opposite directions.
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND AND
MORTGAGE BACKED SECURITIES PORTFOLIOS may invest in mortgage-related securities
and asset-backed securities, which are subject to prepayment risk. If these
securities are prepaid, a Portfolio may have to replace them with lower-yielding
securities. Stripped mortgage-backed securities are generally more sensitive to
changes in prepayment and interest rates than other mortgage-related securities.
Unlike mortgage-related securities, asset-backed securities are usually not
collaterlized.
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RISK/RETURN SUMMARY
The INTERNATIONAL BOND, TOTAL RETURN BOND AND INTERMEDIATE-TERM BOND
PORTFOLIOS may invest in non-investment grade securities -- also known as "junk
bonds" -- which have a higher risk of default and tend to be less liquid than
higher-rated securities. These Portfolios may also invest in debt obligations of
foreign issuers. Investing in foreign securities presents additional risks. See
"Investments in Foreign Securities" below. In addition, these Portfolios may
actively and frequently trade their portfolio securities.
The INTERNATIONAL BOND PORTFOLIO is a nondiversified fund, meaning that we
can invest a higher percentage of its assets in the securities of fewer issuers
than a diversified fund. Investing in a nondiversified portfolio involves
greater risk than investing in a diversified portfolio.
Although investments in mutual funds involve risk, investments in money
market funds like the U.S. GOVERNMENT MONEY MARKET PORTFOLIO are generally less
risky than investments in other types of funds. This is because the Portfolio
may only invest in high quality securities, limits the average maturity of its
portfolio to 90 days or less, and limits its ability to invest in any particular
security to those that mature in 13 months or less. For purposes of satisfying
the average maturity and maximum maturity requirements, securities with demand
features are treated as maturing on the date that the Portfolio can demand
repayment of the security. Although the Portfolio seeks to preserve the value of
your investment at $1 per share, it is possible to lose money by investing in
the Portfolio.
INVESTMENTS IN FOREIGN SECURITIES
Investing in foreign securities involves more risk than investing in
securities of U.S. issuers. Foreign markets, especially those in developing
countries, tend to be more volatile than U.S. markets and are generally not
subject to regulatory requirements comparable to those in the U.S. The amount of
income available for distribution may be affected by our foreign currency gains
or losses and certain hedging activities. There are special risks that may arise
with the introduction of the euro as the common currency of the European
Monetary Union. These risks include the possibility that computing, accounting
and trading systems will fail to recognize the euro, as well as the possibility
that the euro will cause markets to become more volatile. In addition, political
developments and changes in currency exchange rates may adversely affect the
value of a Portfolio's foreign securities.
* * *
6 THE TARGET PORTFOLIO TRUST [TELEPHONE] (800) 225-1852
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RISK/RETURN SUMMARY
In addition to the principal investment strategies discussed above, the
Portfolios may use risk management techniques to try to preserve assets or
enhance return. These strategies may present above-average risks. Derivatives
may not fully offset the underlying positions and this could result in losses to
a Portfolio that would not otherwise have occurred. Some of our investment
strategies involve additional risks. For example, the International Bond, Total
Return Bond, Intermediate-Term Bond and Mortgage Backed Securities Portfolios
may borrow from banks or through reverse repurchase agreements and dollar rolls
to take advantage of investment opportunities. This is known as using
"leverage." If a Portfolio borrows money to purchase securities and those
securities decline in value, then the value of the Portfolio's shares will
decline faster than if the Portfolio were not leveraged. For more information
about the risks associated with the Portfolios, see "How the Portfolios Invest
- -- Investment Risks."
An investment in a Portfolio is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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RISK/RETURN SUMMARY
EVALUATING PERFORMANCE
A number of factors -- including risk -- can affect how a Portfolio performs.
The following bar charts show each Portfolio's performance for each full
calendar year of operation. The bar charts and tables below demonstrate the risk
of investing in the Portfolios by showing how returns can change from year to
year and by showing how each Portfolio's average annual total returns compare
with those of a broad measure of market performance and/or a group of similar
mutual funds. Past performance does not mean that a Portfolio will achieve
similar results in the future.
LARGE CAPITALIZATION GROWTH PORTFOLIO
[ANNUAL RETURNS BAR CHART]
ANNUAL RETURNS
<TABLE>
<S> <C>
1994 -0.68%
1995 25.76%
1996 21.10%
1997 20.77%
1998 44.22%
</TABLE>
BEST QUARTER: 33.06% (4th quarter of 1998)
WORST QUARTER: -13.67% (3rd quarter of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
LARGE CAP GROWTH PORTFOLIO 44.22% 21.38% 17.48% (since 1-5-93)
S&P 500(2) 28.60% 24.05% 21.60% (since 1-5-93)
LIPPER AVERAGE(3) 22.91% 18.66% 17.34% (since 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee.
(2) The Standard & Poor's 500 Stock Index (S&P 500) -- an unmanaged index of 500
stocks of large U.S. companies -- gives a broad look at how stock prices
have performed. These returns do not include the effect of any sales
charges. These returns would be lower if they included the effect of sales
charges. Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Growth Funds category and does not include the effect of any sales
charges. Again, these returns would be lower if they included the effect of
sales charges. Source: Lipper, Inc.
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RISK/RETURN SUMMARY
LARGE CAPITALIZATION VALUE PORTFOLIO
ANNUAL RETURNS
[BAR CHART]
<TABLE>
<S> <C>
1994 2.18%
1995 32.08%
1996 19.17%
1997 29.80%
1998 10.25%
</TABLE>
BEST QUARTER: 14.53% (2nd quarter of 1997)
WORST QUARTER: -10.46% (3rd quarter of 1998)
AVERAGE ANNUAL RETURNS(1) (as of 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
LARGE CAP VALUE PORTFOLIO 10.25% 18.14% 15.38% (SINCE 1-5-93)
S&P 500(2) 28.60% 24.05% 21.60% (SINCE 1-5-93)
LIPPER AVERAGE(3) 15.61% 18.35% 17.16% (SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee.
(2) The Standard & Poor's 500 Stock Index (S&P 500) -- an unmanaged index of 500
stocks of large U.S. companies -- gives a broad look at how stock prices
have performed. These returns do not include the effect of any sales
charges. These returns would be lower if they included the effect of sales
charges. Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Growth & Income Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
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RISK/RETURN SUMMARY
SMALL CAPITALIZATION GROWTH PORTFOLIO
[BAR CHART]
ANNUAL RETURNS
<TABLE>
<S> <C>
1994 -2.19%
1995 24.62%
1996 18.88%
1997 20.85%
1998 2.55%
</TABLE>
BEST QUARTER: 22.49% (4th quarter of 1998)
WORST QUARTER: -24.41% (3rd quarter of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
SMALL CAP GROWTH PORTFOLIO 2.55% 12.42% 13.48%(SINCE 1-5-93)
RUSSELL 2000(2) -2.55% 11.87% 13.01%(SINCE 1-5-93)
LIPPER AVERAGE(3) -0.32% 12.87% 13.56%(SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee. Without the management fee waiver or
expense reimbursement in effect in 1993, the average annual returns would
have been lower.
(2) The Russell 2000 Index -- an unmanaged index of the stocks of the 2,000
smallest U.S. companies included in the Russell 3000 Index -- gives a broad
look at how the stock prices of smaller companies have performed. These
returns do not include the effect of any sales charges. These returns would
be lower if they included the effect of sales charges. Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Small Company Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
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RISK/RETURN SUMMARY
SMALL CAPITALIZATION VALUE PORTFOLIO
[BAR CHART]
ANNUAL RETURNS
<TABLE>
<S> <C>
1994 -11.03%
1995 19.21%
1996 21.75%
1997 29.98%
1998 - 6.62%
</TABLE>
BEST QUARTER: 16.85% (2nd quarter of 1997)
WORST QUARTER: -20.07% (3rd quarter of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
SMALL CAP VALUE PORTFOLIO -6.62% 9.42% 12.91%(SINCE 1-5-93)
RUSSELL 2000(2) -2.55% 11.87% 13.01%(SINCE 1-5-93)
LIPPER AVERAGE(3) -0.32% 12.87% 13.56%(SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses but do not reflect
the expense of the Target Program fee. Without the management fee waiver or
expense reimbursement in effect in 1993, the average annual returns would
have been lower.
(2) The Russell 2000 Index -- an unmanaged index of the stocks of the 2,000
smallest U.S. companies included in the Russell 3000 Index -- gives a broad
look at how the stock prices of smaller companies have performed. These
returns do not include the effect of any sales charges. These returns would
be lower if they included the effect of sales charges. Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Small Company Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
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RISK/RETURN SUMMARY
INTERNATIONAL EQUITY PORTFOLIO
[BAR CHART]
ANNUAL RETURNS
<TABLE>
<S> <C>
1994 0.18%
1995 15.38%
1996 15.25%
1997 10.60%
1998 15.49%
</TABLE>
BEST QUARTER: 18.03% (1st quarter of 1998)
WORST QUARTER: -17.53% (3rd quarter of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO 15.49% 11.22% 14.53% (SINCE 1-5-93)
EAFE(2) 20.33% 9.50% 13.10% (SINCE 1-5-93)
LIPPER AVERAGE(3) 13.05% 7.69% 12.27% (SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee.
(2) The Morgan Stanley Capital International (MSCI) EAFE (R) Index -- a
weighted, unmanaged index that reflects stock price movements in Europe,
Australasia and the Far East -- gives a broad look at how foreign stocks
have performed. These returns do not include the effect of any sales
charges. These returns would be lower if they included the effect of sales
charges. Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper International Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
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RISK/RETURN SUMMARY
INTERNATIONAL BOND PORTFOLIO
[BAR CHART]
ANNUAL RETURNS(*)
<TABLE>
<S> <C>
1995 14.66%
1996 4.45%
1997 -5.73%
1998 8.55%
</TABLE>
BEST QUARTER: 11.74% (1st quarter of 1995)
WORST QUARTER: -5.74% (1st quarter of 1997)
(*) Without the management fee waiver or expense reimbursement in effect
through 1995, the annual returns would have been lower.
AVERAGE ANNUAL RETURNS(1) (as of 12-31-98)
<TABLE>
<CAPTION>
1 YEAR SINCE INCEPTION
<S> <C> <C>
INTERNATIONAL BOND PORTFOLIO 8.55% 4.67% (SINCE 5-17-94)
WB INDEX(2) 17.79% 8.74% (SINCE 5-17-94)
LIPPER AVERAGE(3) 11.91% 8.38% (SINCE 5-17-94)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee. Without the management fee waiver or
expense reimbursement in effect through 1995, the average annual returns
would have been lower.
(2) The Salomon Smith Barney Non-U.S. World Government Bond Index (WB Index) --
an unmanaged index of approximately 600 high quality bonds issued in several
different currencies -- gives a broad look at how foreign bonds have
performed. These returns do not include the effect of any sales charges.
These returns would be lower if they included the effect of sales charges.
Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper International Income Funds category and does not include the effect
of any sales charges. Again, these returns would be lower if they included
the effect of sales charges. Source: Lipper, Inc.
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<PAGE> 16
RISK/RETURN SUMMARY
TOTAL RETURN BOND PORTFOLIO
ANNUAL RETURNS(*)
<TABLE>
<S> <C>
1994 - 3.54%
1995 19.63%
1996 5.02%
1997 9.23%
1998 8.28%
</TABLE>
BEST QUARTER: 6.32% (2nd quarter of 1995)
WORST QUARTER: -3.35% (1st quarter of 1994)
(*) Without the management fee waiver or expense reimbursement in effect
through 1995, the annual returns would have been lower.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
TOTAL RETURN BOND PORTFOLIO 8.28% 7.47% 7.93% (SINCE 1-5-93)
LGCI(2) 9.47% 7.30% 7.92% (SINCE 1-5-93)
LIPPER AVERAGE(3) 7.44% 7.13% 7.01% (SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee. Without the management fee waiver or
expense reimbursement in effect through 1995, the average annual returns
would have been lower.
(2) The Lehman Government/Corporate Index (LGCI) -- an unmanaged index of
publicly traded intermediate- and long-term government and corporate debt
with an average maturity of 10 years -- gives a broad look at how bonds have
performed. These returns do not include the effect of any sales charges.
These returns would be lower if they included the effect of sales charges.
Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Corporate Debt BBB Funds category and does not include the effect of
any sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
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<PAGE> 17
RISK/RETURN SUMMARY
INTERMEDIATE-TERM BOND PORTFOLIO
[BAR CHART]
ANNUAL RETURNS
<TABLE>
<S> <C>
1994 -2.23%
1995 16.87%
1996 5.22%
1997 8.57%
1998 7.09%
</TABLE>
BEST QUARTER: 5.79% (2nd quarter of 1995)
WORST QUARTER: -1.79% (1st quarter of 1994)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
INTERMEDIATE-TERM
BOND PORTFOLIO 7.09% 6.93% 7.34% (SINCE 1-5-93)
LIGC(2) 8.44% 6.60% 6.96% (SINCE 1-5-93)
LIPPER AVERAGE(3) 6.60% 5.58% 7.01% (SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee. Without the management fee waiver or
expense reimbursement in effect through 1993, the average annual returns
would have been lower.
(2) The Lehman Intermediate Government/Corporate Index (LIGC) -- an unmanaged
index of publicly traded U.S. Government bonds and investment grade
corporate bonds with maturities of up to 10 years -- gives a broad look at
how intermediate-term bonds have performed. These returns do not include the
effect of any sales charges. These returns would be lower if they included
the effect of sales charges. Source: Lipper, Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Intermediate Investment Grade Funds category and does not include the
effect of any sales charges. Again, these returns would be lower if they
included the effect of sales charges. Source: Lipper, Inc.
15
<PAGE> 18
RISK/RETURN SUMMARY
MORTGAGE BACKED SECURITIES PORTFOLIO
[BAR CHART]
ANNUAL RETURNS(*)
<TABLE>
<S> <C>
1994 -0.51%
1995 16.18%
1996 5.56%
1997 8.82%
1998 6.37%
</TABLE>
BEST QUARTER: 4.71% (1st quarter of 1995)
WORST QUARTER: -1.67% (1st quarter of 1994)
(*) Without the management fee waiver or expense reimbursement in effect
through 1995, the annual returns would have been lower.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
MORTGAGE BACKED
SECURITIES PORTFOLIO 6.37% 7.15% 7.45% (SINCE 1-5-93)
MORTGAGE INDEX(2) 6.99% 7.24% 7.20% (SINCE 1-5-93)
LIPPER AVERAGE(3) 6.08% 5.95% 6.15% (SINCE 1-5-93)
</TABLE>
(1) The Portfolio's returns are after deduction of expenses, but do not reflect
the expense of the Target Program fee. Without the management fee waiver or
expense reimbursement in effect through 1995, the average annual returns
would have been lower.
(2) The Salomon Smith Barney Mortgage Backed Security Index (Mortgage Index) --
an unmanaged index of 30- and 15-year mortgage-related securities issued by
U.S. Government agencies -- gives a broad look at how mortgage-backed
securities have performed. These returns do not include the effect of any
sales charges. These returns would be lower if they included the effect of
sales charges. Source: Bloomberg, L.P.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper U.S. Mortgage Funds category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Source: Lipper, Inc.
16 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800)225-1852
<PAGE> 19
RISK/RETURN SUMMARY
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
ANNUAL RETURNS
<TABLE>
<S> <C>
1994 3.79%
1995 5.25%
1996 4.53%
1997 4.95%
1998 4.88%
</TABLE>
BEST QUARTER: 1.36% (4th quarter of 1997)
WORST QUARTER: 0.67% (1st quarter of 1994)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION
<S> <C> <C> <C>
U.S. GOVERNMENT
MONEY MARKET PORTFOLIO 4.88% 4.69% 4.35% (SINCE 1-5-93)
LIPPER AVERAGE(2) 4.89% 4.72% 4.36% (SINCE 1-5-93)
</TABLE>
7-DAY YIELD(1) (AS OF 12-31-98)
<TABLE>
<S> <C>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO 4.51%
IBC AVERAGE(3) 4.53%
</TABLE>
(1) The Portfolio's returns and yield are after deduction of expenses, but do
not reflect the expense of the Target Program fee.
(2) The Lipper Average is based on the average return of all mutual funds in the
Lipper U.S. Government Money Funds category. Source: Lipper, Inc.
(3) The IBC Average is based upon the average yield of all mutual funds in the
International Business Communications Financial Data All Taxable Money
Market Fund category. Source: IBC/Donahue, Inc.
17
<PAGE> 20
RISK/RETURN SUMMARY
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold the shares of each Portfolio.
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
EQUITY PORTFOLIOS INCOME PORTFOLIOS
----------------- -----------------
<S> <C> <C>
Maximum sales charge (load) imposed on None None
purchases (as a percentage of offering price)
Maximum deferred sales charge (load) None None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed None None
on reinvested dividends and other distributions
Redemption fees None None
Exchange fee None None
Maximum annual Target Program fee(1) 1.25%/1.50%(2) 1.35%/1.00%(3)
</TABLE>
(1) The Target Program fee only applies to Target Program participants.
(2) The maximum Target Program fee is 1.25% for investors who invest in the
Portfolios through an Individual Retirement Account or a qualified employee
benefit plan (together, Plan investors). The maximum Target Program fee is
1.50% for non-Plan investors.
(3) The maximum Target Program fee is 1.35% for Plan investors and is 1.00% for
non-Plan investors.
18 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800)225-1852
<PAGE> 21
RISK/RETURN SUMMARY
EQUITY PORTFOLIOS
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM PORTFOLIO ASSETS)
<TABLE>
<S> <C>
LARGE CAPITALIZATION GROWTH PORTFOLIO
Management fees .60%
+ Distribution and service (12b-1) fees None
+ Other expenses .08%
= TOTAL ANNUAL FUND OPERATING EXPENSES .68%
LARGE CAPITALIZATION VALUE PORTFOLIO
Management fees .60%
+ Distribution and service (12b-1) fees None
+ Other expenses .11%
= TOTAL ANNUAL FUND OPERATING EXPENSES .71%
SMALL CAPITALIZATION GROWTH PORTFOLIO
Management fees .60%
+ Distribution and service (12b-1) fees None
+ Other expenses .17%
= TOTAL ANNUAL FUND OPERATING EXPENSES .77%
SMALL CAPITALIZATION VALUE PORTFOLIO
Management fees .60%
+ Distribution and service (12b-1) fees None
+ Other expenses .19%
= TOTAL ANNUAL FUND OPERATING EXPENSES .79%
INTERNATIONAL EQUITY PORTFOLIO
Management fees .70%
+ Distribution and service (12b-1) fees None
+ Other expenses .21%
= TOTAL ANNUAL FUND OPERATING EXPENSES .91%
</TABLE>
19
<PAGE> 22
RISK/RETURN SUMMARY
INCOME PORTFOLIOS
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM PORTFOLIO ASSETS)
<TABLE>
<S> <C>
INTERNATIONAL BOND PORTFOLIO
Management fees .50%
+ Distribution and service (12b-1) fees None
+ Other expenses 1.04%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.54%
TOTAL RETURN BOND PORTFOLIO
Management fees .45%
+ Distribution and service (12b-1) fees None
+ Other expenses .36%
= TOTAL ANNUAL FUND OPERATING EXPENSES .81%
INTERMEDIATE-TERM BOND PORTFOLIO
Management fees .45%
+ Distribution and service (12b-1) fees None
+ Other expenses .21%
= TOTAL ANNUAL FUND OPERATING EXPENSES .66%
MORTGAGE BACKED SECURITIES PORTFOLIO
Management fees .45%
+ Distribution and service (12b-1) fees None
+ Other expenses .25%
= TOTAL ANNUAL FUND OPERATING EXPENSES .70%
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Management fees .25%
+ Distribution and service (12b-1) fees None
+ Other expenses .30%
= TOTAL ANNUAL FUND OPERATING EXPENSES .55%
</TABLE>
20 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800)225-1852
<PAGE> 23
RISK/RETURN SUMMARY
FEES AND EXPENSES EXAMPLE
This example will help you compare the fees and expenses of the Portfolios and
the cost of investing in the Portfolios with the cost of investing in other
mutual funds.
The example assumes that you invest $10,000 in a Portfolio for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Portfolio's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
------ ------ ------ ------
<S> <C> <C> <C> <C>
LARGE CAPITALIZATION GROWTH PORTFOLIO $ 69 $ 218 $ 379 $ 847
LARGE CAPITALIZATION VALUE PORTFOLIO $ 73 $ 227 $ 395 $ 883
SMALL CAPITALIZATION GROWTH PORTFOLIO $ 79 $ 246 $ 428 $ 954
SMALL CAPITALIZATION VALUE PORTFOLIO $ 81 $ 252 $ 439 $ 978
INTERNATIONAL EQUITY PORTFOLIO $ 93 $ 290 $ 504 $1,120
INTERNATIONAL BOND PORTFOLIO $ 157 $ 486 $ 839 $1,834
TOTAL RETURN BOND PORTFOLIO $ 83 $ 259 $ 450 $1,002
INTERMEDIATE-TERM BOND PORTFOLIO $ 67 $ 211 $ 368 $ 822
MORTGAGE BACKED SECURITIES PORTFOLIO $ 72 $ 224 $ 390 $ 871
U.S. GOVERNMENT MONEY MARKET PORTFOLIO $ 56 $ 176 $ 307 $ 689
</TABLE>
21
<PAGE> 24
HOW THE PORTFOLIOS INVEST
INVESTMENT OBJECTIVES AND POLICIES
EQUITY PORTFOLIOS
LARGE CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is LONG-TERM CAPITAL APPRECIATION. This
means that we seek investments that we think will increase in value.
In pursuing our objective, we invest in STOCKS OF LARGE COMPANIES we
believe will experience earnings growth at a rate faster than that of the S&P
500. When we consider investing in a company's stock, we look at several factors
to evaluate the stock's growth potential, including the company's historical
profitability, the economic outlook for the company's industry, the company's
position in that industry, and the qualifications of company management. For
example, we may select a company's stock based on new products or services the
company is introducing. Dividend income is only an incidental consideration.
Generally, we will consider selling a security when we think it has achieved its
growth potential, or when we think we can find better growth opportunities. We
normally invest at least 80% of the Portfolio's total assets in common stocks,
and at least 65% of its total assets in common stocks of companies with a total
market capitalization of $5 billion or more (measured at the time of purchase).
LARGE CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN consisting of CAPITAL
APPRECIATION and DIVIDEND INCOME. This means that we seek investments that we
think will increase in value as well as pay the Portfolio dividends.
In pursuing our objective, we invest in STOCKS OF LARGE COMPANIES using a
VALUE INVESTMENT STYLE. That is, we invest in stocks that we believe are
undervalued and have an above-average potential to increase in price. We
consider a number of factors in choosing stocks, like a company's sales,
earnings, book value, cash flow, recent performance and the industry it's in. We
consider selling a stock if it has increased in value to the point where we no
longer consider it to be undervalued. We normally invest at least 80% of the
Portfolio's total assets in common stocks and securities convertible into common
stocks, and at least 65% of its total assets in common stocks of companies with
a total market capitalization of $5 billion or more (measured at the time of
purchase) that we think will pay regular dividends.
SMALL CAPITALIZATION GROWTH PORTFOLIO
The Portfolio's investment objective is MAXIMUM CAPITAL APPRECIATION. This means
that we seek investments that we think will increase in value.
22 The Target Portfolio Trust [TELEPHONE] (800)225-1852
<PAGE> 25
HOW THE PORTFOLIOS INVEST
In pursuing our objective, we invest in STOCKS OF SMALL COMPANIES we
believe will experience earnings growth at a rate faster than that of the U.S.
economy in general. When we consider investing in a company's stock, we look at
several factors to evaluate the stock's growth potential, including the
company's historical profitability, return on capital, the economic outlook for
the company's industry, the company's position in that industry, and the
qualifications of company management. For example, we may select a company's
stock based on new products or services the company is introducing. We do not
consider dividend income in selecting stocks for the Portfolio. Generally, we
will consider selling a security when we think it has achieved its growth
potential, or when we think we can find better growth opportunities. We normally
invest at least 65% of its total assets in common stocks of companies with a
total market capitalization of less than $1.5 billion (measured at the time of
purchase).
SMALL CAPITALIZATION VALUE PORTFOLIO
The Portfolio's investment objective is ABOVE-AVERAGE CAPITAL APPRECIATION. This
means that we seek investments that we think will increase in value.
In pursuing our objective, we invest in STOCKS OF SMALL COMPANIES using a
value investment style. That is, we invest in stocks that we believe are
undervalued and have an above average potential to increase in price. We
consider a number of factors in choosing stocks, like a company's sales,
earnings, book value, cash flow and recent performance. We also consider
dividend growth prospects in selecting stocks for the Portfolio. We consider
selling a stock if it has increased in value to the point where we no longer
consider it to be undervalued. We normally invest at least 80% of the
Portfolio's total assets in common stocks, and at least 65% of its total assets
in common stocks of companies with a total market capitalization of less than
$1.5 billion (measured at the time of purchase).
INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's investment objective is CAPITAL APPRECIATION. This means that we
seek investments that we think will increase in value.
In pursuing our objective, we invest in STOCKS of companies located in
FOREIGN COUNTRIES. We look for stocks that we believe are undervalued based on
their earnings, cash flow or asset values. We consider selling a stock if it has
increased in value to the point where we no longer consider it to be
undervalued. We may invest in stocks of companies in both developed and
developing countries. We normally invest at least 65% of the Portfolio's total
assets in stocks of companies in at least three foreign countries. The foreign
securities held by the Portfolio normally will be denominated in foreign
currencies, including the euro -- a multinational currency unit.
23
<PAGE> 26
HOW THE PORTFOLIOS INVEST
The Portfolio may also invest in AMERICAN DEPOSITARY RECEIPTS (ADRS),
AMERICAN DEPOSITARY SHARES (ADSS), GLOBAL DEPOSITARY RECEIPTS (GDRS) and
EUROPEAN DEPOSITARY RECEIPTS (EDRS). ADRs, ADSs, GDRs and EDRs are certificates
- -- usually issued by a bank or trust company -- that represent an equity
investment in a foreign company. ADRs and ADSs are issued by U.S. banks and
trust companies and are valued in U.S. dollars. EDRs and GDRs are issued by
foreign banks and trust companies and are usually valued in foreign currencies.
INCOME PORTFOLIOS
INTERNATIONAL BOND PORTFOLIO
The Portfolio's investment objective is HIGH TOTAL RETURN. This means that we
seek investments that we think will increase in value as well as pay income.
In pursuing our objective, we invest in HIGH GRADE FOREIGN DEBT OBLIGATIONS
issued or guaranteed by foreign governments, their agencies and
instrumentalities, foreign companies and financial institutions and by
supranational organizations. These obligations may include mortgage-related
securities, including collateralized mortgage obligations and stripped
mortgage-backed securities. We may also invest in asset-backed securities like
automobile loans and credit card receivables. We normally invest at least 75% of
the Portfolio's total assets in debt obligations rated A or better by S&P,
Moody's or another major rating service and unrated debt obligations that we
believe are comparable in quality. However, we may invest up to 25% of the
Portfolio's total assets in HIGH YIELD DEBT OBLIGATIONS -- also known as "JUNK
BONDS" -- rated at least B by S&P, Moody's or another major rating service and
unrated bonds we believe are comparable in quality. The Portfolio may continue
to hold an obligation even if it is later downgraded or no longer rated.
We normally invest at least 65% of the Portfolio's total assets in high
grade foreign bonds of issuers in at least three foreign countries. These
issuers may be in developed as well as developing countries. The ~foreign debt
obligations held by the Portfolio normally will be denominated ~in foreign
currencies, including the euro -- a multinational currency unit. The Portfolio
can also invest in debt obligations issued by the U.S. Government and its
agencies or by U.S. companies.
The Portfolio is a NONDIVERSIFIED FUND that generally may invest a higher
percentage of its assets in the securities of fewer issuers than a diversified
fund. This could make the value of the Portfolio's shares more volatile than the
shares of a diversified fund. In addition, economic, political or regulatory
24 The Target Portfolio Trust [TELEPHONE] (800) 225-1852
<PAGE> 27
HOW THE PORTFOLIOS INVEST
developments could have a greater impact on the Portfolio's share price than
would be the case if the Portfolio were diversified among more issuers.
TOTAL RETURN BOND PORTFOLIO
The Portfolio's investment objective is TOTAL RETURN consisting of CURRENT
INCOME and CAPITAL APPRECIATION. This means that we seek investments that we
think will pay income as well as increase in value.
In pursuing our objective, we invest primarily in DEBT OBLIGATIONS issued
or guaranteed by the U.S. GOVERNMENT and its agencies, as well as debt
obligations issued by U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS
and their agencies. The Portfolio can invest up to 20% of its assets in foreign
debt obligations.
The Portfolio invests in MORTGAGE-RELATED SECURITIES issued or guaranteed
by U.S. Government entities including securities issued by the Federal National
Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage
Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National
Mortgage Association (GNMA or "Ginnie Mae"). However, we may invest up to 25% of
the Portfolio's assets in privately issued mortgage-related securities (those
not issued or guaranteed by the U.S. Government). The mortgage-related
securities in which the Portfolio may invest may include COLLATERALIZED MORTGAGE
OBLIGATIONS and STRIPPED MORTGAGE-BACKED SECURITIES. We may also invest in
asset-backed securities.
We normally invest at least 65% of the Portfolio's total assets in bonds,
and at least 90% of its total assets in "investment grade" debt obligations --
debt obligations rated at least BBB by S&P, Baa by Moody's, or the equivalent by
another major rating service, and unrated debt obligations that we believe are
comparable in quality. However, we may invest up to 10% of the Portfolio's
assets in HIGH YIELD DEBT OBLIGATIONS -- also known as "JUNK BONDS" -- which are
rated at least B by S&P, Moody's or another major rating service, and unrated
debt obligations that we believe are comparable in quality. The Portfolio may
continue to hold an obligation even if it is later downgraded or no longer
rated.
The Portfolio's dollar-weighted average portfolio maturity will generally
be between four and fifteen years.
INTERMEDIATE-TERM BOND PORTFOLIO
The Portfolio's investment objective is CURRENT INCOME and REASONABLE ~STABILITY
OF PRINCIPAL. This means that we seek investments that we think will pay
dividends and other income, while attempting to reduce volatility.
25
<PAGE> 28
HOW THE PORTFOLIOS INVEST
In pursuing our objective, we invest in DEBT OBLIGATIONS issued or
guaranteed by the U.S. GOVERNMENT and its agencies, as well as debt obligations
issued by U.S. COMPANIES, FOREIGN COMPANIES AND FOREIGN GOVERNMENTS and their
agencies. The Portfolio may invest up to 20% of its assets in foreign debt
obligations.
The Portfolio invests in MORTGAGE-RELATED SECURITIES issued or guaranteed
by U.S. Government entities and up to 25% of its assets in privately issued
mortgage-related securities (those not issued or guaranteed by the U.S.
Government). These investments may include COLLATERALIZED MORTGAGE OBLIGATIONS
and stripped mortgage-backed securities. We may also invest in asset-backed
securities like automobile loans and credit card receivables.
We normally invest at least 65% of the Portfolio's total assets in bonds,
and at least 90% of its total assets in "investment grade" debt obligations --
debt obligations rated at least BBB by S&P, Baa by Moody's, or the equivalent by
another major rating service, and unrated bonds that we believe are comparable
in quality. However, we may invest up to 10% of the Portfolio's assets in HIGH
YIELD DEBT OBLIGATIONS -- also known as "JUNK BONDS" -- which are rated at least
B by S&P, Moody's or another major rating service, and unrated bonds that we
believe are comparable in quality. The Portfolio may continue to hold an
obligation even if it is later downgraded or no longer rated. The Portfolio's
dollar-weighted average maturity will generally be between three and ten years.
Mortgage Backed Securities Portfolio
The Portfolio's primary investment objective is HIGH CURRENT INCOME and its
secondary investment objective is CAPITAL APPRECIATION, each to the extent
consistent with the PROTECTION OF CAPITAL. This means we seek investments that
we think that will pay income and also increase in value, while attempting to
reduce volatility.
In pursuing these objectives, we normally invest at least 65% of the
Portfolio's total assets in MORTGAGE-BACKED DEBT SECURITIES. These securities
will usually be mortgage-related securities issued or guaranteed by U.S.
governmental agencies, including securities issued by the Federal National
Mortgage Association (FNMA or "Fannie Mae") or the Federal Home Loan Mortgage
Corporation (FHLMC or "Freddie Mac") or guaranteed by the Government National
Mortgage Association (GNMA or "Ginnie Mae"). However, we may invest up to 25% of
the Portfolio's total assets in privately issued mortgage-related securities
(which are not guaranteed by the U.S. Government). The mortgage-related
securities in which the Portfolio invests include COLLATERALIZED MORTGAGE
OBLIGATIONS issued by U.S. Government-related entities and by private issuers
and STRIPPED MORTGAGE-BACKED SECURITIES. We
26 The Target Portfolio Trust [TELEPHONE] (800) 225-1852
<PAGE> 29
HOW THE PORTFOLIOS INVEST
may also invest in ASSET-BACKED SECURITIES like automobile loans and credit
card receivables.
We normally purchase mortgage-related securities that are rated at least
A by Moody's or S&P, or the equivalent by another major rating service, and
unrated bonds we believe are comparable in quality. The Portfolio may continue
to hold an obligation even if it is later downgraded or no longer rated.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The Portfolio's investment objective is MAXIMUM CURRENT INCOME consistent with
the maintenance of LIQUIDITY and the PRESERVATION OF CAPITAL. This means that we
seek income-producing investments with the credit quality and liquidity to
preserve the value of the Portfolio's shares. Because we seek to maintain the
value of the Portfolio's shares at $1, we manage the Portfolio to comply with
specific regulations designed for money market funds.
In pursuing our objective, we invest exclusively in U.S. dollar denominated
SECURITIES ISSUED OR GUARANTEED BY THE U.S. GOVERNMENT that mature in ~13 months
or less and REPURCHASE AGREEMENTS relating to those securities.
While we make every effort to maintain a net asset value of $1 per share,
we can't guarantee that we will always be successful. So far, the Portfolio's
net asset value per share has never deviated from $1.
* * *
In choosing portfolio securities, the investment advisers to the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios consider economic conditions and interest rate
fundamentals and, for foreign debt securities, country and currency selection.
The investment advisers also evaluate individual debt securities within each
fixed-income sector based upon their relative investment merit and consider
factors such as yield, duration and potential for price or currency appreciation
as well as credit quality, maturity and risk.
* * *
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Portfolios, Their Investments and
Risks." The Statement of Additional Information -- which we refer to as the SAI
- -- contains additional information about the Portfolios. To obtain a copy, see
the back cover page of this prospectus.
Although we make every effort to achieve each Portfolio's objective, we
can't guarantee success. Each Portfolio's investment objective is a fundamental
policy that cannot be changed without shareholder approval. The Board of the
Trust can change investment policies that are not fundamental.
27
<PAGE> 30
HOW THE PORTFOLIOS INVEST
MORTGAGE-RELATED SECURITIES
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and MORTGAGE
BACKED SECURITIES PORTFOLIOS may each invest in MORTGAGE-RELATED SECURITIES
issued or guaranteed by U.S. governmental entities or private issuers. In
addition, the International Bond Portfolio may invest in mortgage-related
securities issued or guaranteed by foreign governmental entities. These
securities are usually pass-through instruments that pay investors a share of
all interest and principal payments from an underlying pool of fixed or
adjustable rate mortgages. Mortgage-related securities issued by the U.S.
Government or its agencies include FNMAs, GNMAs and debt securities issued by
the FHLMC. The U.S. Government or the issuing agency directly or indirectly
guarantees the payment of interest and principal on these securities, but not
their value. Private mortgage-related securities that are not guaranteed by U.S.
governmental entities generally have one or more types of credit enhancement to
ensure timely receipt of payments and to protect against default.
Mortgage pass-through securities include collateralized mortgage
obligations, multi-class pass-through securities and stripped mortgage-backed
securities. A COLLATERALIZED MORTGAGE OBLIGATION (CMO) is a security backed by
an underlying portfolio of mortgages or mortgage-backed securities that may be
issued or guaranteed by a bank or by U.S. governmental entities. A MULTI-CLASS
PASS-THROUGH SECURITY is an equity interest in a trust composed of underlying
mortgage assets. Payments of principal and interest on the mortgage assets and
any reinvestment income thereon provide the funds to pay debt service on the CMO
or to make scheduled distributions on the multi-class pass-through security. A
STRIPPED MORTGAGE-BACKED SECURITY (MBS STRIP) may be issued by U.S. governmental
entities or by private institutions. MBS strips take the pieces of a debt
security (principal and interest) and break them apart. The resulting securities
may be sold separately and may perform differently.
The values of mortgage-backed securities vary with changes in market
interest rates generally and in yields among various kinds of mortgage-related
securities. Such values are particularly sensitive to changes in prepayments of
the underlying mortgages. For example, during periods of falling interest rates,
prepayments tend to increase as homeowners and others refinance their
higher-rate mortgages; these prepayments reduce the anticipated duration of the
mortgage-related securities. Conversely, during periods of rising interest
rates, prepayments can be expected to decline, which has the effect of extending
the anticipated duration at the same time that the value of the securities
declines. MBS strips tend to be even more highly sensitive to changes in
prepayment and interest rates than mortgage-related securities and CMOs
generally.
28 THE TARGET PORTFOLIO TRUST [TELEPHONE] (800) 225-1852
<PAGE> 31
HOW THE PORTFOLIOS INVEST
ASSET-BACKED SECURITIES
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and MORTGAGE
BACKED SECURITIES PORTFOLIOS may each invest in ASSET-BACKED DEBT SECURITIES. An
asset-backed security is another type of pass-through instrument that pays
interest based upon the cash flow of an underlying pool of assets, such as
automobile loans and credit card receivables. Unlike mortgage-related
securities, asset-backed securities are usually not collateralized.
OTHER INVESTMENTS
In addition to their principal strategies, we may also use the following
investment strategies to increase the Portfolios' returns or protect their
assets if market conditions warrant.
MONEY MARKET INSTRUMENTS
Each Portfolio may invest in high quality MONEY MARKET INSTRUMENTS. Money market
instruments include the commercial paper of U.S. and foreign corporations,
obligations of U.S. and foreign banks, certificates of deposit and obligations
issued or guaranteed by the U.S. Government or its agencies or a foreign
government. The U.S. GOVERNMENT MONEY MARKET PORTFOLIO will normally limit its
investments in these instruments to securities issued or guaranteed by the U.S.
Government or its agencies.
All Portfolios except the International Bond Portfolio will generally
purchase money market instruments in one of the two highest short-term quality
ratings of a major rating service. The INTERNATIONAL BOND PORTFOLIO will only
purchase money market instruments in the highest short-term quality rating of a
major rating service. The Portfolios may also invest in money market instruments
that are not rated, but which we believe are of comparable quality to the
instruments described above.
U.S. GOVERNMENT SECURITIES
The Portfolios may invest in DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY.
Treasury securities have varying interest rates and maturities, but they are all
backed by the full faith and credit of the U.S. Government.
The Portfolios may also invest in other DEBT OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT and government-related entities. Some of these
debt securities are backed by the full faith and credit of the U.S. Government,
like GNMA obligations. Debt securities issued by other government entities, like
obligations of FNMA and SLMA, are not backed by the full faith and credit of the
U.S. Government. However, these issuers have the right to borrow from the U.S.
Treasury to meet their obligations. In contrast, the debt securities of other
issuers, like the Farm Credit System, depend entirely upon their own resources
to repay their debt.
29
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HOW THE PORTFOLIOS INVEST
The U.S. Government sometimes "strips" its debt obligations into their
component parts: the U.S. Government's obligation to make interest payments and
its obligation to repay the amount borrowed. These STRIPPED SECURITIES are sold
to investors separately. Stripped securities do not make periodic interest
payments. They are usually sold at a discount and then redeemed for their face
value on their maturity dates. These securities increase in value when interest
rates fall and lose value when interest rates rise. However, the value of
stripped securities generally fluctuates more in response to interest rate
movements than the value of traditional debt obligations. A Portfolio may try to
earn money by buying stripped securities at a discount and either selling them
after they increase in value or holding them until they mature.
DEBT OBLIGATIONS
In addition to their principal investments, the Large Capitalization Value,
Small Capitalization Value and International Equity Portfolios may invest in
debt obligations issued by U.S. and foreign companies that are rated at least A
by S&P or by Moody's or the equivalent by another major rating service. The
Large Capitalization Value and Small Capitalization Value Portfolios may also
invest in asset-backed securities from time to time. See "Asset-Backed
Securities" above.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of a Portfolio's assets in money market
instruments or U.S. Government securities. Investing heavily in these securities
limits our ability to achieve capital appreciation, but can help to preserve a
Portfolio's assets when the markets are unstable.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The TOTAL RETURN BOND, INTERMEDIATE-TERM BOND AND MORTGAGE BACKED SECURITIES
PORTFOLIOS may each enter into REVERSE REPURCHASE AGREEMENTS and DOLLAR ROLLS.
When a Portfolio enters into a reverse repurchase agreement, the Portfolio
borrows money on a temporary basis by selling a security with an obligation to
repurchase it at an agreed-upon price and time.
When a Portfolio enters into a dollar roll, the Portfolio sells securities
to be delivered in the current month and repurchases substantially similar (same
type and coupon) securities to be delivered on a specified future date by the
same party. The Portfolio is paid the difference between the current sales price
and the forward price for the future purchase as well as the interest earned on
the cash proceeds of the initial sale.
30 THE TARGET PORTFOLIO TRUST [TELEPHONE] (800) 225-1852
<PAGE> 33
HOW THE PORTFOLIOS INVEST
SHORT SALES
The MORTGAGE BACKED SECURITIES PORTFOLIO may make SHORT SALES of a security.
This means that the Portfolio may sell a security that it does not own when we
think the value of the security will decline. The Portfolio generally borrows
the security to deliver to the buyer in a short sale. The Portfolio must then
buy the security at its market price when the borrowed security must be returned
to the lender. Short sales involve costs and risks. The Portfolio must pay the
lender interest on the security it borrows, and the Portfolio will lose money if
the price of the security increases between the time of the short sale and the
date when the Portfolio replaces the borrowed security. The Portfolio may also
make SHORT SALES "AGAINST THE BOX." In a short sale against the box, at the time
of sale, the Portfolio owns or has the right to acquire the identical security
at no additional cost. When selling short against the box, the Portfolio gives
up the opportunity for capital appreciation in the security.
REPURCHASE AGREEMENTS
Each Portfolio may also use REPURCHASE AGREEMENTS, where a party agrees to sell
a security to the Portfolio and then repurchase it at an agreed-upon price at a
stated time. A repurchase agreement is like a loan by a Portfolio to the other
party that creates a fixed return for the Portfolio.
CONVERTIBLE SECURITIES
Each Portfolio other than the U.S. Government Money Market Portfolio may also
invest in CONVERTIBLE SECURITIES. These are securities -- like bonds, corporate
notes and preferred stock -- that we can convert into the company's common stock
or some other equity security.
DERIVATIVE STRATEGIES
The INTERNATIONAL EQUITY, INTERNATIONAL BOND, TOTAL RETURN BOND,
INTERMEDIATE-TERM BOND and MORTGAGE-BACKED SECURITIES PORTFOLIOS may each use
various derivative strategies to try to improve the Portfolio's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Portfolio will not lose money. The derivatives in which
these Portfolios may invest include FUTURES, OPTIONS AND OPTIONS ON FUTURES. In
addition, each of these Portfolios, except the Mortgage Backed Securities
Portfolio, may enter into FOREIGN CURRENCY EXCHANGE CONTRACTS and purchase
COMMERCIAL PAPER THAT IS INDEXED TO FOREIGN CURRENCY EXCHANGE RATES. Because the
International Equity and International Bond Portfolios
31
<PAGE> 34
HOW THE PORTFOLIOS INVEST
invest a large percentage of their assets in securities denominated in foreign
currencies, we may use "CURRENCY HEDGES" to help protect the Portfolios' NAVs
from declining if a particular foreign currency were to decrease in value
against the U.S. dollar.
Derivatives involve costs and can be volatile. With derivatives, the
investment adviser tries to predict whether the underlying investment -- a
security, market index, currency, interest rate or some other benchmark -- will
go up or down at some future date. We may use derivatives to try to reduce risk
or to increase return consistent with a Portfolio's overall investment
objective. The investment adviser will consider other factors (such as cost) in
deciding whether to employ any particular strategy or use any particular
instrument. Any derivatives we use may not match a Portfolio's underlying
holdings. For more information about these strategies, see the SAI, "Description
of the Portfolios, Their Investments and Risks -- Risk Management and Return
Enhancement Strategies."
OPTIONS
The International Equity, International Bond, Total Return Bond,
Intermediate-Term Bond and Mortgage-Backed Securities Portfolios may purchase
and sell put and call options on securities and currencies traded on U.S. or
foreign securities exchanges or in the over-the-counter market. An option is the
right to buy or sell securities in exchange for a premium. The options may be on
debt securities, aggregates of debt securities, financial indexes and U.S.
Government securities. The Portfolios will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS;FOREIGN CURRENCY FORWARD CONTRACTS
The International Equity, International Bond, Total Return Bond,
Intermediate-Term Bond and Mortgage Backed Securities Portfolios may purchase
and sell financial futures contracts and related options on debt securities,
aggregates of debt securities, currencies, financial indexes or U.S. Government
securities. A futures contract is an agreement to buy or sell a set quantity of
underlying product at a future date or to make or receive a cash payment based
on the value of a securities index. The International Equity, International
Bond, Total Return Bond, and Intermediate-Term Bond Portfolios also may enter
into foreign currency forward contracts to protect the value of their assets
against future changes in the level of foreign currency exchange rates. A
foreign currency forward contract is an obligation to buy or sell a given
currency on a future date and at a set price.
32 THE TARGET PORTFOLIO TRUST [TELEPHONE] (800) 225-1852
<PAGE> 35
HOW THE PORTFOLIOS INVEST
ADDITIONAL STRATEGIES
The Portfolios may also use additional strategies, such as purchasing debt
securities on a WHEN-ISSUED or DELAYED-DELIVERY basis. When a Portfolio makes
this type of purchase, the price and interest rate are fixed at the time of
purchase, but delivery and payment for the debt obligations take place at a
later time. The Portfolio does not earn interest income until the date the debt
obligations are delivered.
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and
MORTGAGE BACKED SECURITIES PORTFOLIOS may each enter into INTEREST RATE SWAP
TRANSACTIONS. In a swap transaction, a Portfolio and another party "trade"
income streams. The swap is done to preserve a return or spread on a particular
investment or portion of a Portfolio or to protect against any increase in the
price of securities the Portfolio anticipates purchasing at a later date.
The Portfolios also follow certain policies when they BORROW MONEY (the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios can each borrow up to 331/3% of the value of its
total assets, while the other Portfolios may each borrow up to 20% of the value
of its total assets); and hold ILLIQUID SECURITIES (each Portfolio except the
U.S. Government Money Market Portfolio may hold up to 15% of its net assets, and
the U.S. Government Money Market Portfolio may hold up to 10% of its net assets,
in illiquid securities, including securities with legal or contractual
restrictions, those without a readily available market and repurchase agreements
with maturities longer than seven days).
Each Portfolio is subject to certain investment restrictions that are
fundamental policies, which means they cannot be changed without shareholder
approval. For more information about these restrictions, see the SAI.
PORTFOLIO TURNOVER
As a result of the strategies described above, the International Bond,
Total Return Bond and Intermediate-Term Bond Portfolios may have an annual
portfolio turnover rate of over 100%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher brokerage commissions and other transaction costs and can
affect a Portfolio's performance. It can also result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
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<PAGE> 36
HOW THE PORTFOLIOS INVEST
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Portfolios is no
exception. Since a Portfolio's holdings can vary significantly from broad market
indexes, performance of the Portfolios can deviate from performance of the
indexes. This chart outlines the key risks and potential rewards of the
Portfolios' principal investments and certain other investments the Portfolios
may make. See, too, "Description of the Portfolios, Their Investments and Risks"
in the SAI.
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
COMMON STOCKS - Individual stocks - Historically, stocks have
could lose value outperformed other
Large Cap Growth, investments over the
Large Cap Value, - The equity markets could long term
Small Cap Growth and go down, resulting in a
Small Cap Value decline in value of a - Generally, economic
Portfolios Portfolio's investments growth means higher
corporate profits,
- Companies that pay which leads to an
At least 80% dividends may not do increase in stock
so if they don't prices, known as
have profits or capital appreciation
International adequate cash flow
Equity Portfolio - May be a source of
- Changes in economic or dividend income
political conditions,
both domestic and
At least 65% international, may
result in a decline in
value of a Portfolio's
investments
- ----------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION - Stocks of small companies - Highly successful smaller
STOCKS (market capi- are more volatile and may companies can outperform
talization below decline more than those in larger ones
$1.5 billion) the S&P 500 Index
Small Cap Growth and - Small companies are more
Small Cap Value likely to reinvest earnings
Portfolios and not pay dividends
At least 65% - Changes in interest
rates may affect the
International Equity securities of small
Portfolio companies more than
the securities of
Percentage varies larger companies
</TABLE>
34 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 37
HOW THE PORTFOLIOS INVEST
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEBT OBLIGATIONS - A Portfolio's share price, - Bonds have generally
yield and total return will outperformed money market
Large Cap Value and fluctuate in response to bond instruments over the long
Small Cap Value market movements term with less risk than
Portfolios stock
- Credit risk -- the default of
Up to 20% an issuer would leave a - Most bonds will rise in value
Portfolio with unpaid when interest rates fall
interest or principal. The
International Equity lower a bond's quality, the - Regular interest income
Portfolio higher its potential
volatility - Generally more secure than
Up to 35% stock since companies must
- Market risk -- the risk that pay their debts before paying
International Bond the market value of an stockholders
Portfolio investment may move up or
down, sometimes rapidly or - Investment-grade bonds have a
Up to 100% unpredictably. Market risk lower risk of default.
may affect an industry, a
Total Return Bond sector, or the market as a - Bonds with longer maturity
and Intermediate-Term whole dates typically have higher
Bond Portfolios yields
- Interest rate risk -- the
Up to 100% value of most bonds will fall - Intermediate-term securities
when interest rates rise; the may be less susceptible to
Mortgage Backed longer a bond's maturity and loss of principal than longer
Securities Portfolio the lower its credit quality, term securities
the more its value typically
Up to 100% falls. It can lead to price
volatility, particularly for
junk bonds and stripped
securities
- ------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES - Foreign markets, economies - Investors can participate
and political systems may in foreign markets and
not be as stable as in the invest in companies operating
International Equity U.S., particularly those in in those markets
and International developing countries
Bond Portfolios - Changing value of foreign
- Currency risk -- changing currencies
Up to 100% value of foreign currencies
- Opportunities for
Total Return Bond and - May be less liquid than diversification
Intermediate-Term Bond U.S. stocks and bonds
Portfolios - Principal and interest on
- Differences in foreign foreign government securities
Up to 20% laws, accounting standards, may be guaranteed
public information, custody
and settlement practices
- Year 2000 conversion may be
more of a problem for some
foreign issuers
- Not all government securities
are insured or guaranteed by the
government, but only by the
issuing agency
</TABLE>
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HOW THE PORTFOLIOS INVEST
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT - Not all are insured or - Regular interest income
SECURITIES guaranteed by the U.S.
Government, but only by the - The U.S. Government
U.S. Government Money issuing agency guarantees interest and
Market Portfolio principal payments on
- Limits potential for certain securities.
Up to 100% capital appreciation
- Generally more secure than
Other Portfolios - Market risk lower quality debt
securities and equity
Percentage varies, and - Interest rate risk securities
up to 100% on
a temporary basis
- May preserve a
Portfolio's assets
- ---------------------------------------------------------------------------------------------------------
MONEY MARKET - U.S. Government money market - May preserve a Portfolio's
INSTRUMENTS securities offer a lower yield assets
than lower-quality or longer-
U.S. Government Money term securities
Market Portfolio
- Limits potential for
Up to 100% capital appreciation
Other Portfolios - Credit risk
Up to 100% on - Market risk
a temporary basis
- ---------------------------------------------------------------------------------------------------------------
MORTGAGE-RELATED - Prepayment risk -- the risk - Regular interest income
SECURITIES that the underlying
mortgage may be prepaid - The U.S. Government
partially or completely, guarantees interest and
generally during periods of principal payments on
International Bond, falling interest rates, certain securities
Total Return Bond which could adversely
and Intermediate-Term affect yield to maturity - May benefit from security
Bond Portfolios and could require a interest in real estate
Portfolio to reinvest in collateral
lower-yielding securities.
Percentage varies - Pass-through instruments
- Credit risk -- the risk provide greater
Mortgage Backed that the underlying diversification than direct
Securities Portfolio mortgages will not be paid ownership of loans
by debtors or by credit
Up to 100% insurers or guarantors of
such instruments. Some
private mortgage securities
are unsecured or secured by
lower-rated insurers or
guarantors and thus may
involve greater risk
- Market risk
- Interest rate risk
</TABLE>
36 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 39
HOW THE PORTFOLIOS INVEST
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HIGH YIELD DEBT SECURITIES - Higher credit risk than - May offer higher interest
(JUNK BONDS) higher-grade debt securities income than higher-grade
debt securities and higher
potential gains
International Bond - Higher market risk than
Portfolio higher-grade debt securities
- More volatile than
higher-grade debt securities
Up to 25% - May be more illiquid
(harder to value and sell),
Total Return Bond in which case valuation
and Intermediate-Term would depend more on
Bond Portfolios investment adviser's
judgment than is generally
Up to 10% the case with higher-rated
securities
- -------------------------------------------------------------------------------------------------------
ASSET-BACKED - Prepayment risk - Regular interest income
SECURITIES
- The security interest in - Prepayment risk is
the underlying collateral generally lower than with
Large Cap Value, may not be as great as with mortgage-related securities
Small Cap Value, mortgage-related securities
International Bond, - Pass-through instruments
Total Return Bond, - Credit risk -- the risk provide greater
Intermediate-Term that the underlying diversification than direct
Bond and Mortgage receivables will not be ownership of loans How the
Backed Securities paid by debtors or by
Portfolios credit insurers or
guarantors of such
instruments. Some
Percentage varies asset-backed securities are
unsecured or secured by
lower-rated insurers or
guarantors and thus may
involve greater risk
- Market risk
- Interest rate risk
DERIVATIVES - Derivatives such as futures, - A Portfolio could make
options and foreign currency money and protect against
exchange contracts may not losses if the investment
fully offset the underlying analysis proves correct
International Equity, positions and this could
International Bond, result in losses to the - One way to manage a Portfolio's
Total Return Bond, Portfolio that would not risk/return balance by locking
Intermediate-Term Bond have otherwise occurred in the value of an investment
and Mortgage Backed ahead of time.
Securities Portfolios - Derivatives used for risk
management may not have the - Derivatives that involve leverage
intended effects and may could generate substantial gains
Percentage varies result in losses or missed low cost
opportunities
- May be used to hedge against
- The other party to a changes in currency exchange
derivatives contract could rates
default
- Derivatives that involve
leverage (borrowing for
investment) could magnify
losses
- Certain types of
derivatives involve costs
to a Portfolio which can
reduce returns
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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HOW THE PORTFOLIOS INVEST
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
REVERSE REPURCHASE - May magnify underlying - May magnify underlying
AGREEMENTS AND investment losses investment gains
DOLLAR ROLLS
- Investment costs may exceed
Total Return Bond, potential underlying
Intermediate-Term investment gains
Bond and Mortgage
Backed Securities
Portfolios
Up to 33-1/3%
WHEN-ISSUED AND
DELAYED-DELIVERY
SECURITIES
All Portfolios
Percentage varies
- ----------------------------------------------------------------------------------------------------------------------
BORROWING - Leverage borrowing for - Leverage may magnify
investment may magnify losses investment gains
International Bond,
Total Return Bond, - Interest costs and borrowing
Intermediate-Term Bond fees may exceed potential
and Mortgage Backed investment gains
Securities Portfolios
Up to 33 1/3%
- ----------------------------------------------------------------------------------------------------------------------
ADJUSTABLE/FLOATING RATE - Value lags value of fixed rate - Can take advantage of rasing
SECURITIES securities when interest rates interest rates
change
Large Cap Value,
International Bond,
Total Return Bond,
Intermediate-Term Bond
and Mortgage Backed
Securities Portfolios
Percentage varies
- ----------------------------------------------------------------------------------------------------------------------
STRIPPED SECURITIES - More volatile than securities - Value rises faster when interest
securities that have not rates fall
separated principal and interest
International Bond,
Total Return Bond, - Mortgage-backed stripped
Intermediate-Term Bond securities have more prepayment
and Mortgage Backed and interest rate risk than other
Securities Portfolios mortgage-related securities
Percentage varies
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
38 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 41
HOW THE PORTFOLIOS INVEST
INVESTMENT TYPE
<TABLE>
<CAPTION>
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST RATE SWAPS - Helps protect the return on - Speculative technique
an investment including risk of loss
of interest payment
swapped
International Bond,
Total Return Bond,
Intermediate-Term Bond
and Mortgage Backed
Securities Portfolios
Up to 5% of net assets
- ----------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES - May be difficult to value - May offer a more
precisely attractive yield or
U.S. Government Money potential for growth
Market Portfolio - May be difficult to sell at than more widely traded
the time or price desired securities
Up to 10% of net assets
Other Portfolios
Up to 15% of net assets
- ----------------------------------------------------------------------------------------------------------
39
</TABLE>
<PAGE> 42
HOW THE TRUST IS MANAGED
BOARD OF TRUSTEES
The Board of Trustees oversees the actions of the Manager, the sub-advisers and
the Distributor and decides on general policies. The Board also oversees the
Trust's officers who conduct and supervise the daily business operations of the
Trust.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Trust, PIFM manages the Trust's investment
operations, administers its business affairs and is responsible for supervising
the sub-adviser(s) (which we call an Adviser) for each of the Portfolios. For
the fiscal year ended December 31, 1998, the Trust paid PIFM the management
fees, and PIFM paid each Portfolio's Adviser(s) the sub-advisory fees, set forth
in the table below for each of the Portfolios (shown as a percentage of average
net assets).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ANNUAL DOLLAR ANNUAL SUB-ADVISORY
MANAGEMENT AMOUNT OF FEE PAID TO
FEE PAID TO MANAGEMENT ADVISER(S)
PORTFOLIO PIFM FEE BY PIFM
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Capitalization Growth Portfolio .60% $1,666,766 .30%
Large Capitalization Value Portfolio .60% 1,692,469 .30%
Small Capitalization Growth Portfolio .60% 975,926 .30%
Small Capitalization Value Portfolio .60% 922,536 .30%
International Equity Portfolio .70% 1,724,342 .40%
International Bond Portfolio .50% 153,602 .30%
Total Return Bond Portfolio .45% 278,041 .25%
Intermediate-Term Bond Portfolio .45% 455,487 .25%
Mortgage Backed Securities Portfolio .45% 331,815 .25%
U.S. Government Money Market Portfolio .25% 266,250 .125%
- ------------------------------------------------------------------------------------------------
</TABLE>
Subject to the supervision of the Board of Trustees of the Trust, PIFM is
responsible for conducting the initial review of prospective Advisers for the
Trust. In evaluating a prospective Adviser, PIFM considers many factors,
including the firm's experience, investment philosophy and historical
performance. PIFM is also responsible for monitoring the performance of the
Trust's Advisers.
PIFM and the Trust operate under an exemptive order (the Order) from the
Securities and Exchange Commission that generally permits PIFM to enter into or
amend agreements with Advisers without obtaining shareholder
40 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 43
HOW THE TRUST IS MANAGED
approval each time. This authority is subject to certain conditions, including
the requirement that the Board of Trustees approve any new or amended agreements
with Advisers. Shareholders of each Portfolio still have the right to terminate
these agreements for the Portfolio at any time by a vote of the majority of
outstanding shares of the Portfolio. The Trust will notify shareholders of any
new Advisers or material amendments to advisory agreements made pursuant to the
Order. On October 30, 1996, the shareholders of the Trust voted to allow the
Trust and PIFM to operate under the Order.
As of March 31, 1999, PIFM served as the Manager to all 46 of the
Prudential Mutual Funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $71.6 billion.
ADVISERS AND PORTFOLIO MANAGERS
INTRODUCTION
The Advisers are responsible for the day-to-day management of each Portfolio, or
portion thereof, that they manage, subject to the supervision of PIFM and the
Board of Trustees. The Advisers are paid by PIFM, not the Trust.
The LARGE CAPITALIZATION GROWTH, LARGE CAPITALIZATION VALUE, SMALL
CAPITALIZATION GROWTH and SMALL CAPITALIZATION VALUE PORTFOLIOS each have two
Advisers, each of whom manages approximately 50% of the Portfolio's assets. For
each of these Portfolios, PIFM hired two Advisers with different investment
philosophies. PIFM believes that at any given time, certain investment
philosophies will be more successful than others and that a combination of
different investment approaches may benefit these Portfolios and help reduce
their volatility. PIFM periodically rebalances these Portfolios to maintain the
approximately equal allocation of their assets between the two Advisers.
Reallocations may result in higher portfolio turnover and correspondingly higher
transactional costs. In addition, Portfolios with two Advisers may experience
wash transactions -- where one Adviser buys a security at the same time the
other one sells it. When this happens, the Portfolio's position in that security
remains unchanged, but the Portfolio has paid additional transaction costs.
41
<PAGE> 44
HOW THE TRUST IS MANAGED
LARGE CAPITALIZATION GROWTH PORTFOLIO
COLUMBUS CIRCLE INVESTORS (CCI) and OAK ASSOCIATES, LTD. (OAK) are the Advisers
for the Large Capitalization Growth Portfolio. For their services as Advisers,
CCI and Oak each receive a fee from PIFM at the annual rate of .30% of the
average daily net assets of the portion of the Portfolio it manages.
As of December 31, 1998, CCI had approximately $9.6 billion in assets under
management for corporate, nonprofit, government, union and mutual fund clients.
The address of CCI is Metro Center, One Station Place, 8th Floor, Stanford,
CT 06902.
ANTHONY RIZZA, a Managing Director of CCI, has been primarily responsible
for managing CCI's part of the Portfolio since 1998. From 1995 to 1998, Mr.
Rizza was part of a team managing the Portfolio. Mr. Rizza is a Chartered
Financial Analyst and a member of the Hartford Society of Security Analysts. He
has been a portfolio manager with CCI since 1991.
OAK has specialized in large-cap equity investing since it was founded in
1985. Oak provides investment management services to both individual and
institutional clients. As of December 31, 1998, Oak had more than $11.5 billion
in assets under management. The address of Oak is 3875 Embassy Parkway, Suite
250, Akron, OH 44333.
JAMES D. OELSCHLAGER, President of Oak since 1985, has managed the assets
of the Portfolio since 1995. DONNA BARTON, MARGARET BALLINGER and DOUGLAS MACKAY
assist Mr. Oelschlager in managing the Portfolio's assets. Ms. Barton and Ms.
Ballinger have been with Oak since 1985, and Mr. MacKay has been a research
analyst with Oak since 1990.
LARGE CAPITALIZATION VALUE PORTFOLIO
INVESCO CAPITAL MANAGEMENT, INC. (INVESCO) and HOTCHKIS AND WILEY are the
Advisers for the Large Capitalization Value Portfolio. For their services as
Advisers, INVESCO and Hotchkis and Wiley each receive a fee from PIFM at the
annual rate of .30% of the average daily net assets of the portion of the
Portfolio it manages.
As of December 31, 1998, INVESCO had approximately $146 billion in assets
under management for clients located throughout the U.S., Europe and Japan. The
address of INVESCO is 1315 Peachtree Street, Suite 500, Atlanta, GA 30309.
NIELSON BROWN, a Vice President of INVESCO, has managed the Portfolio since
its inception. Mr. Brown is a Chartered Financial Analyst and
42 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
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HOW THE TRUST IS MANAGED
a member of the Atlanta Society of Financial Analysts. He has been a portfolio
manager with INVESCO since 1989.
HOTCHKIS AND WILEY has specialized in large-cap equity investing since it
was formed in 1980. As of December 31, 1998, Hotchkis and Wiley had
approximately $14.5 billion in assets under management for corporate, public,
endowment and foundation and mutual fund clients. The address of Hotchkis and
Wiley is 800 West Sixth Street, Fifth Floor, Los Angeles, CA 90017.
ROGER DEBARD, Managing Director of Hotchkis and Wiley, has managed the
assets of the Portfolio since 1995. Mr. DeBard is a Chartered Financial Analyst
and has been a portfolio manager for Hotchkis and Wiley since 1985.
SMALL CAPITALIZATION GROWTH PORTFOLIO
SAWGRASS ASSET MANAGEMENT, L.L.C. (SAWGRASS) AND INVESTMENT ADVISERS, INC.
(IAI) are the Advisers for the Small Capitalization Growth Portfolio. For their
services as Advisers, Sawgrass and IAI each receive a fee from PIFM at the
annual rate of .30% of the average daily net assets of the portion of the
Portfolio it manages.
SAWGRASS has specialized in small-cap equity investing since it was
organized in 1998. Sawgrass was formed by a core group of investment
professionals who had worked together for 15 years at Barnett Capital Advisors,
Inc. As of May 24, 1999, Sawgrass had approximately $250 million in assets under
management for corporate, municipal, public and state retirement plans and
mutual funds. The address of Sawgrass is 4337 Pablo Oaks Court, Building 200,
Jacksonville, FL 32224.
DEAN MCQUIDDY, a principal and Director of Equity Investments of Sawgrass,
has managed the assets of the Portfolio since May 1999. Mr. McQuiddy is a
Chartered Financial Analyst and has been with Sawgrass since January 1998. Prior
to 1998, Mr. McQuiddy was the head small-cap portfolio manager of Barnett
Capital Advisors, Inc.
IAI has provided investment advice to corporate, public, jointly trusteed,
endowment and foundation and mutual fund clients since it was established in
1947. As of December 31, 1998, IAI had approximately $6 billion in assets under
management. The address of IAI is 3700 First Bank Place, P.O. Box 357,
Minneapolis, MN 55440.
MARTIN J. CALIHAN, Vice President of IAI, has managed the assets of the
Portfolio since 1997. Mr. Calihan has been a portfolio manager with IAI since
1992.
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HOW THE TRUST IS MANAGED
SMALL CAPITALIZATION VALUE PORTFOLIO
LAZARD ASSET MANAGEMENT (LAZARD) and WOOD, STRUTHERS & WINTHROP MANAGEMENT CORP.
(WSW) are the Advisers for the Small Capitalization Value Portfolio. For their
services as Advisers, Lazard and WSW each receive a fee from PIFM at the annual
rate of .30% of the average daily net assets of the portion of the Portfolio it
manages.
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. As of March 31, 1999, Lazard and its
global affiliates had approximately $64 billion in assets under management. The
address of Lazard is 30 Rockefeller Plaza, New York, NY 10112.
HERBERT W. GULLQUIST and EILEEN D. ALEXANDERSON have managed the assets of
the Portfolio since 1995. Mr. Gullquist, a Managing Director and Vice Chairman
of Lazard Freres and Chief Investment Officer of Lazard, has been with Lazard
since 1982. Ms. Alexanderson, a Managing Director of Lazard Freres and a
Certified Financial Analyst, has been with Lazard since 1979.
WSW was founded in 1871 and has specialized in small-cap equity investing
since 1967. WSW provides investment management services to both individual and
institutional clients. As of December 31, 1998, WSW had approximately $10
billion in assets under management. The address of WSW is 277 Park Avenue, New
York, NY 10172.
JAMES A. ENGLE and ROGER W. VOGEL have managed the assets of the Portfolio
since 1995. Mr. Engle has been the Chief Investment Officer of WSW since 1988.
Mr. Vogel, who is Senior Vice President for the Equities Division at WSW, has
been the lead small-cap equity portfolio manager of WSW since 1993.
INTERNATIONAL EQUITY PORTFOLIO
LAZARD is the Adviser to the International Equity Portfolio. For its services as
Adviser, Lazard receives a fee from PIFM at the annual rate of .40% of the
Portfolio's average daily net assets.
HERBERT W. GULLQUIST and JOHN R. REINSBERG have managed the Portfolio since
its inception. Mr. Gullquist, a Managing Director and Vice Chairman of Lazard
Freres and Chief Investment Officer of Lazard, has been with Lazard since 1982.
Mr. Reinsberg is a Managing Director of Lazard Freres and has been with Lazard
since 1992.
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HOW THE TRUST IS MANAGED
INTERNATIONAL BOND PORTFOLIO
DELAWARE INTERNATIONAL ADVISERS LTD. (DIAL) is the Adviser to the International
Bond Portfolio. For its services as Adviser, DIAL receives a fee from PIFM at
the annual rate of .30% of the Portfolio's average daily net assets. DIAL has
managed the Portfolio since August 28, 1997.
DIAL has specialized in international and global investing since 1990. As
of December 31, 1998, DIAL had approximately $11.8 billion in assets under
management. The address of DIAL is 80 Cheapside, Third Floor, London, EC2V 6EE,
United Kingdom.
IAN G. SIMS, Deputy Managing Director of DIAL and Chief Investment Officer
for Global Fixed Income Investments, has headed the team managing the Portfolio
since 1997. The other members of the portfolio management team are W. HYWEL
MORGAN, CHRISTOPHER A. MOTH, JOANNA BATES and JOHN KIRK, all of whom are Senior
Portfolio Managers with DIAL.
TOTAL RETURN BOND PORTFOLIO AND INTERMEDIATE-TERM BOND PORTFOLIO
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) is the Adviser to the Total Return
Bond and Intermediate-Term Bond Portfolios. For its services as Adviser, PIMCO
receives a fee from PIFM at the annual rate of .25% of the average daily net
assets of each Portfolio.
As of December 31, 1998, PIMCO had approximately $157.9 billion of assets
under management. The address of PIMCO is 840 Newport Center Drive, Suite 300,
Newport Beach, CA 92660.
JOHN L. HAGUE, a Managing Director of PIMCO, has managed the Portfolios
since their inception. Mr. Hague has been a portfolio manager with PIMCO and its
predecessor since 1989.
MORTGAGE BACKED SECURITIES PORTFOLIO AND
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
WELLINGTON MANAGEMENT COMPANY, LLP (WMC) is the Adviser to the Mortgage Backed
Securities and U.S. Government Money Market Portfolios. For its services as
Adviser, WMC receives a fee from PIFM at the annual rate of .25% and .125% of
the average daily net assets of the Mortgage Backed Securities and U.S.
Government Money Market Portfolios, respectively.
WMC provides investment management services to investment companies,
employee benefit plans, endowment funds, foundations, other institutions and
individuals. As of December 31, 1998, WMC had approximately $211 billion of
assets under management. The address of WMC is 75 State Street, Boston,
Massachusetts 02109.
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HOW THE TRUST IS MANAGED
THOMAS L. PAPPAS, a Senior Vice President of WMC, has managed the Mortgage
Backed Securities Portfolio since its inception. Mr. Pappas has been a portfolio
manager with WMC since 1987. TIMOTHY E. SMITH, a Vice President of WMC, has
managed the U.S. Government Money Market Portfolio since 1997. Mr. Smith has
been a portfolio manager with WMC since 1992.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Trust's
shares under a Distribution Agreement with the Trust.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Trust and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although at this time
there can be no assurance that there will be no adverse impact on the Trust, the
Manager, the Advisers, the Distributor, the Transfer Agent and the Custodian
have advised the Trust that they have been actively working on necessary changes
to their computer systems to prepare for the year 2000. The Trust and its Board
receive, and have received since early 1998, satisfactory quarterly reports from
the principal service providers as to their preparations for year 2000
readiness, although there can be no assurance that the service providers (or
other securities market participants) will successfully complete the necessary
changes in a timely manner or that there will be no adverse impact on the Trust.
Moreover, the Trust at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000 readiness,
the latter of which would involve substantial expenses without an assurance of
success.
Additionally, issuers of securities generally as well as those purchased by
the Portfolios may confront Year 2000 compliance issues which, if material and
not resolved, could have an adverse impact on securities markets and/or a
specific issuer's performance and could result in a decline in the value of the
securities held by the Portfolios.
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PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Trust should be aware of some important tax
issues. For example, each Portfolio distributes DIVIDENDS of ordinary income and
any realized net CAPITAL GAINS to shareholders. These distributions are subject
to taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of a Portfolio for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless your shares are
held in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
Each Portfolio distributes DIVIDENDS of any net investment income to
shareholders on a regular basis as shown below.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PORTFOLIO DIVIDENDS
- ---------------------------------------------------------------------------------------------------
<S> <C>
International Bond, Total Return Bond,
Intermediate-Term Bond, Mortgage Backed Securities and
U.S. Government Money Market Portfolios Declared daily, paid monthly
Large Capitalization Growth, Large
Capitalization Value, Small Capitalization Growth,
Small Capitalization Value and International Equity Portfolios Declared and paid annually
- ---------------------------------------------------------------------------------------------------
</TABLE>
For example, if a Portfolio owns ACME Corp. stock and the stock pays a dividend,
the Portfolio will pay out a portion of this dividend to its shareholders,
assuming the Portfolio's income is more than its costs and expenses. The
dividends you receive from each Portfolio will be taxed as ordinary income,
whether or not they are reinvested in the Portfolio.
For Portfolios that invest in foreign securities, the amount of income
available for distribution to shareholders will be affected by any foreign
currency gains or losses generated by the Portfolio and cannot be predicted.
This fact, coupled with the different tax and accounting treatment of certain
currency gains and losses, increases the possibility that distributions, in
whole or in part, may be a return of capital to shareholders.
Each Portfolio also distributes realized net CAPITAL GAINS to shareholders
- -- typically once a year -- which are generated when the Portfolio sells its
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PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
assets for a profit. For example, if a Portfolio bought 100 shares of ACME Corp.
stock for a total of $1,000 and more than one year later sold the shares for a
total of $1,500, the Portfolio has net long-term capital gains of $500, which it
will pass on to shareholders (assuming the Portfolio's total gains are greater
than any losses it may have). Capital gains are taxed differently depending on
how long the Portfolio holds the security -- if a security is held more than one
year before it is sold, LONG-TERM capital gains are taxed at the rate of 20%,
but if the security is held one year or less, SHORT-TERM capital gains are taxed
at ordinary income rates of up to 39.6%. Different rates apply to corporate
shareholders.
For your convenience, a Portfolio's distributions of dividends and capital
gains are AUTOMATICALLY REINVESTED in the Portfolio without any sales charge. If
you ask us to pay the distributions in cash, we will send you a check if your
account is with the Transfer Agent. Otherwise, if your account is with a broker,
you will receive a credit to your account. Shareholders participating in the
Target Program and investing through a Plan account are not eligible to receive
dividends and capital gains distributions in cash. Whether you receive these
distributions in additional shares or in cash, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of a Portfolio as part of a qualified tax-deferred plan or account, your taxes
are deferred, so you will not receive a Form 1099. However, you will receive a
Form 1099 when you take any distributions from your qualified tax-deferred plan
or account.
Portfolio distributions are generally taxable to you in the calendar year
they are received, except when we declare certain dividends in the fourth
quarter and actually pay them in January of the following year. In such cases,
the dividends are treated as if they were paid on December 31 of the prior year.
Corporate shareholders are eligible for the 70% dividends-received deduction for
certain dividends.
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PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
WITHHOLDING TAXES
If federal tax law requires you to provide the Trust with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will withhold and pay to the U.S. Treasury 31% of your distributions
and sale proceeds. If you are subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions. Dividends of net
investment income and short-term capital gains paid to a nonresident foreign
shareholder generally will be subject to a U.S. withholding tax of 30%. This
rate may be lower, depending on any tax treaty the U.S. may have with the
shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a Portfolio just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Portfolio decreases by the amount
of the dividend and the market changes (if any) to reflect the payout. The
distribution you receive makes up for the decrease in share value. However, the
timing of your purchase does mean that part of your investment came back to you
as taxable income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts -- available to certain taxpayers beginning in
1998 -- contributions are not tax deductible, but distributions from the plan
may be tax-free. Please contact your financial adviser for information on a
variety of retirement plans offered by Prudential.
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PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Portfolio for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of a Portfolio for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
[RECEIPTS FROM SALE GRAPHIC]
Receipts +$ Capital Gain
$ (taxes owed)
from Sale OR
-$ Capital Loss
(offset against gain)
Exchanging your shares of a Portfolio for the shares of another Portfolio
of the Trust is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Portfolio shares
will not be reported on the Form 1099; however, proceeds from the sale or
exchange will be reported on Form 1099-B. Therefore, unless you hold your shares
in a qualified tax-deferred plan or account, you or your financial adviser
should keep track of the dates on which you buy and sell -- or exchange --
Portfolio shares, as well as the amount of any gain or loss on each transaction.
For tax advice, please see your tax adviser.
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE TRUST
INTRODUCTION
Shares of the Portfolios may be purchased by Target Program participants. Shares
of the Portfolios are also offered to certain investors who do not participate
in the Target Program. These investors include banks, trust companies and other
investment advisory services and certain fee-based programs sponsored by
Prudential Securities and its affiliates for which the Portfolios are available
investment options. Participants in these programs would not have to pay the
Target Program fee, but may have to pay different fees charged by their
broker-dealer or financial adviser.
THE TARGET PROGRAM
The Target Program is an investment advisory service that provides each
participant with recommendations on how to allocate the participant's assets
among the Portfolios. Prudential Securities identifies your investment
objectives, preferences and risk tolerance by evaluating your responses to a
Questionnaire. Prudential Securities Financial Advisors will help you to
complete this Questionnaire.
Prudential Securities then uses an investment profile matrix and an asset
allocation methodology developed by Ibbotson Associates, Inc., an investment
consulting firm, to translate the investment needs, preferences and attitudes
expressed in your Questionnaire into a recommended allocation of your assets
among the Portfolios. Prudential Securities will provide you with a written
Evaluation that sets forth its recommendation. Under the Target Program,
Prudential Securities provides recommendations, but does not have the authority
to make investment decisions for any participant. You must make your own
investment decisions and you may implement or disregard any of Prudential
Securities' asset allocation recommendations. After you make your investment
decision, you may choose to have your investments in the Portfolios
automatically rebalanced (on a quarterly or annual basis) to maintain your
chosen allocation among the Portfolios.
Prudential Securities will provide you with a quarterly account statement
(Quarterly Account Monitor), which provides a comprehensive review of your
investment performance. The Quarterly Account Monitor also includes market
commentaries from the Advisers, as well as information on dividends,
distributions and portfolio transactions.
Prudential Securities Financial Advisors may review your Evaluation and
Quarterly Account Monitors periodically with you and may arrange for
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE TRUST
Prudential Securities to prepare a new Evaluation for you based on changes in
your financial status.
Target Program Fees. Prudential Securities receives a quarterly fee for the
services it provides to Target Program investors. These fees are in addition to
the expenses of the Portfolios. Financial advisors receive a portion of the
Target Program fees. The quarterly Target Program fee is calculated as a
percentage of a participant's investment in the Portfolios. The amount of the
fee depends on whether you invest in equity or income Portfolios and whether you
are investing through an individual retirement account or employee benefit plan
(collectively, Plans). This table shows the maximum annual Target Program fees
as a percentage of a participant's average daily net assets invested in the
Portfolios.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MAXIMUM ANNUAL TARGET PROGRAM FEES
Non-PLAN INVESTORS PLAN INVESTORS
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Amounts Invested in Equity Portfolios 1.50% 1.25%
(Large Capitalization Growth, Large
Capitalization Value, Small Capitalization
Growth, Small Capitalization Value and
International Equity Portfolios)
Amounts Invested in Income Portfolios 1.00% 1.35%
(International Bond, Total Return Bond,
Intermediate-Term Bond, Mortgage Backed
Securities and U.S. Government
Money Market Portfolios)
- ---------------------------------------------------------------------------------------
</TABLE>
The maximum Target Program fees may be changed by Prudential Securities
upon notice to you. You may negotiate lower fees if your investment exceeds
$100,000. Fiduciary accounts with a common trustee (unaffiliated with Prudential
Securities) may be added together to determine whether the Target Program fee is
negotiable provided that the aggregate investment of such accounts
in the Target Program is at least $250,000. Prudential Securities will consider
the size of your Target account and your other accounts with Prudential
Securities in deciding whether to lower your fee. Before you open a Target
Program account, you must notify Prudential Securities of any factors that may
make you eligible for a reduction of the Target Program fee. Independent plan
fiduciaries should consider, in a prudent manner, the relationship of Target
Program fees to be paid by their Plans along with the level of services provided
by Prudential Securities.
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HOW TO BUY, SELL AND
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The following investors can participate in the Target Program without
paying the quarterly fee:
- banks, trust companies and other investment advisory services and
certain fee-based programs sponsored by Prudential Securities and its
affiliates for which the Portfolios are an available option
- Trustees of the Trust
- employees of Prudential Securities, PIFM and their subsidiaries and
family members of such persons maintaining an employee-related account
at Prudential Securities
In addition, the Target Program fee may be reduced or waived for the
following investors:
- certain banks, trust companies or unaffiliated investment advisers who
maintain accounts with Prudential Securities
- personal trusts that participate in The Prudential Bank Personal Trust
Program administered by Prudential Bank & Trust (as trustee) or its
affiliates.
Because Prudential Securities receives different Target Program fees
depending on whether investors invest in equity Portfolios or income Portfolios,
it may have a conflict of interest when making recommendations.
You can choose to have the quarterly Target Program fee automatically
deducted from your Prudential Securities account or billed to you quarterly.
Either way, the Target Program fee is shown in your monthly statement. The
initial fee is based on the value of your initial investment in the Portfolios.
The initial fee covers the period from your initial purchase through the last
day of the calendar quarter and is prorated accordingly. After you pay the
initial fee, the quarterly Target Program fee covers the calendar quarter during
which you pay the fee and is based on your current allocations as measured as of
the last day of the previous quarter. If you choose to be billed, you must pay
the initial fee by check within 45 calendar days after your initial purchase.
If you choose to have the Target Program fee automatically deducted from
your account, the fee will be deducted on the sixth business day of each
calendar quarter. If you don't have sufficient liquid assets (e.g., cash or
non-Target money market fund shares) in your account to pay the fee, Prudential
Securities will automatically redeem an appropriate number of shares of the
Portfolios you own to cover the fee. If you are a non-Plan
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HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE TRUST
investor, Prudential Securities would redeem shares of the Portfolio in which
you have the largest investment to cover the shortfall. If you invest through a
Plan, Prudential Securities would redeem shares on a pro rata basis from all
Portfolios in which you invest to cover the shortfall.
If you choose to be billed for the Target Program fee, you must pay the fee
by check within 45 days after the end of the last calendar quarter. If you do
not pay the fee when it is due, Prudential Securities will automatically deduct
the fee from your account. If you don't have sufficient liquid assets to cover
the fee, Prudential Securities will automatically redeem an appropriate number
of shares of the Portfolios you own to cover the shortfall as described in the
preceding paragraph.
You may also choose to pay the Target Program fee through automatic
redemptions of your shares in the Portfolios. You may instruct Prudential
Securities to automatically redeem shares of a particular Portfolio, from the
Portfolio in which you have the largest investment, or shares from all
Portfolios in which you invest on a pro rata basis. The automatic redemption
will be effected on or about the sixth business day of each calendar quarter.
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
To purchase shares of the Portfolios through the Target Program, you must have a
securities account with Prudential Securities or one of its affiliates. You must
pay for Portfolio shares by check made payable to Prudential Securities or to a
broker or affiliate that clears securities transactions through Prudential
Securities on a fully disclosed basis. If you already have an account with
Prudential Securities, you can pay for Portfolio shares by using free credit
cash balances in your account or through the sale of non-Target money market
fund shares held in your account.
Minimum Investment Requirements. The minimum initial investment for Plan
accounts is $10,000. The minimum initial investment for non-Plan accounts is
$25,000.
The minimum initial investment is reduced to $10,000 for these non-Plan
investors:
- custodial accounts established under the Uniform Gifts to Minors Act
- Trustees of the Trust (except that the minimum initial investment
requirement is waived entirely for Trustees who are paid under a
deferred fee agreement with the Trust)
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HOW TO BUY, SELL AND
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- employees of Prudential Securities, PIFM and their subsidiaries and
family members of such persons with an employee-related account at
Prudential Securities
Fiduciary accounts that have a common trustee (unaffiliated with Prudential
Securities) may be added together for purposes of meeting the initial minimum
investment requirement, as long as the aggregate investment of these accounts in
the Target Program is at least $250,000.
The minimum investment requirement may also be reduced or waived for certain
start-up Plans that have been in existence for less than one year and for
certain transfers from asset allocation programs involving other mutual funds.
Prudential Securities, in its discretion, may also reduce the minimum initial
investment requirement for any account. Before you invest in the Portfolios, you
must notify Prudential Securities of any factors that may make you eligible for
a waiver of the minimum investment requirements.
STEP 2: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Portfolio is based on the share value. The
share value of a mutual fund -- known as the NET ASSET VALUE or NAV -- is
determined by a simple calculation: it's the total value of the Portfolio
(assets minus liabilities) divided by the total number of shares outstanding.
For example, if the value of the investments held by Fund XYZ (minus its
expenses) is $1,000 and there are 100 shares of Fund XYZ owned by shareholders,
the price of one share of the fund -- or the NAV -- is $10 ($1,000 divided by
100). Portfolio securities are valued based upon market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Trust's Board. Most national newspapers report the NAVs of
most mutual funds, which allows investors to check the price of mutual funds
daily.
In determining the NAV of the U.S. GOVERNMENT MONEY MARKET PORTFOLIO, the
Trust values the Portfolio's securities using the amortized cost method. The
Portfolio seeks to maintain a NAV of $1 per share at all times.
We determine the NAV of each Portfolio except the U.S. Government Money
Market Portfolio once each business day at 4:15 p.m. New York Time (4:30 p.m.
for the U.S. Government Money Market Portfolio) on days that the New York Stock
Exchange is open for trading. For Portfolios that invest in foreign securities,
the NAV can change on days when you cannot buy or sell shares. We do not
determine NAV on days when we have not received any
55
<PAGE> 58
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE TRUST
orders to purchase, sell or exchange, or when changes in the value of a
Portfolio's investments do not materially affect its NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE PORTFOLIOS?
You will pay the NAV next determined after we receive your order to purchase.
STEP 3: ADDITIONAL SHAREHOLDER SERVICES
As a shareholder of the Trust, each Target Program participant can take
advantage of the following services and privileges:
The PruTector Program. Optional group term life insurance -- which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines -- is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Portfolios. To reduce fund expenses, we will
send one annual shareholder report, one semi-annual shareholder report and one
annual prospectus per household, unless you instruct us otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Trust for cash (in the form of a check) at any
time, subject to certain restrictions, by contacting your Prudential Securities
Financial Advisor or Prusec registered representative.
When you sell shares of a Portfolio -- also known as redeeming your shares
- -- the price you will receive will be the NAV next determined after Prudential
Securities or Prusec receives your order to sell.
Generally, we will pay you for the shares that you sell within seven days
after Prudential Securities or Prusec receives your sell order. If you are
selling shares you recently purchased with a check, we may delay sending you the
56 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 59
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE TRUST
sale proceeds until your check clears, which can take up to 10 days from the
purchase date. You can avoid delay if you purchase shares by wire, certified
check or cashier's check.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the
Portfolios, or when we may delay paying you the proceeds from a sale. This may
happen during unusual market conditions or emergencies when a Portfolio can't
determine the value of its assets or sell its holdings. For more information,
see the SAI, "Purchase, Redemption and Pricing of Shares."
SMALL ACCOUNTS
If you make a sale that reduces your Target Program account to less than
$10,000, the Trust may sell the rest of your shares and close your account. If
your shares are worth more than what you paid for them, this may cause you to
have a capital gain. See "Portfolio Distributions and Tax Issues -- If You Sell
or Exchange Your Shares." We will give you 30 days' notice, during which time
you can purchase additional shares to avoid this action.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares in a Portfolio for shares in another Portfolio of
the Trust without payment of any exchange fee. You may not exchange shares of
the Portfolios for shares of other Prudential Mutual Funds. If you wish to use
the exchange privilege, contact your Prudential Securities Financial Advisor or
Prusec registered representative. We may change the terms of the exchange
privilege after giving you 60 days' notice.
Remember, as we explained in the section entitled "Portfolio Distributions
and Tax Issues -- If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account -- Exchange Privilege."
FREQUENT TRADING
Frequent trading of Portfolio shares in response to short-term fluctuations in
the market -- also known as "market timing" -- may make it very difficult to
manage a Portfolio's investments. When market timing occurs, a Portfolio may
57
<PAGE> 60
have to sell portfolio securities to have the cash necessary to redeem the
market timer's shares. This can happen at a time when it is not advantageous to
sell any securities, so the Portfolio's performance may be hurt. When large
dollar amounts are involved, market timing can also make it difficult to use
long-term investment strategies because we cannot predict how much cash the
Portfolio will have to invest. When, in our opinion, such activity would have a
disruptive effect on portfolio management, the Portfolio reserves the right to
refuse purchase orders and exchanges into the Portfolio by any person, group or
commonly controlled account. The Trust may notify a market timer of rejection
of an exchange or purchase order after the day the order is placed. If
the Trust allows a market timer to trade Portfolio shares, it may require the
market timer to enter into a written agreement to follow certain procedures and
limitations.
58 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 61
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate each Portfolio's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that particular Portfolio, assuming
reinvestment of all dividends and other distributions. The information is for
the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information is contained in the annual
report, which you can receive at no charge.
LARGE CAPITALIZATION GROWTH PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
LARGE CAP GROWTH PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995(2) 1994(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.58 $12.97 $12.13 $9.74 $9.91
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.01) --(3) .02 .10 .10
Net realized and unrealized gain (loss)
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(1) 44.22% 20.77% 21.09% 25.76% (.68)%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $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 54% 82% 65% 154% 24%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
(3) Less than $.005 per share.
59
<PAGE> 62
FINANCIAL HIGHLIGHTS
LARGE CAPITALIZATION VALUE PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
LARGE CAP VALUE PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996(2) 1995(2) 1994(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $16.21 $13.97 $12.57 $10.02 $10.11
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .28 .31 .31 .33 .26
Net realized and unrealized gain (loss)
on investment transactions 1.34 3.77 2.07 2.89 (.04)
TOTAL FROM INVESTMENT OPERATIONS 1.62 4.08 2.38 3.22 .22
- --------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.27) (.28) (.31) (.30) (.25)
Distributions in excess of
net investment income -- -- (.03) -- --
Distributions from net realized gains (1.69) (1.56) (.64) (.37) (.06)
TOTAL DISTRIBUTIONS (1.96) (1.84) (.98) (.67) (.31)
NET ASSET VALUE, END OF YEAR $15.87 $16.21 $13.97 $12.57 $10.02
TOTAL RETURN(1) 10.25% 29.80% 19.17% 32.08% 2.18%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $283,488 $275,093 $227,706 $187,596 $142,219
Average net assets (000) $282,078 $253,579 $208,898 $163,124 $128,865
RATIOS TO AVERAGE NET ASSETS:
Expenses .71% .72% .77% .76% .81%
Net investment income 1.65% 1.90% 2.33% 2.83% 2.66%
Portfolio turnover 24% 21% 22% 59% 6%
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
60 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 63
FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION GROWTH PORTFOLIO
The financial highlights for the two years ended December 31, 1998
were audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the three years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
SMALL CAP GROWTH PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995(2) 1994(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.57 $14.93 $14.15 $11.59 $11.86
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.05) (.05) (.02) .02 .01
Net realized and unrealized gain (loss)
on investment transactions .48 3.02 2.63 2.84 (.27)
TOTAL FROM INVESTMENT OPERATIONS .43 2.97 2.61 2.86 (.26)
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- -- (.02) (.01)
Distributions from net realized gains (.65) (2.33) (1.83) (.28) --
TOTAL DISTRIBUTIONS (.65) (2.33) (1.83) (.30) (.01)
NET ASSET VALUE, END OF YEAR $15.35 $15.57 $14.93 $14.15 $11.59
TOTAL RETURN(1) 2.55% 20.85% 18.88% 24.62% (2.19)%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $158,982 $165,898 $147,469 $121,533 $96,462
Average net assets (000) $162,654 $156,570 $141,496 $107,649 $87,403
RATIOS TO AVERAGE NET ASSETS:
Expenses .77% .79% .89% .85% .93%
Net investment income (loss) (.35)% (.36)% (.32)% .12% .10%
Portfolio turnover .69% 106% 108% 120% 97%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
61
<PAGE> 64
FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION VALUE PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
SMALL CAP VALUE PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997(2) 1996(2) 1995(2) 1994(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.50 $15.22 $13.07 $11.07 $12.72
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .08 .08 .11 .14 .11
Net realized and unrealized gain (loss)
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)
TOTAL DISTRIBUTIONS (1.33) (2.17) (.67) (.14) (.27)
NET ASSET VALUE, END OF YEAR $14.98 $17.50 $15.22 $13.07 $11.07
TOTAL RETURN(1) (6.62)% 29.98% 21.75% 19.21% (11.03)%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $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 .48% .45% .77% 1.14% .88%
Portfolio turnover 39% 36% 60% 110% 97%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
62 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 65
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995(2) 1994(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.27 $14.82 $13.64 $11.95 $13.09
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .23 .21 .25 .17 .06
Net realized and unrealized gain (loss)
on investment transactions 1.98 1.32 1.79 1.67 (.01)
TOTAL FROM INVESTMENT OPERATIONS 2.21 1.53 2.04 1.84 .05
- ----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.41) (.22) (.11) (.01)
Distributions from net realized gains (.84) (1.67) (.64) (.04) (1.07)
Distributions in excess
of net realized gains -- -- -- -- (.11)
TOTAL DISTRIBUTIONS (.94) (2.08) (.86) (.15) (1.19)
NET ASSET VALUE, END OF YEAR $15.54 $14.27 $14.82 $13.64 $11.95
TOTAL RETURN(1) 15.49% 10.60% 15.25% 15.38% .18%
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $244,291 $237,851 $240,563 $191,598 $188,025
Average net assets (000) $246,335 $245,536 $221,626 $183,414 $179,614
RATIOS TO AVERAGE NET ASSETS:
Expenses .91% .93% .99% 1.02% 1.07%
Net investment income 1.42% 1.15% 1.77% 1.32% .47%
Portfolio turnover 45% 37% 39% 76% 116%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
(2) Calculated based upon average shares outstanding during the period.
63
<PAGE> 66
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the two years ended December 31, 1996 and the period from May 17,
1994 through December 31, 1994, were audited by other independent auditors,
whose reports were unqualified.
<TABLE>
<CAPTION>
INTERNATIONAL BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.17 $10.17 $10.19 $9.57 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .31 .42 .51 .57(2) .27(2)
Net realized and unrealized gain (loss)
on investment transactions .45 (1.00) (.08) .82 (.19)
TOTAL FROM INVESTMENT OPERATIONS .76 (.58) .43 1.39 .08
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.31) -- (.21) (.57) (.27)
Distributions in excess of
net investment income (.06) (.06) -- -- (.24)
Distributions from net realized gains (.04) --(3) (.24) (.20) --
Tax return of capital distributions -- (.36) -- -- --
TOTAL DISTRIBUTIONS (.41) (.42) (.45) (.77) (.51)
NET ASSET VALUE, END OF YEAR $9.52 $9.17 $10.17 $10.19 $9.57
TOTAL RETURN(4) 8.55% (5.73)% 4.45% 14.66% .71%
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $31,042 $31,189 $41,780 $34,660 $21,447
Average net assets (000) $30,720 $35,163 $38,788 $29,510 $15,366
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.54% 1.35% 1.34% 1.00%(2) 1.00%(2),(5)
Net investment income 3.38% 4.44% 5.02% 5.56%(2) 4.84%(2),(5)
Portfolio turnover 110% 202% 226% 456% 361%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Information shown is for the period from 5-17-94, when investment
operations commenced, through 12-31-94.
(2) Net of expense subsidies. For the period 5-17-94 through 12-31-94, had
the Manager not reimbursed expenses for the Portfolio, net investment
income per share and the ratios of expenses and net investment income
to average net assets would have been $.21, 1.90% and 3.94%,
respectively. For the year ended 12-31-95, had the Manager not
reimbursed expenses for the Portfolio, net investment income per share
and the ratios of expenses and net investment income to average net
assets would have been $.55, 1.15% and 5.40%, respectively.
(3) Less than $.005 per share.
(4) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported. Total
returns for periods of less than one year are not annualized.
(5) Annualized.
64 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 67
FINANCIAL HIGHLIGHTS
TOTAL RETURN BOND PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
TOTAL RETURN BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.56 $10.28 $10.62 $9.48 $10.28
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .58 .57 .57 .62(1) .47(1)
Net realized and unrealized gain (loss)
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 from net realized gains (.34) (.10) (.26) (.08) --
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(2) 8.28% 9.23% 5.02% 19.63% (3.54)%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $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%(1) .85%(1)
Net investment income 5.54% 5.54% 5.67% 6.21%(1) 4.90%(1)
Portfolio turnover 327% 323% 340% 141% 121%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of expense subsidies. For the year ended 12-31-94, had the Manager
not reimbursed expenses for the Portfolio, net investment income per
share and the ratios of expenses and net investment income to average
net assets would have been $.44, 1.18% and 4.57%, respectively. For
the year ended 12-31-95, had the Manager not reimbursed expenses for
the Portfolio, net investment income per share and the ratios of
expenses and net investment income to average net assets would have
been $.60, 1.04% and 6.02%, respectively.
(2) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
65
<PAGE> 68
FINANCIAL HIGHLIGHTS
INTERMEDIATE-TERM BOND PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.42 $10.30 $10.51 $9.56 $10.26
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .63 .58 .59 .63 .49
Net realized and unrealized gain (loss)
on investment transactions .09 .28 (.07) .94 (.71)
TOTAL FROM INVESTMENT OPERATIONS .72 .86 .52 1.57 (.22)
- --------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.61) (.57) (.59) (.60) (.48)
Distributions from net realized gains (.17) (.17) (.14) (.02) --
TOTAL DISTRIBUTIONS (.78) (.74) (.73) (.62) (.48)
NET ASSET VALUE, END OF YEAR $10.36 $10.42 $10.30 $10.51 $9.56
TOTAL RETURN(1) 7.09% 8.57% 5.22% 16.87% (2.23)%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $105,283 $95,071 $100,392 $77,125 $62,924
Average net assets (000) $101,219 $95,575 $81,723 $68,628 $69,602
RATIOS TO AVERAGE NET ASSETS:
Expenses .66% .71% .73% .79% .80%
Net investment income 5.71% 5.64% 5.69% 6.09% 5.06%
Portfolio turnover 249% 249% 311% 93% 77%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
66 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 69
FINANCIAL HIGHLIGHTS
MORTGAGE BACKED SECURITIES PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
MORTGAGE BACKED SECURITIES PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.45 $10.21 $10.31 $9.51 $10.18
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .64 .64 .65 .68(1) .61(1)
Net realized and unrealized gain (loss)
on investment transactions .01 .23 (.12) .83 (.66)
TOTAL FROM INVESTMENT OPERATIONS .65 .87 .53 1.51 (.05)
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.63) (.63) (.63) (.68) (.61)
Distributions in excess of
net investment income -- -- -- (.03) (.01)
TOTAL DISTRIBUTIONS (.63) (.63) (.63) (.71) (.62)
NET ASSET VALUE, END OF YEAR $10.47 $10.45 $10.21 $10.31 $9.51
TOTAL RETURN(2) 6.37% 8.82% 5.56% 16.18% (.51)%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $72,870 $71,596 $73,867 $69,759 $61,971
Average net assets (000) $73,737 $71,757 $72,214 $65,149 $66,276
RATIOS TO AVERAGE NET ASSETS:
Expenses .70% .88% .91% .85%(1) .85%(1)
Net investment income 6.14% 6.21% 6.44% 6.79%(1) 6.19%(1)
Portfolio turnover 24% 128% 102% 154% 380%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of expense subsidies. For the year ended 12-31-94, had the Manager
not reimbursed expenses for the Portfolio, net investment income per
share and the ratios of expenses and net investment income to average
net assets would have been $.60, .99% and 6.05%, respectively. For the
year ended 12-31-95, had the Manager not reimbursed expenses for the
Portfolio, net investment income per share and the ratios of expenses
and net investment income to average net assets would have been $.67,
.92% and 6.72%, respectively.
(2) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
67
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FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The financial highlights for the two years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, and the financial
highlights for the three years ended December 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET PORTFOLIO (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .048 .049 .045 .051(1) .037(1)
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(2) 4.88% 4.95% 4.53% 5.25% 3.79%
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $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%(1) .50%(1)
Net investment income 4.85% 4.91% 4.49% 5.18%(1) 4.03%(1)
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Net of expense subsidies. For the year ended 12-31-94, had the Manager
not reimbursed expenses for the Portfolio, net investment income per
share and the ratios of expenses and net investment income to average
net assets would have been $.031, 1.14% and 3.39%, respectively. For
the year ended 12-31-95, had the Manager not reimbursed expenses for
the Portfolio, net investment income per share and the ratios of
expenses and net investment income to average net assets would have
been $.050, .80% and 5.13%, respectively.
(2) Total return assumes reinvestment of dividends and any other
distributions. It is calculated assuming shares are purchased on the
first day and sold on the last day of each period reported.
68 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
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APPENDIX I
DESCRIPTION OF SECURITY RATINGS
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B -- Debt rated BB and B are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation.
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposure to adverse business, financial or economic conditions which could lead
to the debtor's inadequate capacity to meet its financial commitment on the
debt.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
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A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
An S&P's commercial paper rating is a current assessment of the likelihood
of timely payment of debt considered short-term in the relevant market.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or supporting institutions) are considered to
have a superior capacity for repayment of senior short-term debt obligations.
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Prime-1 repayment ability will often be evidenced by any of the following
characteristics:
- leading market positions in well-established industries
- high rate of return on funds employed
- conservative capitalization structure with moderate reliance on debt and
ample asset protection
- broad margins in earnings coverage of fixed financial charges and high
internal cash generation
- well-established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or supporting institutions) are considered to have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics of issuers rated Prime-1
but to a lesser degree. Earnings trends and coverage ratios, while sound, be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
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<PAGE> 74
APPENDIX II
EXEMPTIONS
The following is the text of the proposed and final exemptions from the
Department of Labor from certain provisions of the Employee Retirement Income
Security Act of 1974 relating to the purchase of shares and participation in
TARGET by certain retirement plans.
PROPOSED EXEMPTION
FEDERAL REGISTER
VOL. 58, No. 131
Monday, July 12, 1993
Notices
DEPARTMENT OF LABOR (DOL)
Pension and Welfare Benefits Administration (PWBA)
. . .
Prudential Mutual Fund Management, Inc. (PMF) Located in New York, NY
[Application No. D-9217]
PROPOSED EXEMPTION
SECTION I. COVERED TRANSACTIONS
The Department is considering granting an exemption under the authority of
section 408(a) of the Act and section 4975(c)(2) of the Code and in accordance
with the procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990). If the exemption is granted, the restrictions of section
406(a) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the Code,
shall not apply to the purchase or redemption of shares by an employee benefit
plan, an individual retirement account (the IRA) or a retirement plan for a
self-employed individual (the Keogh Plan; collectively, the Plans) in the Target
Portfolio Trust (the Trust) established in
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<PAGE> 75
connection with such Plans' participation in the Target Personal Investment
Advisory Service (the Target Program). In addition, the restrictions of section
406(b) of the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the Code, shall
not apply to the provision, by Prudential Securities Incorporated (Prudential
Securities), of investment advisory services to an independent fiduciary of a
participating Plan (the Independent Plan Fiduciary) which may result in such
fiduciary's selection of portfolios of the Trust (the Portfolios) in the Target
Program for the investment of Plan assets.
This exemption is subject to the following conditions that are set forth
below in Section II.
SECTION II. GENERAL CONDITIONS
(1) The participation of Plans in the Target Program is approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Prudential Securities and/or its affiliates covered by an
IRA not subject to Title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.
(2) The total fees paid to Prudential Securities and its affiliates
constitute no more than reasonable compensation.
(3) No Plan pays a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) Prudential Securities provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by Prudential Securities to an
Independent Plan Fiduciary are implemented only at the express direction of such
independent fiduciary.
(7) Prudential Securities provides investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio is independent of Prudential Securities
and its affiliates.
(9) The quarterly investment advisory fee that is paid by a Plan to
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<PAGE> 76
Prudential Securities for investment advisory services rendered to such Plan is
offset by such amount as is necessary to assure that PMF retains no more than 20
basis points from any Portfolio (with the exception of the U.S. Government Money
Market Portfolio for which PMF retains an investment management fee of 12.5
basis points) containing investments attributable to the Plan investor.
(10) With respect to its participation in the Target Program prior to
purchasing Trust shares,
(a) Each Plan receives the following written or oral disclosures or
questionnaires from Prudential Securities or the Trust:
(1) A copy of the prospectus (the Prospectus) for the Trust
discussing the investment objectives of the Portfolios comprising the
Trust, the policies employed to achieve these objectives, the corporate
affiliation existing between Prudential Securities, PMF and its
subsidiaries, the compensation paid to such entities and additional
information explaining the risks attendant to investing in the Trust.
(2) Upon written or oral request to Prudential Securities, the
Independent Plan Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest,
the investment policies and strategies that the Portfolios may utilize,
including a description of the risks.
(3) As applicable, an Investor Profile Questionnaire given to the
Independent Plan Fiduciary or eligible participant of a Plan providing
for participant-directed investments (the section 404(c) Plan).
(4) As applicable, a written analysis of Prudential Securities'
asset allocation decision and recommendation of specific Portfolios
given to the Independent Plan Fiduciary or the participant in a section
404(c) Plan.
(5) A copy of the investment advisory agreement between Prudential
Securities and such Plan relating to participation in the Target
Program.
(6) Upon written request to the Trust, a copy of the respective
investment advisory agreement between Prudential Securities and the
Sub-Advisers.
(7) As applicable, an explanation by a Prudential Securities
Financial Advisor (the Financial Advisor) to section 404(c) Plan
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<PAGE> 77
participants or the Independent Plan Fiduciary of the services offered
under the Target Program and the operation and objectives of the
Portfolios.
(8) Copies of the proposed exemption and grant notice describing
the exemptive relief provided herein.
(b) If accepted as an investor in the Target Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing to Prudential Securities, prior to purchasing Trust shares that
such fiduciary has received copies of the documents described in
subparagraph 10(a) of this section.
(c) With respect to a section 404(c) Plan, written acknowledgment of
the receipt of such documents is provided by the Independent Plan Fiduciary
(i.e., the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, or, in some instances, the Plan participant).
Such Independent Plan Fiduciary will be required to represent in writing to
PMF that such fiduciary is (1) independent of PMF and its affiliates and
(2) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program.
(d) With respect to a Plan that is covered under title I of the Act,
where investment decisions are made by a trustee, investment manager or a
named fiduciary, such Independent Plan Fiduciary is required to
acknowledge, in writing, receipt of such documents and represent to PMF
that such fiduciary is (1) independent of PMF and its affiliates, (2)
capable of making an independent decision regarding the investment of Plan
assets and (3) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an informed
decision concerning participation in the Target Program.
(11) Subsequent to its participation in the Target Program, each Plan
receives the following written or oral disclosures with respect to its ongoing
participation:
(a) Written confirmations of each purchase or redemption transaction by
the Plan with respect to a Portfolio.
(b) Telephone quotations from Prudential Securities of such Plan's
account balance.
(c) A monthly statement of account from Prudential Securities
specifying the net asset value of the Plan's investment in such account to
the extent there are transactions by the Plan.
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<PAGE> 78
(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.
(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and
cumulative realized gains and losses and income received from each
Portfolio, a summary of purchase, sale and exchange activity, dividends and
interest received or reinvested and market commentary. The Quarterly
Account Monitor will also contain an analysis and an evaluation of a Plan
investor's account to ascertain whether the Plan's investment objectives
have been met and recommending, if required, changes in Portfolio
allocations.
(1) In the case of a section 404(c) Plan where the Independent
Plan Fiduciary has established an omnibus account in the name of the
Plan (the Undisclosed Account) with Prudential Securities, the
Quarterly Account Monitor will be provided to the Independent Plan
Fiduciary.
(2) In the case of a section 404(c) Plan where the Independent
Plan Fiduciary opens an account for each Plan participant (the
Disclosed Account), the Quarterly Account Monitor will be furnished to
each participant and will set forth information pertaining to the
participant's individual account.
(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.
(g) Periodic meetings with Financial Advisors, Independent Plan
Fiduciaries or if applicable, participants of Section 404(c) Plans, to
discuss the Quarterly Account Monitor or other questions that may arise.
(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
76 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 79
whether the conditions of this exemption have been met, except that (a) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records are
lost or destroyed prior to the end of the six year period, and (b) no party in
interest other than PMF shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (13) below.
(13)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the Act, the records referred to in paragraph (14) of this section are
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any
duly authorized employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of
this paragraph (13) are authorized to examine the trade secrets of PMF or
commercial or financial information which is privileged or confidential.
SECTION III. DEFINITIONS
For purposes of this exemption:
(1) An "affiliate" of Prudential Securities includes - -
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term "control"
means the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either
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<PAGE> 80
(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a Section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests in
Trust shares, or
(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
Effective date: If granted, this proposed exemption will be effective March
15, 1993.
SUMMARY OF FACTS AND REPRESENTATIONS
1. The parties to the transactions are as follows:
a. Prudential Securities, located in New York, New York, is an
indirect, wholly owned subsidiary of the Prudential Insurance Company of
America (Prudential), the largest insurance company in the United States
and the second largest insurance company in the world. Prudential
Securities offers a broad spectrum of financial services to both individual
and institutional investors including cash management services, retirement
and financial planning services, mutual funds, investment management
services and insurance and annuity services. Among these services are a
variety of asset allocation programs. The investment management and
financial services that comprise Prudential Securities are involved with
the management of more than $50 billion in assets. Prudential Securities
assists investors in selecting Portfolios for investment in the Trust. In
addition, Prudential Securities serves as the distributor of Trust shares
and provides investment allocation advice to investors.
b. PMF, which is located in New York, New York, is an indirect wholly
owned subsidiary of Prudential. PMF is a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the 1940 Act).
PMF was incorporated in May 1987 under the laws of the State of Delaware.
Currently, PMF is the investment manager to 35 open-end investment
companies, constituting all of the Prudential mutual funds. In addition,
PMF serves as investment manager or administrator to 19 closed-end
investment companies. These companies collectively have total assets of
approximately $41 billion. PMF serves as the investment manager of the
Trust and the underlying Portfolios.
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c. Prudential Mutual Fund Services, Inc. (PMFS) of Edison, New Jersey
is a wholly owned subsidiary of PMF. PMFS will serve as Transfer Agent and
Dividend Disbursing Agent for the Trust. In these capacities, PMFS
maintains certain books and records for the Trust.
d. Ibbotson Associates, Inc. (Ibbotson) of Chicago, Illinois, is an
investment consulting, data and software products firm that specializes in
applying investment theories and empirical findings to current business
practice. Ibbotson is not related to Prudential or its affiliates. Ibbotson
has developed software for the Target Program (described herein) which
involve investment profile matrices and asset allocation methodologies.
These matrices and methodologies translate investor needs, preferences and
attitudes into suggested portfolio allocations. Ibbotson will maintain and
update the software package from time to time as deemed appropriate by
Prudential Securities.
2. On July 31, 1992, Prudential Securities formed the Trust, a no load,
open-end, diversified management investment company registered under the
Investment Company Act of 1940, as amended. The Trust is organized as a Delaware
business trust and it has an indefinite duration. As of September 22, 1992, the
Trust had no assets.
The Trust consists of nine different portfolios which range from the U.S.
Government Money Market Portfolio to the International Equity Portfolio and
which pay monthly or annual dividends to investors. The composition of the
Portfolios covers a spectrum of investments which include U.S.
Government-related securities or equity or debt securities issued by foreign or
domestic corporations. The Portfolios are further categorized under two major
groupings -- Equity and Income. No Portfolio of the Trust is permitted to invest
any of its assets in securities issued by Prudential Securities or companies
which are directly or indirectly controlled by, or under common control with
Prudential Securities. Further, no Portfolio of the Trust may engage in
principal transactions with Prudential Securities or its affiliates.
3. Shares in the Trust are being offered by Prudential Securities, as
distributor, to participants in the Target Program. The Target Program is an
investment advisory service pursuant to which the Asset Management Group of
Prudential Securities, in its capacity as investment adviser to participants in
the Target Program, in conjunction with Ibbotson, directly provides to investors
asset allocation recommendations and related services with respect to the
Portfolios based on an evaluation of an investor's investment objectives and
risk tolerances.
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<PAGE> 82
The Target Program is designed for mid-sized investors with assets of
$10,000 - $1 million. To participate in the Trust, each investor must open a
brokerage account with Prudential Securities by making a current, minimum
initial investment of $10,000.(3)
Although PMF anticipates that investors in the Trust will consist of
institutions and individuals, it is proposed that prospective investors include
Plans for which PMF may or may not currently maintain investment accounts. A
majority of these Plans may be IRAs or Keogh Plans. In addition, it is proposed
that Plans for which PMF or an affiliate serves as a prototype sponsor and/or a
nondiscretionary trustee or custodian be permitted to invest in the Trust.(4)
The applicants represent that the initial purchase of shares in the Trust
by a Plan may give rise to a prohibited transaction where PMF or an affiliate
has a party in interest relationship with the Plan. PMF also acknowledges that a
prohibited transaction could arise upon a subsequent purchase or redemption of
shares in the Trust by a participating Plan inasmuch as the party in interest
relationship between PMF and the Plan may have been established at that point.
Accordingly, the applicants have requested retroactive exemptive relief
from the Department with respect to the purchase and redemption from Prudential
Securities of shares in the Trust by a participating Plan where
- -------------------
(3) Shares in the Trust are not certificated for reasons of economy and
convenience. PMFS, the Trust's transfer agent, however, maintains a record
of each investor's ownership of shares. Although Trust shares are
transferable and accord voting rights to their owners, they do not confer
pre-emptive rights (i.e., the privilege of a shareholder to maintain a
proportionate share of ownership of a company by purchasing a proportionate
share of any new stock issues). PMF represents that in the context of an
open-end investment company that continuously issues and redeems shares, a
pre-emptive right would make the normal operations of the Trust
impossible.
As for the voting rights, PMF states that they are accorded to
recordholders of Trust shares. PMF notes that a recordholder of Trust
shares may determine to seek the submission of proxies by Plan participants
and vote Trust shares accordingly. In the case of individual account plans
such as Section 404(c) Plans, PMF believes that most Plans will
pass-through the vote to participants on a pro-rata basis.
(4) The Department notes that the general standards of fiduciary conduct
promulgated under the Act would apply to the participation in the Target
Program by an Independent Plan Fiduciary. Section 404 of the Act requires
that a fiduciary discharge his duties respecting a plan solely in the
interest of the plan's participants and beneficiaries and in a prudent
fashion. Accordingly, an Independent Plan Fiduciary must act prudently with
respect to the decision to enter into the Target Program with Prudential
Securities as well as with respect to the negotiation of services that will
be performed thereunder and the compensation that will be paid to
Prudential Securities and its affiliates. The Department expects that an
Independent Plan Fiduciary, prior to entering into the Target Program, to
understand fully all aspects of such arrangement following disclosure by
Prudential Securities of all relevant information.
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Prudential Securities does not (a) sponsor the Plan (other than serving as
a prototype sponsor) or (b) exercise discretionary authority over such Plan's
assets.(5) No commissions or fees are being paid by a Plan with respect to the
sale and redemption transactions or a Plan's exchange of shares in a Portfolio
for shares of another Portfolio. If granted, the applicants request that the
exemption be made effective as of March 15, 1993.
4. Overall responsibility for the management and supervision of the Trust
and the Portfolios rests with the Trust's Board of Trustees (the Trustees) which
will initially be comprised of seven members. The Trustees approve all
significant agreements involving the Trust and the persons and companies that
provide services to the Trust and the Portfolios. Three of the Trustees and all
of the Trust's executive officers are affiliated with PMF and/or its affiliates.
The four remaining Trustees are not affiliated with PMF.
5. Under its management agreement entered into with the Trust, PMF, as
investment manager, manages the investment operations of the Trust, administers
the Trust's affairs and is responsible for the selection, subject to the review
and approval of the Trustees, of the Sub-Advisers of each Portfolio.(6)
Through the Target Program, Prudential Securities provides a Plan investor
with non-binding, asset allocation recommendations with respect to such
investor's investments in the Portfolios. In order to make these evaluations,
Prudential Securities will furnish copies of an Investor Profile Questionnaire,
designed to elicit information about the specific investment needs, objectives
and expectations of the investor, to the Independent Plan Fiduciary or
participant of a Title I Plan, as provided below, or to an IRA or a Keogh Plan.
In the case of a Plan where the Independent Plan Fiduciary
- ------------------------
(5) PMF represents that to the extent employee benefit plans that are
maintained by PMF purchase or redeem shares in the Trust, such transactions
will meet the provisions of Prohibited Transaction Exemption (PTE) 77-3 (42
FR 18734, April 8, 1977). The applicants further represent that, although
the exemptive relief proposed above would not permit PMF or an affiliate
(while serving as a Plan fiduciary with discretionary authority over the
management of a Plan's assets) to invest those assets over which it
exercises discretionary authority in Trust shares, a purchase or redemption
of Trust shares under such circumstances would be permissible if made in
compliance with the terms and conditions of PTE 77-4 (42 FR 18732, April 8,
1977). The Department expresses no opinion herein as to whether such
transactions will comply with the terms and conditions of PTEs 77-3 and
77-4.
(6) Subject to the supervision and direction of the Trustees, PMF provides to
the Trust investment management evaluation services principally by
performing initial review on prospective Sub-Advisers for each Portfolio
and thereafter monitoring each Sub-Adviser's performance. In evaluating
prospective Sub-Advisers, PMF considers, among other factors, each Sub-
Adviser's level of expertise, consistency of performance and investment
discipline or philosophy. PMF has the responsibility for communicating
performance expectations and evaluations to the Sub-Advisers and ultimately
recommending to the Trustees whether the Sub-Advisers' contracts should be
renewed.
81
<PAGE> 84
has established a Disclosed Account in the name of each Plan participant (such
as in a section 404(c) Plan), Prudential Securities will furnish copies of the
Investor Profile Questionnaire to each of the Plan participants for response.
However, if the Independent Plan fiduciary establishes an Undisclosed Account
with Prudential Securities in the name of the Plan, Prudential Securities will
provide the Independent Plan Fiduciary, upon oral or written request and at no
additional cost, with sufficient copies of the Investor Profile Questionnaire so
that the Independent Plan Fiduciary may distribute such questionnaire to Plan
participants. Prudential Securities, if requested, will also perform, at no
additional cost, the asset allocation analyses for each of these participants.
6. Based upon data obtained from the Investor Profile Questionnaire,
Prudential Securities evaluates the investor's risk tolerances and financial
goals. Prudential Securities then provides investment advice as to the
appropriate mix of investment Portfolios of the Trust that are designed to
balance the investor's goals, objectives and risk tolerances as part of a
long-term investment strategy.
The applicants represent that Prudential Securities does not have any
discretionary authority or control with respect to the allocation of an
investor's assets among the Portfolios. In the case of an IRA or Keogh Plan, the
applicants represent that all of Prudential Securities' recommendations and
evaluations are presented to the Independent Plan Fiduciary and are implemented
only if accepted and acted upon by such Independent Plan Fiduciary. However, in
the case of a Plan such as a section 404(c) Plan, PMF represents that
Independent Plan Fiduciaries or participants in such Plan are presented with
Prudential Securities' recommendations and evaluations depending upon the type
of account the Independent Plan Fiduciary has established with Prudential
Securities.
7. With respect to an Undisclosed Account, the applicants represent that
Prudential Securities' recommendations will be presented to the Independent Plan
Fiduciary and such fiduciary will advise Prudential Securities of the investment
to be made for the Plan. However, with respect to a Disclosed Account, the
applicants note that Prudential Securities' recommendations will be presented to
the participants who will be responsible for acting upon that recommendation.
8. The applicants note that not all of the services described above will be
provided to every Plan. The services provided to each Plan or to each
82 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 85
Plan participant will depend on what is decided upon by the Independent Plan
Fiduciary. The applicants represent that an Independent Plan Fiduciary may
decide for its own reasons to establish an Undisclosed Account with Prudential
Securities under which Prudential Securities is not required to provide
investment allocation services to each Plan participant. The applicants state
that an Independent Plan Fiduciary may already have an established relationship
with a recordkeeper which, depending on the recordkeeper's accounting system,
makes it administratively desirable for the Independent Plan Fiduciary to invest
a Plan's assets on an undisclosed basis instead of on a disclosed basis. The
recordkeeper would be responsible for making allocations to each participant's
account in the Plan.
However, if the Independent Plan Fiduciary requests a reduction in the
level of services, there will be no corresponding reduction in the fee that the
fiduciary pays Prudential Securities if the investment in the Target Program is
$100,000 or less. Only investments in excess of $100,000 in the Target Program
can result in the payment to Prudential Securities of a quarterly investment
allocation fee that is lower than 1.35 percent. (See Representation 17.)(7)
9. Based upon the investment advice and recommendations, which may or may
not be adopted, the Independent Plan Fiduciary, with respect to an Undisclosed
Account, the Plan participant, with respect to a Disclosed Account, or the IRA
or Keogh Plan participant, as applicable, selects the specific Portfolios.
Prudential Securities will continue to render Portfolio selection advice to
Plans or Plan fiduciaries relating to asset allocations among the selected
Portfolios.
10. As stated above, PMF is responsible, subject to the supervision and
direction of the Trustees, for selecting the Sub-Advisers which will provide
discretionary advisory services with respect to the investment of the assets of
the individual Portfolios on the basis of their performance in their respective
areas of expertise in asset management. PMF represents that there are presently
seven Sub-Advisers, all of which are independent of, and will
- --------------------------
(7) In this regard, the Department emphasizes that it expects the Independent
Plan Fiduciary to prudently consider the relationship of the fees to be
paid by the Plan to the level of services to be provided by Prudential
Securities. In light of the relatively fixed nature of the fees,
Independent Plan Fiduciaries should consider the appropriateness of this
arrangement in the context of a section 404(c) Plan where asset allocation
advice is not provided directly or indirectly to Plan participants.
In response to the Department's concern over this matter, Prudential
Securities represents that it will amend the Trust Prospectus and
Investment Advisory Agreement to include the following statement: "The
Independent Plan Fiduciary [has] should] consider, in a prudent manner, the
relationship of the fees to be paid by the Plan along with the level of
services provided by Prudential Securities."
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<PAGE> 86
remain independent of, PMF and/or its affiliates(8). The Sub-Advisers are
registered investment advisers under the 1940 Act. They maintain their principal
executive offices in various regions of the United States.
11. Aside from the Investor Profile Questionnaire described above, in order
for a Plan to participate in the Target Program, Prudential Securities will
provide an Independent Plan Fiduciary with a copy of the Trust Prospectus. This
document discusses the investment objectives of the Portfolios comprising the
Trust, the policies employed to achieve these objectives, the corporate
affiliation existing between Prudential Securities, PMF and its subsidiaries,
the compensation paid to such entities and information explaining the risks
attendant to investing in the Trust. In addition, upon written or oral request
to Prudential Securities, the Independent Plan Fiduciary will be given a
Statement of Additional Information supplementing the Prospectus which describes
the types of securities and other instruments in which the Portfolios may
invest, the investment policies and strategies that the Portfolios may utilize
including a description of the risks.(9) Further, each Independent Plan
Fiduciary or if, applicable, Plan participant, will be given a copy of the
investment advisory agreement between Prudential Securities and such Plan
relating to participation in the Target Program including copies of the notice
of proposed exemption and grant notice for the exemptive relief provided herein.
Upon written request to the Trust, Prudential Securities will also provide an
Independent Plan Fiduciary or if applicable, Plan participant, with a copy of
the respective investment advisory agreement between PMF and the Sub-Advisers.
(Independent Plan Fiduciaries or Plan participants will be apprised by
Prudential Securities that they may receive the aforementioned information in
sales and marketing material and/or in communications made by brokers.)
With respect to a section 404(c) Plan, Financial Advisors affiliated with
Prudential Securities will also explain the services offered under the Target
Program as well as the operation and objectives of the Portfolios to either the
Independent Plan Fiduciary or to eligible section 404(c) Plan participants
- ------------------------
(8) Although there are presently nine Portfolios comprising the Trust, there
are only seven Sub-Advisers because two of the Sub-Advisers manage two
Portfolios.
(9) In the case of a section 404(c) Plan, Prudential Securities represents that
the Plan administrator, trustee or named fiduciary, as the recordholder of
Trust shares, will make available the Trust Prospectus to section 404(c)
Plan participants. If requested by such Plan administrator, trustee or
named fiduciary, the Prudential Securities will make available to such
Independent Plan Fiduciaries sufficient quantities of Prospectuses for
distribution to Plan participants, as well as provide Statements of
Additional Information to any parties upon request.
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<PAGE> 87
depending upon the type of account the Independent Plan Fiduciary establishes
with Prudential Securities.(10)
If accepted as a Trust investor, an Independent Plan Fiduciary will be
required by Prudential Securities to acknowledge, in writing, prior to
purchasing Trust shares, that such fiduciary has received copies of the
aforementioned documents. With respect to a Plan that is covered by title I of
the Act (e.g., a defined contribution plan), where investment decisions will be
made by a trustee, investment manager or a named fiduciary, Prudential
Securities will require that such Independent Plan Fiduciary acknowledge in
writing receipt of such documents and represent to Prudential Securities that
such fiduciary is (a) independent of Prudential Securities and its affiliates,
(b) capable of making an independent decision regarding the investment of Plan
assets and (c) knowledgeable with respect to the Plan in administrative matters
and funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program. With respect to a section 404(c)
Plan, written acknowledgment of the receipt of such documents will be provided
by the Independent Plan Fiduciary (i.e., the Plan administrator, trustee or
named fiduciary, as the recordholder of Trust shares, or in some instances, the
Plan participant). Such Independent Plan Fiduciary will be required to
represent, in writing, to Prudential Securities that such fiduciary is (a)
independent of Prudential Securities and its affiliates and (b) knowledgeable
with respect to the Plan in administrative matters and funding matters related
thereto, and able to make an informed decision concerning participation in the
Target Program.
12. Prudential Securities will provide all parties that execute the
investment advisory agreement and in whose name the Target Program account is
registered with written confirmations of each purchase and redemption of shares
of a Portfolio, telephone quotations of such investor's account balance, a
monthly statement of account specifying the net asset value of a Plan's assets
that are invested in such account (to the extent there are transactions
involving the account), and a written quarterly Target Program account
statement. The Quarterly Account Monitor is designed to include a record of the
performance of the client's assets and rates of return as compared to several
appropriate market indices (illustrated in a manner that reflects the effect of
any fees for participation in the Target Program actually incurred during the
period), the
- ----------------------
(10) The Department is expressing no opinion as to whether the information
provided under the Target Program is sufficient to enable a participant to
exercise independent control over assets in his or her account as
contemplated by section 404(c) of the Act.
85
<PAGE> 88
client's actual portfolio with a breakdown of investments made in each
Portfolio, year to date and cumulative realized gains and losses and income
received from each Portfolio, a summary of purchase, sale and exchange activity
and dividends and interest received or reinvested as well as a market
commentary. In addition, the Quarterly Account Monitor will contain an analysis
and an evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations. The Quarterly Account Monitor is described in the summary
of the Target Program attached to the front of the Trust's Prospectus.
If an Independent Plan Fiduciary of a section 404(c) Plan opens a Disclosed
Account for each Plan participant, such participant will receive a Quarterly
Account Monitor reflecting information that pertains to the participant's
individual account. However, if an Independent Plan Fiduciary elects to
establish an Undisclosed Account with Prudential Securities, then Prudential
Securities will provide the Quarterly Account Monitor to the Independent Plan
Fiduciary. Such report will contain information relative to the Plan's account.
In addition, on both a quarterly and annual basis, commencing with the
first quarterly report due after this notice of proposed exemption is issued,
Prudential Securities will provide, as applicable, an Independent Plan Fiduciary
or a section 404(c) Plan participant with written disclosures of (a) the
percentage of each Portfolio's aggregate brokerage commissions that are paid to
Prudential Securities and (b) the average brokerage commission per share paid by
each Portfolio to Prudential Securities, as compared to the average brokerage
commission per share paid by each Portfolio to brokers other than Prudential
Securities, both expressed as cents per share. With respect to a Disclosed
Account established for a section 404(c) Plan participant, Prudential Securities
will provide the brokerage report to the participant and not to the Independent
Plan Fiduciary.
Further, the Independent Plan Fiduciary or section 404(c) Plan participant,
as applicable, will have access to a Financial Advisor for the discussion of any
questions that may arise.
13. A Plan wishing to redeem Trust shares must communicate such request in
writing or by telephone to Prudential Securities. Redemption requests received
in proper form prior to the close of trading on the New York Stock Exchange (the
NYSE) will be effected at the net asset value per share determined on that day.
Redemption requests received after the close of regular trading on the NYSE will
be effected at the net asset value at the
86 THE TARGET PORTFOLIO TRUST [TELEPHONE GRAPHIC] (800) 225-1852
<PAGE> 89
close of business of the next day, except on weekends or holidays when the NYSE
is closed. A Portfolio is required to transmit redemption proceeds for credit to
an investor's account with PMF or to an "introducing" broker(11) within 5
business days after receipt of the redemption request. Prudential Securities
will place redemption proceeds in the client's brokerage account and will, in
the absence of receiving investment instructions, place all such assets in a
money market fund (other than the Trust's U.S. Government Money Market
Portfolio) which may be affiliated with Prudential Securities.(12)
Due to the high costs of maintaining small accounts, the Trust may also
redeem an account where the current value is $10,000 or less, provided the Plan
has been given at least 30 days' advance written notice in which to increase the
account balance to more than the $10,000 amount. The proceeds of such redemption
will be deposited in the investor's brokerage account unless Prudential
Securities is otherwise instructed.(13)
14. Shares of a Portfolio may be exchanged by an investor, without the
payment of any fees, for shares of another Portfolio at their respective net
asset values. However, Portfolio shares are not exchangeable with shares of
other Prudential Mutual Funds.
15. With respect to brokerage transactions that are entered into under the
Target Program for a Portfolio, such transactions may be executed through
Prudential Securities, if in the judgment of the Sub-Adviser, the use of such
broker-dealer is likely to result in price and execution at least as favorable,
and at a commission charge at least as comparable to those of other qualified
broker-dealers. In addition, Prudential Securities may not execute transactions
for a Portfolio on the floor of any national securities exchange but it may
effect transactions by transmitting orders to other
- -----------------------
(11) Prudential Securities provides clearance, settlement and other back office
services to other broker-dealers. Prudential Securities may also provide
confirmations and account statements to clients of brokers who have
"introduced" clients to Prudential Securities. If a Plan uses an
introducing broker, the arrangement between the Plan and that broker will
define whether the broker is authorized by the Plan to accept redemption
proceeds.
(12) The applicants are not requesting, nor is the Department proposing,
exemptive relief with respect to the investment, by Prudential Securities,
of redemption proceeds in an affiliated money market fund where the Plan
investor has not given investment instructions. The applicants represent
that to the extent Prudential Securities is considered a fiduciary, such
investments will comply with the terms and conditions of PTE 77-4. However,
the Department expresses no opinion herein on whether such transactions are
covered by this class exemption.
(13) The 30 day limit does not restrict a Plan's ability to redeem its interest
in the Trust. The 30 day notice period is provided to give a Plan an
opportunity to increase the value of the assets in its Plan account with
Prudential Securities to an amount in excess of $10,000. If desired, the
Plan may still follow the redemption guidelines described in Representation
13 above.
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<PAGE> 90
brokers for execution. In this regard, Prudential Securities is required to pay
fees charged by those persons performing the floor brokerage elements out of the
brokerage compensation it receives from a Portfolio.
16. Each Portfolio bears its own expenses, which generally include all
costs that are not specifically borne by PMF, Prudential Securities, the
Sub-Advisers or PMFS. Included among a Portfolio's expenses are costs incurred
in connection with the Portfolio's organization, investment management and
administration fees, fees for necessary professional and brokerage services,
fees for any pricing service, the costs of regulatory compliance and costs
associated with maintaining the Trust's legal existence and shareholder
relations. No Portfolio, however, will impose sales charges on purchases,
reinvested dividends, deferred sales charges, redemption fees, nor will any
Portfolio incur distribution expenses.
17. The total fees that are paid to Prudential Securities and its
affiliates will constitute no more than reasonable compensation. In this regard,
for its asset allocation and related services, Prudential Securities will charge
an investor a quarterly investment advisory fee. The "outside fee," which is
computed quarterly, ranges annually from .50 percent up to a maximum of 1.35
percent of the average annual net assets held in a Target Program account
invested by the Plans in the Equity and Income Portfolios. The outside fee will
be charged directly to an investor and it will not be affected by the allocation
of assets among the Equity or the Income Portfolios nor by whether an investor
follows or ignores Prudential Securities' advice.(14) The outside fee can be
negotiated to below the 1.35 percent maximum only if the Plan invests an
aggregate amount of $100,000 or greater in the Target Program. In the case of
Plans, the outside fee may be paid by the Plan or by the Plan sponsor or, in the
case of IRAs only, the fee may be paid by the IRA beneficiary directly.
For Plan investors, the outside fee will be payable in full within 6
business days after the trade date for the initial investment in the Portfolios
and will be based on the value of assets in the Target Program on the trade date
of the initial investment. The initial fee payment will cover the period from
the initial investment trade date through the last calendar day of the calendar
quarter, and the fee will be pro-rated accordingly. Thereafter, the quarterly
fee will cover the period from the first calendar day through the last calendar
day of
- -----------------------
(14) Prudential Securities represents that the outside fee is not imposed on the
accounts of employees of Prudential and its subsidiaries, including PMF,
the accounts of their immediate families, IRAs and certain employee pension
benefit plans for these persons. With respect to employee benefit plans
maintained by PMF or its affiliates for their employees, the applicants
assert that such waiver would be required by PTE 77-3.
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<PAGE> 91
the current calendar quarter. The quarterly fee is based on the value of assets
in the Target Program measured as of the last calendar day of the previous
quarter and is payable on the fifth business day of the current quarter.(15)
18. Each time that additional funds aggregating $10,000 or more are
invested in the Portfolios during any one quarter, the applicable fee, pro-rated
for the number of calendar days then remaining in the quarter and covering the
amount of such additional funds, shall be charged and be payable 6 business days
later. In the case of redemptions aggregating $10,000 or more during a quarter,
the fee will be reduced accordingly, pro-rated for the number of calendar days
then remaining in the quarter.
In addition, for investment management and related services provided to the
Trust, PMF is paid, from each Portfolio, a management fee which is computed
daily and paid monthly at an annual rate ranging from .25 percent to .70 percent
of the value of the Portfolio's average daily net assets depending upon the
Portfolio's objective. From these management fees, PMF compensates the
Sub-Advisers. This "inside fee," which is the difference between the individual
Portfolio's total management fee and the fee paid by PMF to the Sub-Adviser,
varies from 12.5 to 30 basis points depending on the Portfolio. In addition,
pursuant to a Transfer Agency and Service Agreement with the Trust, PMFS will be
paid an annual fee of $35 per Target Program participant out of the operating
expenses of the Portfolios.(16)
19. The management fees that are paid at the Portfolio level to PMF and the
Sub-Advisers are set forth in the table below. As noted in the table, the sum of
the management fees paid by a Portfolio to PMF and the Sub-Advisers (S-A) and
retained by such entities equals the total management fee paid by the Portfolio.
- -----------------------
(15) The applicants represent that an Independent Plan Fiduciary or Plan
participant may change Portfolio allocations on any business day and there
are no limitations as to how frequently Portfolio allocations can be made.
The applicants also state that assets which are subsequently added to a
Target Program account after the beginning of any calendar quarter (and are
allocated in accordance with the Independent Plan Fiduciary's or
participant's asset allocation decision) will not be subject to the outside
fee for that quarter until such additional investments "aggregate" (i.e.,
new money invested during the quarter) $10,000 or more. When this occurs,
the applicants explain that the outside fee will be assessed on such
additional assets and will be payable six business days thereafter
(pro-rated based on the length of time remaining in the current calendar
quarter). If the additional investments have not reached the $10,000 level
by the last day of the calendar quarter, the applicants state that such
investments will start being subject to the outside fee as of the first
business day of the next calendar quarter.
(16) The applicants represent that if an Undisclosed Account is established by
an Independent Plan Fiduciary only one $35 fee will be levied.
89
<PAGE> 92
<TABLE>
<CAPTION>
TOT. MGT. S-A RET. PMF RET.
PORTFOLIO FEE (%) FEE (%) FEE (%)
<S> <C> <C> <C>
EQUITY:
Large capitalization value portfolio.......... .60 .30 .30
Large capitalization growth portfolio......... .60 .30 .30
Small capitalization value portfolio.......... .60 .30 .30
Small capitalization growth portfolio......... .60 .30 .30
International equity portfolio................ .70 .40 .30
INCOME:
U.S. Government Money Market portfolio........ .25 .125 .125
Mortgage backed securities portfolio.......... .45 .25 .20
Intermediate-term bond portfolio.............. .45 .25 .20
Total return bond portfolio................... .45 .25 .20
</TABLE>
20. PMF proposes to offset, quarterly, against the outside fee that will be
paid to Prudential Securities such amount as is necessary to assure that PMF
retains no more than 20 basis points (the Reduction Factor) from any Portfolio
on investment of assets attributable to any Plan.(17)
Under the proposed fee offset, a Reduction Factor of .10 percent will be
applied against Prudential Securities' quarterly outside fee with respect to the
value of the Plan assets that have been invested in the Equity Portfolios only.
As noted above, the Income Portfolios do not involve a Reduction Factor because
the fee retained by PMF for these Portfolios does not exceed 20 basis points.
The Department, in conjunction with the applicants, has developed the
following example to demonstrate how the fee offset mechanism will work and
determine the aggregate fee that a hypothetical Plan investor might expect to
pay to both Prudential Securities and PMF in a given calendar quarter or year:
Assume that as of March 31, 1993, the average daily value of Trust shares
held by a Plan investor was $1,000. Investment assets attributable to the Plan
were distributed among five Portfolios: (1) U.S. Government Money Market
Portfolio in which the Plan made a $50 investment and from which PMF would not
retain, after payment of the sub-advisory fee to the Sub-Adviser, an inside fee
of .125 percent; (2) Total Return Bond Portfolio in which the Plan made a $200
investment and from which PMF would retain, after payment of the sub-advisory
fee to the Sub-Adviser, an inside fee of .20 percent; (3) Small Capitalization
Growth Portfolio in which the Plan made a $250 investment and from which PMF
would be entitled to retain, after
- ---------------------
(17) Prudential Securities asserts that it chose 20 basis points as the maximum
net fee retained for management services rendered to the Portfolios because
this amount represents the lowest percentage management fee charged by PMF
among the Portfolios (except that the fee paid by the U.S. Government Money
Market Portfolio to PMF is equal to 12.5 basis points).
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<PAGE> 93
payment of the sub-advisory fee to the Sub-Adviser, an inside fee of .30
percent; (4) Large Capitalization Growth Portfolio in which the Plan made a $250
investment and from which PMF would be entitled to retain, after payment of the
sub-advisory fee to the Sub-Adviser, an inside fee of .30 percent and (5)
International Equity Portfolio in which the Plan made a $250 investment and from
which PMF would be entitled to retain, after payment of the sub-advisory fee to
the Sub-Adviser, an inside fee of .30 percent.
Assume that the Plan investor pays the maximum annual outside fee of 1.35
percent on the Portfolios so that the total outside fee for the calendar quarter
April 1 through June 30, 1993, prior to the offset, would be:
<TABLE>
<CAPTION>
OUTSIDE
AMOUNT MAX. OUTSIDE FEE FOR
PORTFOLIO INVESTED QUART. FEE QUART.
<S> <C> <C> <C>
U.S. Government Money Market portfolio........ $ 50 1.35%(.25) $0.1688
Total return bond portfolio................... 200 1.35%(.25) .6750
Small capitalization growth portfolio......... 250 1.35%(.25) .8438
Large capitalization growth portfolio......... 250 1.35%(.25) .8438
International equity portfolio................ 250 1.35%(.25) .8438
------- -------
Total......................................... $1,000 $3.3752
</TABLE>
Under the proposed fee offset, the outside fee charged to the Plan must be
reduced by the Reduction Factor to ensure that PMF retains an inside fee of no
more than .20% from each of the Portfolios on investment assets attributable to
the Plan. The following table shows the Reduction Factor as applied to each of
the Portfolios comprising the Trust:
<TABLE>
<CAPTION>
PMF RET.
PMF. RET. RED. FACT. FEE AFTER
PORTFOLIO FEE (%) (%) RED. FACT.
<S> <C> <C> <C>
EQUITY:
Large capitalization value portfolio.......... 0.30 0.10 0.20
Large capitalization growth portfolio......... .30 0.10 .20
Small capitalization value portfolio.......... .30 0.10 .20
Small capitalization growth portfolio......... .30 0.10 .20
International equity portfolio................ .30 0.10 .20
INCOME:
U.S. Government Money Market portfolio........ .125 -- .125
Mortgage backed securities portfolio.......... .20 -- .20
Intermediate-term bond portfolio.............. .20 -- .20
Total return bond portfolio................... .20 -- .20
</TABLE>
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<PAGE> 94
Under the proposed fee offset, the quarterly outside fee will be reduced
with respect to Plan assets in the example that have been invested in the Small
Capitalization Growth Portfolio, the Large Capitalization Growth Portfolio and
the International Equity Portfolio only (i.e., the Equity portfolios). In the
example above, the U.S. Government Money Market Portfolio and the Total Return
Bond Portfolio do not require a reduction of the outside fee because the fee
retained by PMF for these Portfolios does not exceed 20 basis points. Therefore,
the quarterly offset for the Plan investor is computed as follows:
(.25)[($250)(.10%) + ($250)(.10%) + ($250)(.10%)] = $.1875.
In the foregoing example, the Plan investor, like all other investors in
the Target Program, would receive a statement for its Target Program account
during the fourth week of April 1993. This statement would include a debit
notice for the outside fee for the calendar quarter April 1 through June 30, as
adjusted by subtracting the quarterly offset from the quarterly outside fee as
determined above. The net quarterly outside fee that would be paid to Prudential
Securities would be determined as follows:
$3.3752 - $.1875 = $3.1877.
The account of the Plan investor (as with other investors) would be debited
on or about April 8, 1993 (i.e., the sixth business day of the calendar quarter)
for the amount of the net quarterly outside fee (pursuant to the authorization
contained in the Target Program investment advisory agreement, and as described
in the Target Program description attached to the cover of the Trust's
Prospectus).(18)
Assuming the Plan investor wishes to gain a more realistic perspective of
the aggregate quarterly and annual fees that would be paid to both Prudential
Securities and PMF at both the Plan level and the Portfolio level, the investor
would include within the computation on the net quarterly outside fee, the
quarterly inside fee that such investor would be paying to PMF.
- -------------------
(18) The foregoing example illustrates that fact that the outside fee and the
fee offset are computed contemporaneously and that Plan investors will get
the benefit of the fee offset contemporaneously upon the payment of the
outside fee. Because the inside fee is paid monthly and the fee offset is
computed quarterly, the applicants represent that PMF will not receive the
benefit of a "float" as a result of such calculations because the fee
offset will always be realized no later than the time that the outside fee
is paid (i.e., on or about the sixth business day of the first month of the
calendar quarter). Since the inside fee is paid at the end of each calendar
month, Plan investors will realize the full benefit of the offset before
the time that the inside fee is paid for the second and third months of the
calendar quarter.
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The quarterly, aggregate fee calculation would be computed as follows:
$3.1877, representing the quarterly net outside fee paid to Prudential
Securities + (.25) [(.125%)($50) + (.20%)($200) + (.30)($250 + $250 + $250)] or
$.6781, representing the quarterly inside fee paid to PMF = $3.8658, which
represents the quarterly fee that would be paid to Prudential Securities and PMF
for services provided to the Plan investor.
The total annual fee that the Plan investor would pay to both Prudential
Securities and PMF would be equal to (4)[$3.1877 (net outside fee) + $.6781
(inside fee)] or $15.4632 per $1,000 investment, or a total fee percentage of
1.55%.
21. Because PMF will retain an inside fee of 12.5 basis points with respect
to assets invested in the U.S. Government Money Market Portfolio, the applicants
note that a potential conflict may exist by reason of the variance in net inside
fees among the U.S. Government Money Market Portfolio and the other Portfolios.
The applicants also recognize that this factor could result in the
recommendation by Prudential Securities of a higher fee-generating Portfolio to
an investing Plan. To help address this potential conflict, Prudential
Securities will disclose to all participants in the Target Program the fee
differentials of the various Portfolios.
22. The books of the Trust will be audited annually by independent,
certified public accountants selected by the Trustees and approved by the
investors. All investors will receive copies of an audited financial report no
later than 60 days after the close of each Trust fiscal year. The books and
financial records of the Trust will be open for inspection by any investor,
including the Department, the Service and the Securities and Exchange
Commission, at all times during regular business hours.
23. In summary, it is represented that the transactions satisfy the
statutory criteria for an exemption under section 408(a) of the Act because: (a)
The investment of a Plan's assets in the Target Program will be made and
approved by a Plan fiduciary which is independent of Prudential Securities and
its affiliates such that Independent Plan Fiduciaries will maintain complete
discretion with respect to participating in the Target Program; (b) Independent
Plan Fiduciaries will have an opportunity to redeem their shares in the Trust in
such fiduciaries' individual discretion; (c) no Plan will pay a fee or
commission by reason of the acquisition or redemption of shares in the Trust;
(d) prior to making an investment in the Trust, each Independent Plan Fiduciary
will receive offering materials and
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disclosures from either PMF or Prudential Securities which disclose all material
facts concerning the purpose, fees, structure, operation, risks and
participation in the Target Program; (e) Prudential Securities will provide
written documentation to an Independent Plan Fiduciary of its recommendations or
evaluations based upon objective criteria; (f) any Sub-Adviser that is appointed
by Prudential Securities to exercise investment discretion over a Portfolio will
always be independent of Prudential Securities and its affiliates; (g) the
annual investment advisory fee that is paid by a Plan to Prudential Securities
for investment advisory services rendered to such Plan will be offset by such
amount as is necessary to assure that PMF retains no more than 20 basis points
from any Portfolio on investment assets attributable to the Plan investor; (h)
each Plan will receive copies of the Trust's semi-annual and annual report which
will include financial statements for the Trust and investment management fees
paid by each Portfolio; and (i) on a quarterly and annual basis, Prudential
Securities will provide written disclosures to Independent Plan Fiduciaries with
respect to (1) the percentage of each Trust Portfolio's brokerage commissions
that are paid to Prudential Securities and its affiliates and (2) the average
brokerage commission per share paid by each Portfolio to Prudential Securities
as compared to the average brokerage commission per share paid by each Portfolio
to brokers other than Prudential Securities and its affiliates, both expressed
as cents per share.
For Further Information Contact: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
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FINAL EXEMPTION
FEDERAL REGISTER
VOL. 58, No. 172
Wednesday, September 8, 1993
Notices
DEPARTMENT OF LABOR (DOL)
Pension and Welfare Benefits Administration (PWBA)
. . .
Prudential Mutual Fund Management, Inc. (PMF) Located in New York, NY
[Prohibited Transaction Exemption 93-59; Exemption Application No. D-9217]
EXEMPTION
SECTION I. COVERED TRANSACTIONS
The restrictions of section 406(a) of the Act and the sanctions resulting
from the application of section 4975 of the Code, by reason of section
4975(c)(1)(A) through (D) of the Code, shall not apply to the purchase or
redemption of shares by an employee benefit plan, an individual retirement
account (the IRA) or a retirement plan for a self-employed individual (the Keogh
Plan; collectively, the Plans) in the Target Portfolio Trust (the Trust)
established in connection with such Plans' participation in the Target Personal
Investment Advisory Service (the Target Program). In addition, the restrictions
of section 406(b) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(E) and (F) of the
Code, shall not apply to the provision, by Prudential Securities Incorporated
(Prudential Securities), of investment advisory services to an independent
fiduciary of a participating Plan (the Independent Plan Fiduciary) which may
result in such fiduciary's selection of portfolios of the Trust (the Portfolios)
in the Target Program for the investment of Plan assets.
This exemption is subject to the following conditions that are set forth
below in Section II.
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SECTION II. GENERAL CONDITIONS
(1) The participation of Plans in the Target Program is approved by an
Independent Plan Fiduciary. For purposes of this requirement, an employee,
officer or director of Prudential Securities and/or its affiliates covered by an
IRA not subject to title I of the Act will be considered an Independent Plan
Fiduciary with respect to such IRA.
(2) The total fees paid to Prudential Securities and its affiliates
constitute no more than reasonable compensation.
(3) No Plan pays a fee or commission by reason of the acquisition or
redemption of shares in the Trust.
(4) The terms of each purchase or redemption of Trust shares remain at
least as favorable to an investing Plan as those obtainable in an arm's length
transaction with an unrelated party.
(5) Prudential Securities provides written documentation to an Independent
Plan Fiduciary of its recommendations or evaluations based upon objective
criteria.
(6) Any recommendation or evaluation made by Prudential Securities to an
Independent Plan Fiduciary are implemented only at the express direction of such
independent fiduciary.
(7) Prudential Securities provides investment advice in writing to an
Independent Plan Fiduciary with respect to all available Portfolios.
(8) Any sub-adviser (the Sub-Adviser) that acts for the Trust to exercise
investment discretion over a Portfolio is independent of Prudential Securities
and its affiliates.
(9) The quarterly investment advisory fee that is paid by a Plan to
Prudential Securities for investment advisory services rendered to such Plan is
offset by such amount as is necessary to assure that PMF retains no more than 20
basis points from any Portfolio (with the exception of the U.S. Government Money
Market Portfolio for which PMF retains an investment management fee of 12.5
basis points) containing investments attributable to the Plan investor.
(10) With respect to its participation in the Target Program prior to
purchasing Trust shares,
(a) Each Plan receives the following written or oral disclosures or
questionnaires from Prudential Securities or the Trust:
(1) A copy of the prospectus (the Prospectus) for the Trust
discussing the investment objectives of the Portfolios comprising the
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Trust, the policies employed to achieve these objectives, the corporate
affiliation existing between Prudential Securities, PMF and its
subsidiaries, the compensation paid to such entities and additional
information explaining the risks attendant to investing in the Trust.
(2) Upon written or oral request to Prudential Securities, the
Independent Plan Fiduciary will be given a Statement of Additional
Information supplementing the Prospectus which describes the types of
securities and other instruments in which the Portfolios may invest,
the investment policies and strategies that the Portfolios may utilize,
including a description of the risks.
(3) As applicable, an Investor Profile Questionnaire given to the
Independent Plan Fiduciary or eligible participant of a Plan providing
for participant-directed investments (the section 404(c) Plan).
(4) As applicable, a written analysis of Prudential Securities'
asset allocation decision and recommendation of specific Portfolios
given to the Independent Plan Fiduciary or the participant in a section
404(c) Plan.
(5) A copy of the investment advisory agreement between Prudential
Securities and such Plan relating to participation in the Target
Program.
(6) Upon written request to the Trust, a copy of the respective
investment advisory agreement between Prudential Securities and the
Sub-Advisers.
(7) As applicable, an explanation by a Prudential Securities
Financial Advisor (the Financial Advisor) to section 404(c) Plan
participants or the Independent Plan Fiduciary of the services offered
under the Target Program and the operation and objectives of the
Portfolios.
(8) Copies of the proposed exemption and grant notice describing
the exemptive relief provided herein.
(b) If accepted as an investor in the Target Program, an Independent
Plan Fiduciary of an IRA or Keogh Plan, is required to acknowledge, in
writing to Prudential Securities, prior to purchasing Trust shares that
such fiduciary has received copies of the documents described in
subparagraph 10(a) of this section.
(c) With respect to a section 404(c) Plan, written acknowledgment of
the receipt of such documents is provided by the Independent Plan
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Fiduciary (i.e., the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, or, in some instances, the Plan participant).
Such Independent Plan Fiduciary will be required to represent in writing to
PMF that such fiduciary is (1) Independent of PMF and its affiliates and
(2) knowledgeable with respect to the Plan in administrative matters and
funding matters related thereto, and able to make an informed decision
concerning participation in the Target Program.
(d) With respect to a Plan that is covered under title I of the Act,
where investment decisions are made by a trustee, investment manager or a
named fiduciary, such Independent Plan Fiduciary is required to
acknowledge, in writing, receipt of such documents and represent to PMF
that such fiduciary is (1) Independent of PMF and its affiliates, (2)
capable of making an independent decision regarding the investment of Plan
assets, and (3) knowledgeable with respect to the Plan in administrative
matters and funding matters related thereto, and able to make an informed
decision concerning participation in the Target Program.
(11) Subsequent to its participation in the Target Program, each Plan
receives the following written or oral disclosures with respect to its ongoing
participation:
(a) Written confirmations of each purchase or redemption transaction by
the Plan with respect to a Portfolio.
(b) Telephone quotations from Prudential Securities of such Plan's
account balance.
(c) A monthly statement of account from Prudential Securities
specifying the net asset value of the Plan's investment in such account to
the extent there are transactions by the Plan.
(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.
(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and
cumulative realized gains and losses and income received from each
Portfolio, a summary of purchase, sale and exchange activity, dividends and
interest received or reinvested and market commentary. The Quarterly
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Account Monitor will also contain an analysis and an evaluation of a Plan
investor's account to assist the Independent Plan Fiduciary or section
404(c) Plan participant in ascertaining whether the investment objectives
for a Plan or an individual account have been met and recommending, if
required, changes in Portfolio allocations.
(1) In the case of a section 404(c) Plan where the Independent
Plan Fiduciary has established an omnibus account in the name of the
Plan with Prudential Securities, the Quarterly Account Monitor will be
provided to the Independent Plan Fiduciary.
(2) In the case of a section 404(c) Plan where the Independent
Plan Fiduciary opens an account for each Plan participant, the
Quarterly Account Monitor will be furnished to each participant and
will set forth information pertaining to the participant's individual
account.
(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) Percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.
(g) Notification that periodic meetings will be held, upon the request
of Plan investors, with Financial Advisors, Independent Plan Fiduciaries
or, if applicable, participants of section 404(c) Plans, to discuss the
Quarterly Account Monitor or other questions that may arise.
(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
whether the conditions of this exemption have been met, except that (a) A
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records are
lost or destroyed prior to the end of the six-year period, and (b) no party in
interest other than PMF shall be subject to the civil penalty that may be
assessed under section 502(i) of the Act, or to the taxes imposed by section
4975(a) and (b) of the Code, if the records are not maintained, or are not
available for examination as required by paragraph (13) below.
(13)(a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504 of
the
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Act, the records referred to in paragraph (14) of this section are
unconditionally available at their customary location during normal business
hours by:
(1) Any duly authorized employee or representative of the Department or
the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any duly
authorized employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or any
duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of
this paragraph (13) are authorized to examine the trade secrets of PMF or
commercial or financial information which is privileged or confidential.
SECTION III. DEFINITIONS
For purposes of this exemption:
(1) An "affiliate" of Prudential Securities includes --
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term "control"
means the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either:
(a) A Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares of a section 404(c) Plan,
(b) A participant in a Keogh Plan,
(c) An individual covered under a self-directed IRA which invests in
Trust shares, or
(d) A trustee, investment manager or named fiduciary responsible for
investment decisions in the case of a title I Plan that does not permit
individual direction as contemplated by section 404(c) of the Act.
For a more complete statement of the facts and representations supporting
the Department's decision to grant this exemption, refer to the
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notice of proposed exemption (the Notice) published on July 12, 1993 at
58 FR 37514.
EFFECTIVE DATE: This exemption is effective March 15, 1993.
WRITTEN COMMENTS
The Department received one written comment with respect to the Notice and
no requests for a public hearing. The comment letter was submitted by PMF,
Prudential Securities and their affiliates (hereinafter, the Applicants) and it
suggested certain clarifications to the General Conditions and the Summary of
Facts and Representations of the Notice. Discussed below are the changes
suggested by the Applicants and the Department's responses to these amendments.
With respect to the General Conditions of the Notice that are set forth in
Section II, the Applicants suggest that the last sentence of paragraph (e) be
clarified to read as follows:
The Quarterly Account Monitor will also contain an evaluation of a Plan
investor's account to assist the Plan ascertaining whether its investment
objectives have been met and recommending, if required, changes in
Portfolio allocations.
However, after considering this comment, the Department has decided that
further revisions of Condition 11(e) are warranted to reflect the fact that it
is the Independent Plan Fiduciary or section 404(c) Plan participant rather than
the Plan who makes determinations about the prudence of continuing a Plan or
account investment in the Target Program. Therefore, the Department has modified
the last sentence of Condition 11(e) as follows:
The Quarterly Account Monitor will also contain an analysis and an
evaluation of a Plan investor's account to assist the Independent Plan
Fiduciary or section 404(c) Plan participant in ascertaining whether the
investment objectives for a Plan or an individual account have been met and
recommending, if required, changes in Portfolio allocations.
The applicants also suggest that Condition 11(g) of the Notice, which
addresses ongoing oral and written disclosures that will be provided by
Prudential Securities to Plan investors, be modified to read as follows:
(g) Periodic meetings will be held at the request of Plan investors
with Financial Advisors, Independent Plan Fiduciaries or, if applicable,
participants of section 404(c) Plans, to discuss the Quarterly Account
Monitor or other questions that may arise.
Although generally agreeing with this comment, the Department
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believes it would be more comprehensible if the words "Notification that" were
inserted at the beginning of this clause to emphasize the fact that Prudential
Securities will inform Plan investors of meetings with its Financial Advisors.
Therefore, the Department has modified Condition 11(g) as follows:
(g) Notification that periodic meetings will be held, upon the request
of Plan Investors, with Financial Advisors, Independent Plan Fiduciaries
or, if applicable participants of section 404(c) Plans, to discuss the
Quarterly Account Monitor or other questions that may arise.
With respect to modifications to the Summary of Facts and Representations
of the Notice, the Applicants suggest that the last sentence of the second
paragraph of Representation 8 be revised to reflect the fact that, in certain
circumstances, the quarterly investment allocation fee can be lower than 1.35
percent. In response to this comment, the Department has revised Representation
8 to read as follows:
The quarterly allocation fee of 1.35 percent per annum may be lowered
in connection with (a) investments of $100,000 or more in the Target
Program or (b) the fee offset described in Representation 20.
The Applicants also request that the Department revise the first sentence
of Footnote 9 in which Prudential Securities states that a Plan administrator,
trustee or named fiduciary, as the recordholder of Trust share, will make
available the Trust Prospectus to section 404(c) Plan participants. The
Applicant's explain that Prudential Securities is not in a position to make any
statements with respect to actions undertaken by Plan administrators, trustees
or named fiduciaries. Therefore, they recommend that the first sentence of
Footnote 9 be deleted.
The Department does not concur entirely with the suggested modification.
Rather than deleting the first sentence of the footnote, the Department believes
the sentence can be clarified to read as follows:
In the case of a section 404(c)Plan, Prudential Securities represents
that the Plan administrator, trustee or named fiduciary, as the
recordholder of Trust shares, has agreed to make the Trust Prospectus
available to section 404(c)Plan participants.
With respect to Representation 17 of the Notice, the applicants state that
it is possible that the outside fee can be negotiated to a level below .50
percent. However, the Applicants anticipate that this fee will generally be no
lower than .50 percent. Therefore, they suggest that the Department revise the
third sentence of Representation 17 to reflect that the fee will generally range
from
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.50 percent to a maximum of 1.35 percent. The Department concurs with this
change and has revised sentence three of Representation 17 as follows:
The "outside fee," which is computed quarterly, generally ranges on an
annual basis from .50 percent up to a maximum of 1.35 percent of the
average annual net assets held in a Target Program account invested by the
Plans in the Equity and Income Portfolios.
The Applicants note that a Plan may be given the option of being separately
invoiced for the outside fee and paying such fee by check or having the outside
fee deducted from the Plan's account with Prudential Securities. In the event
the Plan elects to be invoiced separately for the outside fee, the Applicants
state that the fee is payable 45 days after the end of each calendar quarter or,
for additional investments, after such investments aggregate $10,000. Therefore,
the Applicants suggest that relevant portions of Representation 17, 18 and 20 of
the Notice be revised as well as Footnote 18.
In response to this change, the Department has revised Representation 17 of
the Notice by changing the initial clause of the second paragraph to read "For
some Plan Investors" instead of "For Plan Investors" and adding a new third
paragraph which should be inserted at the end of the text of this
representation. The new paragraph would read as follows:
Plan Investors will be given the option of either being separately
invoiced for the outside fee and paying such fee by check or having the
outside fee deducted from their Prudential Securities account. In the event
the Plan elects to be invoiced separately for the outside fee, the fee is
payable 45 calendar days after the end of the quarter. However, if the Plan
elects to have the outside fee deducted from its Plan account with
Prudential Securities, such outside fee would be payable within 6 business
days of the trade date for an initial investment or within 6 business days
of the current calendar quarter.
The Department also wishes to clarify that the term "applicable fee"
referred to in the initial sentence of Representation 18 means the "outside fee"
which will be paid after a Plan's additional investments in the Trust total
$10,000 or more. Therefore, the Department has revised this sentence by placing
the term outside fee in parentheticals. The revised sentence reads as follows:
Each time that additional funds aggregating $10,000 or more are
invested in the Portfolios during any one quarter, the applicable fee
(i.e., the outside fee), pro-rated for the number of calendar days then
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remaining in the quarter and covering the amount of such additional funds,
shall be charged and be payable 6 business days later.
To reflect the dual billing procedure that Prudential Securities has
established for Plans investing in the Trust, the Department has revised
paragraph 5 of the hypothetical example contained in Representation 20 of the
Notice. The amended paragraph now reads as follows:
The account of the Plan Investor (as with other Investors) would be
debited on or about April 8, 1993 (i.e., the sixth business day of the
calendar quarter) for the amount of the net quarterly outside fee (pursuant
to the authorization contained in the Target Program Investment advisory
agreement, and as described in the Target Program description attached to
the cover of the Trust's Prospectus. However, if the Plan investor is
separately invoiced by Prudential Securities, the outside fee would be
payable 45 calendar days after the end of the calendar quarter.
The Department has also amended Footnote 18 by adding new language to that
contained in the parenthetical so as to reflect the two payment schedules for
the outside fee:
***i.e., on or about the sixth business day of the first month of the
calendar quarter or within 45 calendar days after the end of the calendar
quarter.
Finally, with respect to the example contained in Representation 20, the
Applicants point out that in Clause (1) of the first paragraph of the example
(id at 37520) inadvertently includes the word "not" prior to the word "retain."
The Department concurs with this change and has deleted the word "not" so that
Clause (1) will read as follows:
***(1) U.S. Government Money Market Portfolio in which the Plan made a
$50 investment and from which PMF would retain, after payment of the
subadvisory fee to the Sub-Advisor, an inside fee of .125 percent;
Upon a review of the entire record, including the written comment received,
the Department has determined to grant the exemption subject to the
modifications described above.
FOR FURTHER INFORMATION CONTACT: Ms. Jan D. Broady of the Department,
telephone (202) 219-8881. (This is not a toll-free number.)
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FOR MORE INFORMATION
Please read this prospectus before you invest in the Portfolios and keep it for
future reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
Visit Prudential's Web Site At:
http://www.prudential.com
Additional information about the Trust can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Portfolios' performance)
SEMI-ANNUAL REPORT
TMF 158A
You can also obtain copies of Trust documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call 1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
CUSIP Numbers:
Large Capitalization Growth -- 875921-20-7
Large Capitalization Value -- 875921-10-8
Small Capitalization Growth -- 875921-40-5
Small Capitalization Value -- 875921-30-6
International Equity -- 875921-50-4
International Bond -- 875921-87-6
Total Return Bond -- 875921-88-4
Intermediate-Term Bond -- 875921-80-1
Mortgaged Backed Securities -- 875921-70-2
U.S. Government Money Market -- 875921-60-3
Investment Company Act File No:
811-7064
