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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000
SECURITIES ACT REGISTRATION NOS. 33-50476
INVESTMENT COMPANY ACT REGISTRATION NO. 811-7064
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 12 [X]
AND/OR REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 12 [X]
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
THE TARGET PORTFOLIO TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-1495
DAVID F. CONNOR, ESQ.
100 MULBERRY STREET
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
PAUL H. DYKSTRA, ESQ.
GARDNER, CARTON & DOUGLAS
321 N. CLARK STREET
CHICAGO, ILLINOIS 60610-4795
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii) of Rule 485
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<TABLE>
<S> <C>
Title of Securities Being Registered.......... Shares of Beneficial Interest, $.001 par value
per share
</TABLE>
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[TARGET LOGO GRAPHIC]
THE TARGET
PORTFOLIO TRUST
PROSPECTUS: MAY 1, 2000
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 LOGO]
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objectives and Principal Strategies
6 Principal Risks
10 Evaluating Performance
20 Fees and Expenses
24 HOW THE PORTFOLIOS INVEST
24 Investment Objectives and Policies
31 Other Investments and Strategies
37 Investment Risks
43 HOW THE TRUST IS MANAGED
43 Board of Trustees
43 Manager
44 Advisers and Portfolio Managers
49 Distributor
50 PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
50 Distributions
51 Tax Issues
53 If You Sell or Exchange Your Shares
54 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
54 Introduction
57 How to Buy Shares
59 How to Sell Your Shares
60 How to Exchange Your Shares
62 FINANCIAL HIGHLIGHTS
72 APPENDIX I - DESCRIPTION OF SECURITY RATINGS
75 APPENDIX II - EXEMPTIONS
FOR MORE INFORMATION (Back Cover)
</TABLE>
THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
<PAGE> 4
RISK/RETURN SUMMARY
This section highlights key information about the investment portfolios (the
Portfolios) of THE TARGET PORTFOLIO TRUST (the Trust). Additional information
follows this summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
The following summarizes the investment objectives, principal strategies and
principal risks 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 Composite Stock Price Index (S&P 500).
PRINCIPAL RISKS:
- market risk
- style risk
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.
PRINCIPAL RISKS:
- market risk
- style risk
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
1
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RISK/RETURN SUMMARY
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.
PRINCIPAL RISKS:
- market risk
- style risk
- small company risk
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.
PRINCIPAL RISKS:
- market risk
- style risk
- small company risk
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.
PRINCIPAL RISKS:
- market risk
- style risk
- foreign market risk
- currency risk
- political developments
2 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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RISK/RETURN SUMMARY
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 may actively
and frequently trade its portfolio securities. 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.
PRINCIPAL RISKS:
- credit risk
- interest rate risk
- market risk
- prepayment risk
- active trading risk
- foreign market risk
- currency risk
- political developments
- nondiversification
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).
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RISK/RETURN SUMMARY
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 Portfolio may actively and frequently trade its portfolio securities. The
dollar-weighted average maturity of the Portfolio will be between four and
fifteen years.
PRINCIPAL RISKS:
- credit risk
- interest rate risk
- market risk
- prepayment risk
- active trading risk
- foreign market risk
- currency risk
- political developments
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
4 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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RISK/RETURN SUMMARY
("JUNK BONDS"). The Portfolio may actively and frequently trade its portfolio
securities. The dollar-weighted average maturity of the Portfolio will be
between three and ten years.
PRINCIPAL RISKS:
- credit risk
- interest rate risk
- market risk
- prepayment risk
- active trading risk
- foreign market risk
- currency risk
- political developments
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. The Portfolio may actively and frequently trade its portfolio
securities.
PRINCIPAL RISKS:
- credit risk
- interest rate risk
- market risk
- prepayment risk
- active trading risk
5
<PAGE> 9
RISK/RETURN SUMMARY
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:
- credit risk
- interest rate risk
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.
LARGE CAPITALIZATION GROWTH, LARGE CAPITALIZATION VALUE, SMALL CAPITALIZATION
GROWTH, SMALL CAPITALIZATION VALUE AND INTERNATIONAL EQUITY PORTFOLIOS
MARKET RISK. 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 individual stock losing value, the value of a market sector or of the
equity markets as a whole could go down. In addition, different parts of a
market can react differently to adverse issuer, market, regulatory, political
and economic developments.
STYLE RISK. Since some of the Portfolios follow either a growth or value
investment style, there is the risk that a particular style may be out of favor
for a period of time.
SMALL COMPANY RISK. The SMALL CAPITALIZATION GROWTH and SMALL
CAPITALIZATION VALUE PORTFOLIOS invest primarily in stocks of smaller companies
with a market capitalization of under $1.5 billion. These
6 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 10
RISK/RETURN SUMMARY
companies usually offer a smaller range of products and services than larger
companies. They may also have limited financial resources and may lack
management depth. As a result, stocks issued by smaller companies tend to
fluctuate in value more than the stocks of larger, more established companies.
INVESTMENTS IN FOREIGN SECURITIES. The INTERNATIONAL EQUITY PORTFOLIO
invests primarily in STOCKS OF FOREIGN COMPANIES. Investing in foreign
securities presents additional risks. See "Investments in Foreign Securities"
below.
INCOME PORTFOLIOS
CREDIT RISK. The debt obligations in which the 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 a loss of confidence in the ability of the borrower to pay
back debt. 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.
INTEREST RATE RISK. There is also the risk that the securities could lose
value because of interest rate changes. Debt obligations with longer maturities
typically offer higher yields, but are subject to greater price shifts as a
result of interest rate changes than debt obligations with shorter maturities.
The prices of debt obligations and a Portfolio's net asset value (or share
price) generally move in opposite directions than interest rates.
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.
MARKET RISK. Debt obligations are also subject to market risk, which is the
possibility that the market value of an investment may move up or down
7
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RISK/RETURN SUMMARY
and that its movement may occur quickly or unpredictably. Market risk may affect
an industry, a sector or the entire market.
PREPAYMENT RISK. 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 collateralized. If the issuer of a
non-collateralized debt security defaults on the obligation, there is no
collateral that the security holder may sell to satisfy the debt.
ACTIVE TRADING RISK. The INTERNATIONAL BOND, TOTAL RETURN BOND,
INTERMEDIATE-TERM BOND and MORTGAGE BACKED SECURITIES PORTFOLIOS actively and
frequently trade their portfolio securities. High portfolio turnover results in
higher transaction costs and can affect a Portfolio's performance and have
adverse tax consequences.
INVESTMENTS IN FOREIGN SECURITIES. The INTERNATIONAL BOND, TOTAL RETURN
BOND and INTERMEDIATE-TERM BOND PORTFOLIOS may also invest in DEBT OBLIGATIONS
OF FOREIGN ISSUERS. Investing in foreign securities presents additional risks.
See "Investments in Foreign Securities" below.
NON-DIVERSIFICATION RISK. The INTERNATIONAL BOND PORTFOLIO is a
non-diversified fund, meaning that we can invest a higher percentage of its
assets in the securities of fewer issuers than a diversified fund. Investing in
a non-diversified portfolio involves greater risk than investing in a
diversified portfolio.
INVESTMENTS IN FOREIGN SECURITIES
The INTERNATIONAL EQUITY, INTERNATIONAL BOND, TOTAL RETURN BOND and
INTERMEDIATE-TERM BOND PORTFOLIOS may invest in FOREIGN SECURITIES. Investing in
foreign securities involves more risk than investing in securities of U.S.
issuers.
FOREIGN MARKET RISK. Foreign markets, especially those in developing countries,
tend to be more volatile than U.S. markets and are generally not subject to
regulatory requirements comparable to those in the U.S. Because of differences
in accounting standards and custody and settlement practices, investing in
foreign securities generally involves more risk than investing in securities of
U.S. issuers.
8 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 12
RISK/RETURN SUMMARY
CURRENCY RISK. Changes in currency exchange rates may affect the value of
foreign securities held by a Portfolio and the amount of income available for
distribution. If a foreign currency grows weaker relative to the U.S. dollar,
the value of securities denominated in that foreign currency generally decreases
in terms of U.S. dollars. If a Portfolio does not correctly anticipate changes
in exchange rates, certain hedging activities may also cause the Portfolio to
lose money and reduce the amount of income available for distribution.
POLITICAL DEVELOPMENTS. Political developments may adversely affect the
value of a Portfolio's foreign securities.
* * *
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 OMITTED]
<TABLE>
<S> <C>
1994 -0.68%
1995 25.76%
1996 21.09%
1997 20.77%
1998 44.22%
1999 55.37%
</TABLE>
Best quarter: 33.10% (4th quarter of 1998) Worst quarter: -13.67% (3rd quarter
of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION
<S> <C> <C> <C>
Large Cap Growth Portfolio 53.05% 30.76% 20.44% (since 1-5-93)
S&P 500(2) 21.03% 28.54% 21.52% (since 1-5-93)
Lipper Average(3) 38.09% 30.14% 21.41% (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 Composite Stock Price 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 or operating expenses of a mutual fund. These returns
would be lower if they included the effect of sales charges and operating
expenses. Source: Lipper Inc.
(3) The Lipper Average is based on the average return of all mutual funds in
the Lipper Large-Cap 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.
10 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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RISK/RETURN SUMMARY
LARGE CAPITALIZATION VALUE PORTFOLIO
ANNUAL RETURNS
[BAR CHART OMITTED]
<TABLE>
<S> <C>
1994 2.18%
1995 32.08%
1996 19.17%
1997 29.80%
1998 10.25%
1999 -4.37%
</TABLE>
Best quarter: 14.53% (2nd quarter of 1997) Worst quarter: -12.46% (3rd quarter
of 1999)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION
<S> <C> <C> <C>
Large Cap Value Portfolio -5.80% 14.85% 10.64% (since 1-5-93)
S&P 500(2) 21.03% 28.54% 21.52% (since 1-5-93)
Lipper Average(3) 7.78% 18.48% 14.42% (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 Composite Stock Price 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 or operating expenses of a mutual fund. These returns
would be lower if they included the effect of sales charges and operating
expenses. Source: Lipper Inc.
(3) The Lipper Average is based on the average return of all mutual funds in the
Lipper Multi-Cap Value 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
ANNUAL RETURNS
[BAR CHART OMITTED]
<TABLE>
<S> <C>
1994 -2.19%
1995 24.62%
1996 18.88%
1997 20.85%
1998 2.55%
1999 29.20%
</TABLE>
Best quarter: 23.18% (4th quarter of 1999) Worst quarter: -24.00% (3rd quarter
of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION(2)
<S> <C> <C> <C>
Small Cap Growth Portfolio 27.27% 17.09% 13.87% (since 1-5-93)
Russell 2000(3) 43.09% 18.99% 14.15% (since 1-5-93)
Lipper Average(4) 62.63% 19.61% 18.66% (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) Without the management fee waiver or expense reimbursement in effect in
1993, the average annual returns would have been lower.
(3) 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 or operating expenses
of a mutual fund. These returns would be lower if they included the effect
of sales charges and operating expenses. Source: Lipper Inc.
(4) The Lipper Average is based on the average return of all mutual funds in the
Lipper Small-Cap 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
SMALL CAPITALIZATION VALUE PORTFOLIO
ANNUAL RETURNS
[BAR CHART OMITTED]
<TABLE>
<S> <C>
1994 -11.03%
1995 19.21%
1996 21.75%
1997 29.98%
1998 -6.62%
1999 1.39%
</TABLE>
Best quarter: 18.39% (2nd quarter of 1999) Worst quarter: -20.07% (3rd quarter
of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION(2)
<S> <C> <C> <C>
Small Cap Value Portfolio -0.12% 10.64% 9.52% (since 1-5-93)
Russell 2000(3) -1.49% 13.14% 14.15% (since 1-5-93)
Lipper Average(4) 6.33% 13.68% 11.45% (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) Without the management fee waiver or expense reimbursement in effect in
1993, the average annual returns would have been lower.
(3) 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 or operating expenses
of a mutual fund. These returns would be lower if they included the effect
of sales charges and operating expenses. Source: Lipper Inc.
(4) The Lipper Average is based on the average return of all mutual funds in the
Lipper Small-Cap Value 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
ANNUAL RETURNS
[BAR CHART OMITTED]
<TABLE>
<S> <C>
1994 0.18%
1995 15.38%
1996 15.25%
1997 10.60%
1998 15.49%
1999 23.30%
</TABLE>
Best quarter: 18.03% (4th quarter of 1998) Worst quarter: -17.53% (3rd quarter
of 1998)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION
<S> <C> <C> <C>
International Equity Portfolio 21.46% 14.20% 14.01% (since 1-5-93)
EAFE(2) 26.96% 12.83% 14.71% (since 1-5-93)
Lipper Average(3) 40.80% 15.05% 15.63% (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 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 or operating
expenses of a mutual fund. These returns would be lower if they included the
effect of sales charges and operating expenses. 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.
14 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 18
RISK/RETURN SUMMARY
INTERNATIONAL BOND PORTFOLIO
ANNUAL RETURNS*
<TABLE>
<S> <C>
1995 14.66%
1996 4.45%
1997 -5.73%
1998 8.55%
1999 -5.88%
</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 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS(2) SINCE INCEPTION(2)
<S> <C> <C> <C>
International Bond Portfolio -6.82% 1.87% 1.69% (since 5-17-94)
WB Index(3) -5.07% 5.90% 6.14% (since 5-17-94)
Lipper Average(4) -4.46% 6.46% 5.73% (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.
(2) Without the management fee waiver or expense reimbursement in effect through
1995, the average annual returns would have been lower.
(3) 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 or
operating expenses of a mutual fund. These returns would be lower if they
included the effect of sales charges and operating expenses. Source: Lipper
Inc.
(4) 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.
15
<PAGE> 19
RISK/RETURN SUMMARY
TOTAL RETURN BOND PORTFOLIO
ANNUAL RETURNS*
[BAR CHART OMITTED]
<TABLE>
<S> <C>
1994 -3.54%
1995 19.63%
1996 5.02%
1997 9.23%
1998 8.28%
1999 -0.67%
</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 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS(2) SINCE INCEPTION(2)
<S> <C> <C> <C>
Total Return Bond Portfolio -1.66% 7.02% 5.59% (since 1-5-93)
LGCI(3) 0.39% 7.10% 6.42% (since 1-5-93)
Lipper Average(4) -1.62% 7.83% 6.76% (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) Without the management fee waiver or expense reimbursement in effect through
1995, the average annual returns would have been lower.
(3) 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 or
operating expenses of a mutual fund. These returns would be lower if they
included the effect of sales charges and operating expenses. Source: Lipper
Inc.
(4) 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.
16 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 20
RISK/RETURN SUMMARY
INTERMEDIATE-TERM BOND PORTFOLIO
ANNUAL RETURNS
[BAR CHART]
<TABLE>
<S> <C>
1994 -2.23%
1995 16.87%
1996 5.22%
1997 8.57%
1998 7.09%
1999 1.30%
</TABLE>
Best quarter: 5.79% (2nd quarter of 1995) Worst quarter: -1.79% (1st quarter of
1994)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION(2)
<S> <C> <C> <C>
Intermediate-Term
Bond Portfolio 0.29% 6.62% 5.39% (since 1-5-93)
LIGC(3) 0.39% 7.10% 6.00% (since 1-5-93)
Lipper Average(4) -1.28% 6.85% 5.84% (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) Without the management fee waiver or expense reimbursement in effect
through 1993, the average annual returns would have been lower.
(3) 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 or operating expenses of a mutual fund.
These returns would be lower if they included the effect of sales charges
and operating expenses. Source: Lipper Inc.
(4) The Lipper Average is based on the average return of all mutual funds in
the Lipper Intermediate Investment-Grade Debt 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.
17
<PAGE> 21
RISK/RETURN SUMMARY
MORTGAGE BACKED SECURITIES PORTFOLIO
ANNUAL RETURNS*
[BAR CHART]
<TABLE>
<S> <C>
1994 -0.51%
1995 16.18%
1996 5.56%
1997 8.82%
1998 6.37%
1999 1.54%
</TABLE>
Best quarter: 4.70% (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 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS(2) SINCE INCEPTION(2)
<S> <C> <C> <C>
Mortgage Backed
Securities Portfolio 0.52% 6.51% 5.52% (since 1-5-93)
Mortgage Index(3) 1.83% 7.92% 6.41% (since 1-5-93)
Lipper Average(4) 0.65% 6.98% 5.44% (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) Without the management fee waiver or expense reimbursement in effect through
1995, the average annual returns would have been lower.
(3) 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 or operating expenses of a mutual fund. These returns would be
lower if they included the effect of sales charges and operating expenses.
Source: Bloomberg, L.P.
(4) 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.
18 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 22
RISK/RETURN SUMMARY
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
ANNUAL RETURNS
[BAR CHART]
<TABLE>
<S> <C>
1994 3.79%
1995 5.25%
1996 4.53%
1997 4.95%
1998 4.88%
1999 4.67%
</TABLE>
Best quarter: 1.36% (4th quarter of 1997) Worst quarter: 0.67% (1st quarter of
1994)
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS SINCE INCEPTION
<S> <C> <C> <C>
U.S. Government
Money Market Portfolio 4.65% 4.87% 4.39% (since 1-5-93)
Lipper Average(2) 4.47% % 4.38% (since 1-5-93)
</TABLE>
7-DAY YIELD(1) (AS OF 12-31-99)
<TABLE>
<S> <C>
U.S. Government Money Market Portfolio 4.50%
iMoneyNet, Inc. Average(3) 5.15%
</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 iMoneyNet, Inc. Average is based upon the average yield of all mutual
funds in the iMoneyNet, Inc. All Taxable Money Market Fund category. Source:
iMoneyNet, Inc.
19
<PAGE> 23
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.
20 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 24
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 .13%
= TOTAL ANNUAL FUND OPERATING EXPENSES .73%
SMALL CAPITALIZATION GROWTH PORTFOLIO
Management fees .60%
+ Distribution and service (12b-1) fees None
+ Other expenses .20%
= TOTAL ANNUAL FUND OPERATING EXPENSES .80%
SMALL CAPITALIZATION VALUE PORTFOLIO
Management fees .60%
+ Distribution and service (12b-1) fees None
+ Other expenses .27%
= TOTAL ANNUAL FUND OPERATING EXPENSES .87%
INTERNATIONAL EQUITY PORTFOLIO
Management fees .70%
+ Distribution and service (12b-1) fees None
+ Other expenses .23%
= TOTAL ANNUAL FUND OPERATING EXPENSES .93%
</TABLE>
21
<PAGE> 25
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 .75%
= TOTAL ANNUAL FUND OPERATING EXPENSES 1.25%
TOTAL RETURN BOND PORTFOLIO
Management fees .45%
+ Distribution and service (12b-1) fees None
+ Other expenses .37%
= TOTAL ANNUAL FUND OPERATING EXPENSES .82%
INTERMEDIATE-TERM BOND PORTFOLIO
Management fees .45%
+ Distribution and service (12b-1) fees None
+ Other expenses .22%
= TOTAL ANNUAL FUND OPERATING EXPENSES .67%
MORTGAGE BACKED SECURITIES PORTFOLIO
Management fees .45%
+ Distribution and service (12b-1) fees None
+ Other expenses .35%
= TOTAL ANNUAL FUND OPERATING EXPENSES .80%
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Management fees .25%
+ Distribution and service (12b-1) fees None
+ Other expenses .18%
= TOTAL ANNUAL FUND OPERATING EXPENSES .43%
</TABLE>
22 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 26
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 $ 75 $233 $406 $ 906
Small Capitalization Growth Portfolio $ 82 $255 $444 $ 990
Small Capitalization Value Portfolio $ 89 $278 $482 $1,073
International Equity Portfolio $ 95 $296 $515 $1,143
International Bond Portfolio $127 $397 $686 $1,511
Total Return Bond Portfolio $ 84 $262 $455 $1,014
Intermediate-Term Bond Portfolio $ 68 $214 $373 $ 835
Mortgage Backed Securities Portfolio $ 82 $255 $444 $ 990
U.S. Government Money Market Portfolio $ 44 $138 $241 $ 542
</TABLE>
23
<PAGE> 27
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.
24 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 28
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 the Portfolio's total assets in common stocks of
companies with a total market capitalization of less than $1.5 billion (measured
at the time of purchase).
SMALL CAPITALIZATION VALUE 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 different foreign countries. For
purposes of this policy, the Portfolio will invest in stocks of companies that
are organized under the laws of a foreign country, companies which derive
25
<PAGE> 29
HOW THE PORTFOLIOS INVEST
more than 50% of their revenues from activities in foreign countries, and
companies which have at least 50% of their assets located abroad. The foreign
securities held by the Portfolio normally will be denominated in foreign
currencies, including the euro -- a multinational currency unit.
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. For purposes of this policy, foreign companies and
financial institutions are those that are organized under the laws of a foreign
country, those that derive more than 50% of their revenues from activities in
foreign countries, and companies and financial institutions that have at least
50% of their assets located abroad. The debt obligations in which the Portfolio
invests 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
26 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 30
HOW THE PORTFOLIOS INVEST
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
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.
27
<PAGE> 31
HOW THE PORTFOLIOS INVEST
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.
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
28 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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HOW THE PORTFOLIOS INVEST
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 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.
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
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HOW THE PORTFOLIOS INVEST
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.
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.
FACTORS CONSIDERED IN MAKING INVESTMENT DECISIONS (INCOME PORTFOLIOS)
In choosing portfolio securities, the investment advisers to the International
Bond, Total Return Bond, Intermediate-Term Bond, Mortgage Backed Securities and
U.S. Government Money Market Portfolios consider economic
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HOW THE PORTFOLIOS INVEST
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.
ADDITIONAL INFORMATION ON INVESTMENTS AND RISKS
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.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies described above, we may also
use the following investment strategies to try to increase the Portfolios'
returns or protect their assets if market conditions warrant.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of a 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.
MONEY MARKET INSTRUMENTS. Each Portfolio may invest in high quality
MONEY MARKET INSTRUMENTS for cash management purposes. Money market instruments
include the commercial paper of U.S. and foreign corporations, obligations of
U.S. and foreign banks, certificates of deposit and obligations issued or
guaranteed by the U.S. government or its agencies or a foreign government. The
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
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HOW THE PORTFOLIOS INVEST
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 the Student Loan Marketing Association (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.
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 for their appreciation potential. 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.
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HOW THE PORTFOLIOS INVEST
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.
LEVERAGE
The 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.
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
The Portfolios may each use REPURCHASE AGREEMENTS, where a party agrees to sell
a security to the Portfolio and then repurchase it at an agreed-upon
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HOW THE PORTFOLIOS INVEST
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. Repurchase
agreements are used for cash management purposes.
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. 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 invest a large percentage
of their assets in securities denominated in foreign currencies, we may use
"CURRENCY HEDGES" to help protect the Portfolios' net asset values 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 and this could result in losses to the Portfolio that would not
otherwise have occurred. 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
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HOW THE PORTFOLIOS INVEST
U.S. or foreign securities exchanges or in the over-the-counter market. An
option is the right to buy or sell securities or currencies in exchange for a
premium. The options may be on debt securities, aggregates of debt securities,
financial indexes and U.S. government securities. The 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.
ADDITIONAL STRATEGIES
The Portfolios may also use additional strategies, such as purchasing debt
securities on a WHEN-ISSUED or DELAYED-DELIVERY basis. When a Portfolio makes
this type of purchase, the price and interest rate are fixed at the time of
purchase, but delivery and payment for the debt obligations take place at a
later time. The Portfolio does not earn interest income until the date the debt
obligations are delivered.
The INTERNATIONAL BOND, TOTAL RETURN BOND, INTERMEDIATE-TERM BOND and
MORTGAGE BACKED SECURITIES PORTFOLIOS may each enter into INTEREST RATE SWAP
TRANSACTIONS. In a swap transaction, a Portfolio and another party "trade"
income streams. The swap is done to preserve a return or spread on a particular
investment or portion of a Portfolio or to protect against any increase in the
price of securities the Portfolio anticipates purchasing at a later date.
The Portfolios also follow certain policies when they BORROW MONEY (the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios can each borrow up to 33 1/3% of the value of its
total assets, while each other Portfolio may 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
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HOW THE PORTFOLIOS INVEST
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 on resale, 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, Intermediate-Term Bond and Mortgage Backed Securities
Portfolios have had annual portfolio turnover rates 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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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 of the Portfolios' non-principal
investments and strategies. See, too, "Description of the Portfolios, Their
Investments and Risks" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TYPE
% of Portfolios' Total Assets RISKS POTENTIAL REWARDS
<S> <C> <C>
COMMON STOCKS - Individual stocks could - Historically, stocks have
lose value outperformed other
Large Cap Growth, investments over the long
Large Cap Value, - The equity markets could 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, which
At least 80% - Companies that pay leads to an increase in
dividends may not do so stock prices, known as
International if they don't have capital appreciation
Equity Portfolio profits or adequate cash
flow - May be a source of
At least 65% dividend income
- Changes in economic or
political conditions,
both domestic and
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 larger ones
$1.5 billion) in the S&P 500 Index
Small Cap Growth and - Small companies are more
Small Cap Value likely to reinvest
Portfolios earnings and not pay
dividends
At least 65%
- Changes in interest rates
International Equity may affect the securities
Portfolio of small companies more
than the securities of
Percentage varies larger companies
</TABLE>
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HOW THE PORTFOLIOS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% of Portfolios' Total Assets RISKS POTENTIAL REWARDS
<S> <C> <C>
DEBT OBLIGATIONS - A Portfolio's share - Bonds have generally
price, yield and total outperformed money market
Large Cap Value and return will fluctuate in instruments over the long
Small Cap Value response to bond market term with less risk than
Portfolios movements stocks
Up to 20%
- Credit risk -- the - Most bonds will rise in
International Equity default of an issuer value when interest rates
Portfolio would leave a Portfolio fall
Up to 35% with unpaid interest or
principal. The lower a - Regular interest income
International Bond bond's quality, the
Portfolio higher its potential - High-quality debt
Up to 100% volatility obligations are generally
more secure than stocks
Total Return Bond - Market risk -- the risk since companies must pay
and Intermediate-Term that the market value of their debts before they
Bond Portfolios an investment may move up pay dividends
Up to 100% or down, sometimes
rapidly or unpredictably. - Investment-grade bonds
Mortgage Backed Market risk may affect an have a lower risk of
Securities Portfolio industry, a sector, or default than junk bonds
Up to 100% the market as a whole
- Bonds with longer
- Interest rate risk -- the maturity dates typically
value of most bonds will have higher yields
fall when interest rates
rise. The longer a bond's - Intermediate-term
maturity and the lower securities may be less
its credit quality, the susceptible to loss of
more its value typically principal than longer
falls. It can lead to term securities
price volatility,
particularly for junk
bonds and stripped
securities
FOREIGN SECURITIES - Foreign markets, - Investors can participate
economies and political in foreign markets and
International Equity systems may not be as invest in companies
and International stable as in the U.S., operating in those
Bond Portfolios particularly those in markets
Up to 100% developing countries
- Investors may profit from
Total Return Bond and - Currency risk -- changing changing value of foreign
Intermediate-Term Bond value of foreign currencies
Portfolios currencies can cause
Up to 20% losses - Opportunities for
diversification
- May be less liquid than
U.S. stocks and bonds - Principal and interest on
foreign government
- Differences in foreign securities may be
laws, accounting guaranteed
standards, public
information, custody and
settlement practices
provide less reliable
information on foreign
investments and involve
more risk
- Not all government
securities are insured or
guaranteed by government,
but only by the issuing
agency
</TABLE>
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HOW THE PORTFOLIOS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% 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 U.S. government
U.S. Government Money the issuing agency guarantees interest and
Market Portfolio principal payments on
Up to 100% - Limits potential for certain securities
capital appreciation
Other Portfolios - Generally more secure
- Market risk than lower quality debt
Percentage varies, and securities and equity
up to 100% on - Interest rate risk securities
a temporary basis
- May preserve a
Portfolio's assets
MONEY MARKET - U.S. government money - May preserve a Portfolio's
INSTRUMENTS market securities offer a assets
lower yield than
U.S. Government Money lower-quality or
Market Portfolio longer-term securities
Up to 100%
- Limits potential for
Other Portfolios capital appreciation
Up to 100% on - Credit risk
a temporary basis
- Market risk
MORTGAGE-RELATED - Prepayment risk -- the - Regular interest income
SECURITIES risk that the underlying
mortgage may be prepaid - The U.S. government
International Bond, partially or completely, guarantees interest and
Total Return Bond generally during periods principal payments on
and Intermediate-Term of falling interest certain securities
Bond Portfolios rates, which could
adversely affect yield to - May benefit from security
Percentage varies maturity and could interest in real estate
require a Portfolio to collateral
Mortgage Backed reinvest in
Securities Portfolio lower-yielding - Pass-through instruments
securities. provide greater
Up to 100% diversification than
- Credit risk -- the risk direct ownership of loans
that the underlying
mortgages will not be
paid by debtors or by
credit 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>
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HOW THE PORTFOLIOS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
HIGH YIELD DEBT - Higher credit risk than - May offer higher interest
SECURITIES (JUNK BONDS) higher-grade debt income than higher-grade
securities debt securities and
International Bond higher potential gains
Portfolio - Higher market risk than
higher-grade debt
Up to 25% securities
Total Return Bond
and Intermediate-Term - More volatile than
Bond Portfolios higher-grade debt
securities
Up to 10%
- May be more illiquid
(harder to value and
sell), in which case
valuation would depend
more on investment
adviser's judgment than
is generally the case
with higher-rated
securities
ASSET-BACKED - Prepayment risk - Regular interest income
SECURITIES
- The security interest in - Prepayment risk is
Large Cap Value, the underlying collateral generally lower than with
Small Cap Value, may not be as great as mortgage-related
International Bond, with mortgage-related securities
Total Return Bond, securities
Intermediate-Term - Pass-through instruments
Bond and Mortgage - Credit risk -- the risk provide greater
Backed Securities that the underlying diversification than
Portfolios receivables will not be direct ownership of loans
paid by debtors or by
Percentage varies credit insurers or
guarantors of such
instruments. Some
asset-backed securities
are unsecured or secured
by lower-rated insurers
or guarantors and thus
may involve greater risk
- Market risk
- Interest rate risk
DERIVATIVES - Derivatives such as - A Portfolio could make
futures, options and money and protect against
International Equity, foreign currency exchange losses if the investment
International Bond, contracts may not fully analysis proves correct
Total Return Bond, offset the underlying
Intermediate-Term Bond positions and this could - One way to manage a
and Mortgage Backed result in losses to the Portfolio's risk/return
Securities Portfolios Portfolio that would not balance by locking in the
have otherwise occurred value of an investment
Percentage varies ahead of time
- Derivatives used for risk
management may not have - Derivatives that involve
the intended effects and leverage could generate
may result in losses or substantial gains at low
missed opportunities cost
- The other party to a - May be used to hedge
derivatives contract against changes in
could default currency exchange rates
- Derivatives that involve
leverage could magnify
losses
- Certain types of
derivatives involve costs
to a Portfolio that can
reduce returns
</TABLE>
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HOW THE PORTFOLIOS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% 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
Total Return Bond, exceed potential
Intermediate-Term underlying investment
Bond and Mortgage gains
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
investments may magnify investment gains
International Bond, losses
Total Return Bond,
Intermediate-Term - Interest costs and
Bond and Mortgage investment fees may
Backed Securities exceed potential
Portfolios investment gains
Up to 33 1/3%
ADJUSTABLE/FLOATING RATE - Value lags value of fixed - Can take advantage of
SECURITIES rate securities when rising interest rates
interest rates change
Large Cap Value,
International Bond,
Total Return Bond,
Intermediate-Term
Bond and Mortgage
Backed Securities
Portfolios
Percentage varies
</TABLE>
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HOW THE PORTFOLIOS INVEST
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF PORTFOLIOS' TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
STRIPPED SECURITIES - More volatile than - Value rises faster when
securities that have not interest rates fall
International Bond, separated principal and
Total Return Bond, interest
Intermediate-Term
Bond and Mortgage - Mortgage-backed stripped
Backed Securities securities have more
Portfolios prepayment and interest
Percentage varies rate risk than other
mortgage-related
securities
INTEREST RATE SWAPS - Helps protect the return - Speculative technique
on an investment including risk of loss of
International Bond, interest payment swapped
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 than
Market Portfolio - May be difficult to sell more widely traded
at the time or price securities
Up to 10% of net assets desired
Other Portfolios
Up to 15% of net assets
</TABLE>
42 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 46
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, 1999, 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
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% $2,315,968 .30%
Large Capitalization Value Portfolio .60% $1,679,401 .30%
Small Capitalization Growth Portfolio .60% $ 903,559 .40%
Small Capitalization Value Portfolio .60% $ 774,461 .40%
International Equity Portfolio .70% $1,723,039 .40%
International Bond Portfolio .50% $ 146,497 .30%
Total Return Bond Portfolio .45% $ 296,600 .25%
Intermediate-Term Bond Portfolio .45% $ 487,094 .25%
Mortgage Backed Securities Portfolio .45% $ 316,095 .25%
U.S. Government Money Market Portfolio .25% $ 492,130 .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
43
<PAGE> 47
HOW THE TRUST IS MANAGED
approval each time. This authority is subject to certain conditions,
including the requirement that the Board of Trustees must approve any new or
amended agreements with Advisers. Shareholders of each 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.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of _____, 2000 PIFM served as the manager
to all _____ of the Prudential mutual funds, and as manager or administrator to
_____ closed-end investment companies, with aggregate assets of approximately
$___ billion.
ADVISERS AND PORTFOLIO MANAGERS
INTRODUCTION
The Advisers are responsible for the day-to-day management of each Portfolio, or
portion thereof, that 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 which 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.
44 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
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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.
CCI has specialized in large-cap equity investing since it was established
in 1975. As of March 31, 2000, CCI had approximately $7.2 billion in assets
under management for corporate, nonprofit, government, union and mutual fund
clients. The address of CCI is Metro Center, One Station Place, 8th Floor,
Stamford, CT 06902.
ANTHONY RIZZA, a Managing Director of CCI, 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 ____, 2000, Oak had more than $___ 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.
INVESCO has specialized in value-oriented equity investing since it was
organized in 1971. As of ____, 2000, INVESCO had approximately $__ billion in
assets under management for clients located throughout the U.S., Europe and
Japan. The address of INVESCO is 1315 Peachtree Street, Suite 500, Atlanta, GA
30309.
45
<PAGE> 49
HOW THE TRUST IS MANAGED
NIELSON BROWN, a Vice President of INVESCO, has managed the Portfolio since
its inception. Mr. Brown is a Chartered Financial Analyst and a member of the
Atlanta Society of Financial Analysts. He has been a portfolio manager with
INVESCO since 1989.
HOTCHKIS AND WILEY has specialized in large-cap equity investing since it
was formed in 1980. As of March 31, 2000, Hotchkis and Wiley, a division of
Merrill Lynch Asset Management, L.P., had approximately $11.7 billion in assets
under management for corporate, public, endowment and foundation and mutual fund
clients. The address of Hotchkis and Wiley is 725 South Figueroa Street, Suite
4000, 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 FLEMING ASSET MANAGEMENT USA
(FLEMING USA) are the Advisers for the Small Capitalization Growth
Portfolio. For their services as Advisers, Sawgrass and Fleming USA each receive
a fee from PIFM at the annual rate of .40% 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 _____,2000, Sawgrass had approximately $___ 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.
FLEMING USA is a division of Robert Fleming, Inc., the U.S. equity asset
management affiliate of Robert Fleming Holdings (Flemings Group). Established in
____, the Flemings Group manages over $115 billion of assets on behalf of
private investors, companies, institutions, governments and central banks.
Approximately half of its assets under management are
46 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
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HOW THE TRUST IS MANAGED
pension funds for institutions. The balance of its assets under management are
in open- and closed-end pooled investment vehicles. Fleming USA's address is 320
Park Avenue, New York, NY 10022.
Since August 1999, the assets of the Portfolio have been managed by a team
of portfolio managers. Eytan M. Shapiro, a Director and portfolio manager of
Fleming USA, is responsible for the day-to-day management of the Portfolio's
assets. Mr. Shapiro has been with Fleming USA since 1992 and with the Flemings
Group since 1985. The other members of the team are Timothy R.V. Parton,
Christopher M. V. Jones and T. Gary Liberman. Mr. Parton, a Director and
portfolio manager with Fleming USA, has been with Fleming USA since 1990 and
with the Flemings Group since 1986. Mr. Jones, a Director and portfolio manager
of Fleming USA, as well as Chief Investment Officer of its Small Cap Equity
Group, joined Fleming USA in 1986 and began his career with the Flemings Group
in 1982. Mr. Liberman is a Vice President and analyst with Fleming USA and has
been with the firm since 1995. Prior to joining Fleming USA, Mr. Lieberman was
an analyst with Salomon Brothers Asset Management.
SMALL CAPITALIZATION VALUE PORTFOLIO
LAZARD ASSET MANAGEMENT (LAZARD) and the Wood, Struthers & Winthrop Division of
DLJ ASSET MANAGEMENT, INC., (DLJAM) (FORMERLY KNOWN AS WOOD, STRUTHERS &
WINTHROP MANAGEMENT CORP.) are the Advisers for the Small Capitalization Value
Portfolio. For their services as Advisers, Lazard and DLJAM each receive a fee
from PIFM at the annual rate of .40% of the average daily net assets of the
portion of the Portfolio it manages.
LAZARD is a division of Lazard Freres & Co. LLC (Lazard Freres), a
New York limited liability company. Since it was formed in 1970, Lazard has
provided investment management services to both individual and institutional
clients. As of ____, 2000, Lazard and its global affiliates had approximately
$___ 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.
47
<PAGE> 51
HOW THE TRUST IS MANAGED
DLJAM was founded in 1871 and has specialized in small-cap equity investing
since 1967. DLJAM provides investment management services to both individual and
institutional clients. As of March 31, 2000, DLJAM had approximately $6.7
billion in assets under management. The address of DLJAM is 277 Park Avenue, New
York, NY 10172.
ROGER W. VOGEL has managed the assets of the Portfolio since 1995. Mr.
Vogel, who is Senior Vice President for the Equities Division at DLJAM, has been
the lead small-cap equity portfolio manager of DLJAM since 1993.
INTERNATIONAL EQUITY 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.
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 March 31, 2000, DIAL had approximately $15.3 billion in assets under
management. The address of DIAL is 80 Cheapside, Third Floor, London, EC2V 6EE,
United Kingdom.
CHRISTOPHER A. MOTH, Director of Investment Strategy and Senior Portfolio
Manager at DIAL, has headed the team managing the Portfolio since August 1999.
Mr. Moth has been with DIAL since 1992 and was appointed Director of Investment
Strategy in January 2000. The other members of the portfolio management team are
John Kirk, W. Hywel Morgan and Joanna Bates, all of whom are Senior Portfolio
Managers with DIAL. Mr. Kirk has been with DIAL since September 1998 and was
appointed a Director of DIAL in January 2000. Prior thereto, Mr. Kirk was a
Director and Vice President with the Royal Bank of Canada
48 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
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HOW THE TRUST IS MANAGED
in London. Mr. Morgan has been with DIAL since 1994. Ms. Bates has been with
DIAL since 1997. Prior to joining DIAL, Ms. Bates was an Associate Director at
Hill Samuel Investment Management.
TOTAL RETURN BOND PORTFOLIO AND INTERMEDIATE-TERM BOND PORTFOLIO
PACIFIC INVESTMENT MANAGEMENT COMPANY (PIMCO) is the Adviser to the Total Return
Bond and Intermediate-Term Bond Portfolios. For its services as Adviser, PIMCO
receives a fee from PIFM at the annual rate of .25% of the average daily net
assets of each Portfolio.
PIMCO has specialized in fixed income investing since the firm was
established in 1971. As of March 31, 2000, PIMCO had approximately $193 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 has provided investment management services to investment companies,
employee benefit plans, endowment funds, foundations, other institutions since
it was established in _____. As of March 31, 2000, WMC had approximately $248
billion of assets under management. The address of WMC is 75 State Street,
Boston, MA 02109.
THOMAS L. PAPPAS, a Senior Vice President of WMC, has managed the Mortgage
Backed Securities Portfolio since its inception. Mr. Pappas has been a portfolio
manager with WMC since 1987. TIMOTHY E. SMITH, a Vice President of WMC, has
managed the U.S. Government Money Market Portfolio since 1997. Mr. Smith has
been a portfolio manager with WMC since 1992.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Trust's
shares under a Distribution Agreement with the Trust.
49
<PAGE> 53
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 or tax-deferred plan or account.
Dividends and distributions from a Portfolio also may be subject to state and
local income tax in the state where you live.
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 or 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 Declared daily,
U.S. Government Money Market Portfolios paid monthly
Large Capitalization Growth, Large
Capitalization Value, Small Capitalization Growth, Declared and
Small Capitalization Value and International Equity Portfolios 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.
50 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
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PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
Each Portfolio also distributes realized net CAPITAL GAINS to shareholders
- -- typically once a year. Capital gains are generated when the Portfolio sells
its 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 or 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 or tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified or
tax-deferred plan or account.
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
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<PAGE> 55
PORTFOLIO DISTRIBUTIONS AND TAX ISSUES
prior year. Corporate shareholders are eligible for the 70% dividends-received
deduction for certain dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Trust with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
Dividends of net investment income and short-term capital gains paid to a
nonresident foreign shareholder generally will be subject to a U.S. withholding
tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may
have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a 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 to reflect the payout, although this may not be apparent because
the value of each share of the Portfolio also will be affected by market
changes, if any. The distribution you receive makes up for the decrease in share
value. However, the timing of your purchase does mean that part of your
investment came back to you as taxable income.
QUALIFIED OR TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of retirement plans offered by Prudential.
52 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
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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 or
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.
CAPITAL GAIN
+$ (taxes owed)
RECEIPTS OR
FROM SALE
-$ CAPITAL LOSS
(offset against gain)
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares).
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 Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified or tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell -- or exchange -- 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 Incorporated (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, in addition
to their proportionate share of the expenses of the Portfolios in which they
invest.
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.
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HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
Prudential Securities Financial Advisors may review your Evaluation and
Quarterly Account Monitors periodically with you and may arrange for 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
55
<PAGE> 59
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
prudent manner, the relationship of Target Program fees to be paid by their
Plans along with the level of services provided by Prudential Securities.
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,
56 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
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HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
Prudential Securities will automatically redeem an appropriate number of shares
of the Portfolios you own to cover the fee. If you are a non-Plan investor,
Prudential Securities would redeem shares of the Portfolio in which you have the
largest investment to cover the shortfall. If you invest through a Plan,
Prudential Securities would redeem shares 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
or the Uniform Transfers to Minors Act
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<PAGE> 61
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
- Trustees of the Trust (except that the minimum initial investment
requirement is waived entirely for Trustees who are paid under a
deferred fee agreement with the Trust)
- Employees of Prudential Securities, PIFM and their subsidiaries and
family members of such persons 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
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund --or the NAV -- is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the 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 an NAV of $1 per share at all times.
We determine the NAV of each Portfolio except the U.S. Government Money
Market Portfolio once each business day at 4:15 p.m. New York time (4:30 p.m.
for the U.S. Government Money Market Portfolio) on days that the
58 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
<PAGE> 62
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
New York Stock Exchange (NYSE) is open for trading. The NYSE is closed on most
national holidays and Good Friday. 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 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 investment for your beneficiaries against market declines -- is
available to investors who purchase their shares through Prudential. Eligible
investors who apply for PruTector coverage after the initial 6-month enrollment
period will need to provide satisfactory evidence of insurability. This
insurance is subject to other restrictions and is not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
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 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.
59
<PAGE> 63
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
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
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. As
permitted by the Securities and Exchange Commission, this may happen only 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. This involuntary sale
does not apply to shareholders who own their shares as part of a 401(k) plan, an
IRA or some other qualified or tax-deferred plan or account.
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.
60 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
<PAGE> 64
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE TRUST
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.
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
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 decision may be based upon dollar amount,
volume and frequency of trading. The Trust may notify a market timer of
rejection of an exchange or purchase order after the day the order is placed. If
the Trust allows a market timer to trade Portfolio shares, it may require the
market timer to enter into a written agreement to follow certain procedures and
limitations.
61
<PAGE> 65
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 three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two 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 1999 1998 1997 1996(2) 1995(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 18.29 $ 13.58 $ 12.97 $ 12.13 $ 9.74
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.03) (.01) -- (3) .02 .10
Net realized and unrealized gain (loss)
on investment transactions 9.79 6.00 2.61 2.33 2.41
TOTAL FROM INVESTMENT OPERATIONS 9.76 5.99 2.61 2.35 2.51
- ---------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- (.01) (.02) (.10)
Distributions in excess of
net investment income -- -- -- -- (.01)
Distributions from net realized gains (2.37) (1.28) (1.99) (1.49) (.01)
TOTAL DISTRIBUTIONS (2.37) (1.28) (2.00) (1.51) (.12)
NET ASSET VALUE, END OF YEAR $ 25.68 $ 18.29 $ 13.58 $ 12.97 $ 12.13
TOTAL RETURN(1) 55.37% 44.22% 20.77% 21.09% 25.76%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000) $ 515,470 $ 329,803 $ 243,895 $ 220,782 $ 180,077
Average net assets (000) $ 385,995 $ 277,794 $ 242,233 $ 202,736 $ 162,982
RATIOS TO AVERAGE NET ASSETS:
Expenses .68% .68% .73% .82% .78%
Net investment income (loss) (.16)% (.05)% (.01)% .19% .88%
Portfolio turnover 50% 54% 82% 65% 154%
- ---------------------------------------------------------------------------------------------------------------------
</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 year reported.
(2) Calculated based upon average shares outstanding during the year.
(3) Less than $.005 per share.
62 THE TARGET PORTFOLIO TRUST [PHONE GRAPHIC] (800) 982-4467
<PAGE> 66
FINANCIAL HIGHLIGHTS
LARGE CAPITALIZATION VALUE PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
LARGE CAP VALUE PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997(2) 1996(2) 1995(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.87 $16.21 $13.97 $12.57 $10.02
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .27 .28 .31 .31 .33
Net realized and unrealized gain (loss)
on investment transactions (1.00) 1.34 3.77 2.07 2.89
TOTAL FROM INVESTMENT OPERATIONS (.73) 1.62 4.08 2.38 3.22
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.29) (.27) (.28) (.31) (.30)
Distributions in excess of
net investment income -- -- -- (.03) --
Distributions from net realized gains (1.84) (1.69) (1.56) (.64) (.37)
TOTAL DISTRIBUTIONS (2.13) (1.96) (1.84) (.98) (.67)
NET ASSET VALUE, END OF YEAR $13.01 $15.87 $16.21 $13.97 $12.57
TOTAL RETURN(1) (4.37)% 10.25% 29.80% 19.17% 32.08%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $262,156 $283,488 $275,093 $227,706 $187,596
Average net assets (000) $279,900 $282,078 $253,579 $208,898 $163,124
Ratios to average net assets:
Expenses .73% .71% .72% .77% .76%
Net investment income 1.74% 1.65% 1.90% 2.33% 2.83%
Portfolio turnover 36% 24% 21% 22% 59%
</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 year reported.
(2) Calculated based upon average shares outstanding during the year.
63
<PAGE> 67
FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION GROWTH PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
SMALL CAP GROWTH PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996(2) 1995(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.35 $15.57 $14.93 $14.15 $11.59
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (.06) (.05) (.05) (.02) .02
Net realized and unrealized gain (loss)
on investment transactions 4.35 .48 3.02 2.63 2.84
TOTAL FROM INVESTMENT OPERATIONS 4.29 .43 2.97 2.61 2.86
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- -- -- -- (.02)
Distributions from net realized gains (2.17) (.65) (2.33) (1.83) (.28)
TOTAL DISTRIBUTIONS (2.17) (.65) (2.33) (1.83) (.30)
NET ASSET VALUE, END OF YEAR $17.47 $15.35 $15.57 $14.93 $14.15
TOTAL RETURN(1) 29.20% 2.55% 20.85% 18.88% 24.62%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $186,603 $158,982 $165,898 $147,469 $121,533
Average net assets (000) $150,593 $162,654 $156,570 $141,496 $107,649
RATIOS TO AVERAGE NET ASSETS:
Expenses .80% .77% .79% .89% .85%
Net investment income (loss) (.45)% (.35)% (.36)% (.32)% .12%
Portfolio turnover 207% 69% 106% 108% 120%
</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 year reported.
(2) Calculated based upon average shares outstanding during the year.
64 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 68
FINANCIAL HIGHLIGHTS
SMALL CAPITALIZATION VALUE PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
SMALL CAP VALUE PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998(2) 1997(2) 1996(2) 1995(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.98 $17.50 $15.22 $13.07 $11.07
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .11 .08 .08 .11 .14
Net realized and unrealized gain (loss)
on investment transactions .10 (1.27) 4.37 2.71 2.00
TOTAL FROM INVESTMENT OPERATIONS .21 (1.19) 4.45 2.82 2.14
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.12) (.07) (.08) (.11) (.14)
Distributions in excess of
net investment income -- -- (.01) -- --
Distributions from net realized gains (.10) (1.26) (2.08) (.56) --
TOTAL DISTRIBUTIONS (.22) (1.33) (2.17) (.67) (.14)
NET ASSET VALUE, END OF YEAR $14.97 $14.98 $17.50 $15.22 $13.07
TOTAL RETURN(1) 1.39% (6.62)% 29.98% 21.75% 19.21%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $127,010 $141,557 $163,414 $126,672 $97,594
Average net assets (000) $129,077 $153,756 $144,160 $110,564 $88,085
RATIOS TO AVERAGE NET ASSETS:
Expenses .87% .79% .81% .92% 1.00%
Net investment income .75% .48% .45% .77% 1.14%
Portfolio turnover 42% 39% 36% 60% 110%
</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 year reported.
(2) Calculated based upon average shares outstanding during the year.
65
<PAGE> 69
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
INTERNATIONAL EQUITY PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996(2) 1995(2)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.54 $14.27 $14.82 $13.64 $11.95
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .23 .23 .21 .25 .17
Net realized and unrealized gain (loss)
on investment transactions 3.29 1.98 1.32 1.79 1.67
TOTAL FROM INVESTMENT OPERATIONS 3.52 2.21 1.53 2.04 1.84
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.23) (.10) (.41) (.22) (.11)
Distributions from net realized gains (.17) (.84) (1.67) (.64) (.04)
Distributions in excess
of net realized gains (1.29) -- -- -- --
TOTAL DISTRIBUTIONS (1.69) (.94) (2.08) (.86) (.15)
NET ASSET VALUE, END OF YEAR $17.37 $15.54 $14.27 $14.82 $13.64
TOTAL RETURN(1) 23.30% 15.49% 10.60% 15.25% 15.38%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $274,997 $244,291 $237,851 $240,563 $191,598
Average net assets (000) $246,148 $246,335 $245,536 $221,626 $183,414
RATIOS TO AVERAGE NET ASSETS:
Expenses .93% .91% .93% .99% 1.02%
Net investment income 1.25% 1.42% 1.15% 1.77% 1.32%
Portfolio turnover 35% 45% 37% 39% 76%
</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 year reported.
(2) Calculated based upon average shares outstanding during the year.
66 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 70
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
INTERNATIONAL BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.52 $9.17 $10.17 $10.19 $9.57
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .30 .31 .42 .51 .57(1)
Net realized and unrealized gain (loss)
on investment transactions (.84) .45 (1.00) (.08) .82
TOTAL FROM INVESTMENT OPERATIONS (.54) .76 (.58) .43 1.39
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.23) (.31) -- (.21) (.57)
Distributions in excess of
net investment income -- (.06) (.06) -- --
Distributions from net realized gains (.16) (.04) --(2) (.24) (.20)
Tax return of capital distributions (.11) -- (.36) -- --
TOTAL DISTRIBUTIONS (.50) (.41) (.42) (.45) (.77)
NET ASSET VALUE, END OF YEAR $8.48 $9.52 $9.17 $10.17 $10.19
TOTAL RETURN(3) (5.88)% 8.55% (5.73)% 4.45% 14.66%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $26,492 $31,042 $31,189 $41,780 $34,660
Average net assets (000) $29,300 $30,720 $35,163 $38,788 $29,510
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.25% 1.54% 1.35% 1.34% 1.00%(1)
Net investment income 3.36% 3.38% 4.44% 5.02% 5.56%(1)
Portfolio turnover 132% 110% 202% 226% 456%
</TABLE>
(1) Net of expense subsidies. 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.
(2) Less than $.005 per share.
(3) 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 year reported.
67
<PAGE> 71
FINANCIAL HIGHLIGHTS
TOTAL RETURN BOND PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
TOTAL RETURN BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.49 $10.56 $10.28 $10.62 $9.48
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .56 .58 .57 .57 .62(1)
Net realized and unrealized gain (loss)
on investment transactions (.63) .27 .35 (.09) 1.18
TOTAL FROM INVESTMENT OPERATIONS .07 .85 .92 .48 1.80
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.56) (.58) (.54) (.56) (.58)
Distributions from net realized gains -- (.34) (.10) (.26) (.08)
Total distributions (.56) (.92) (.64) (.82) (.66)
Net asset value, end of year $9.86 $10.49 $10.56 $10.28 $10.62
Total return(2) (.67)% 8.28% 9.23% 5.02% 19.63%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $67,269 $67,078 $50,411 $49,218 $45,118
Average net assets (000) $65,911 $61,786 $48,123 $47,246 $37,023
RATIOS TO AVERAGE NET ASSETS:
Expenses .82% .81% .91% .94% .85%(1)
Net investment income 5.54% 5.54% 5.54% 5.67% 6.21%(1)
Portfolio turnover 368% 327% 323% 340% 141%
</TABLE>
(1) Net of expense subsidies. 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 year reported.
68 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 72
FINANCIAL HIGHLIGHTS
INTERMEDIATE-TERM BOND PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
INTERMEDIATE-TERM BOND PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.36 $10.42 $10.30 $10.51 $9.56
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .56 .63 .58 .59 .63
Net realized and unrealized gain (loss)
on investment transactions (.43) .09 .28 (.07) .94
TOTAL FROM INVESTMENT OPERATIONS .13 .72 .86 .52 1.57
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.57) (.61) (.57) (.59) (.60)
Distributions from net realized gains -- (.17) (.17) (.14) (.02)
TOTAL DISTRIBUTIONS (.57) (.78) (.74) (.73) (.62)
NET ASSET VALUE, END OF YEAR $9.92 $10.36 $10.42 $10.30 $10.51
TOTAL RETURN(1) 1.30% 7.09% 8.57% 5.22% 16.87%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $112,991 $105,283 $95,071 $100,392 $77,125
Average net assets (000) $108,243 $101,219 $95,575 $81,723 $68,628
RATIOS TO AVERAGE NET ASSETS:
Expenses .67% .66% .71% .73% .79%
Net investment income 5.63% 5.71% 5.64% 5.69% 6.09%
Portfolio turnover 253% 249% 249% 311% 93%
</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 year reported.
69
<PAGE> 73
FINANCIAL HIGHLIGHTS
MORTGAGE BACKED SECURITIES PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
MORTGAGE BACKED SECURITIES PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.47 $10.45 $10.21 $10.31 $9.51
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .66 .64 .64 .65 .68(1)
Net realized and unrealized gain (loss)
on investment transactions (.50) .01 .23 (.12) .83
TOTAL FROM INVESTMENT OPERATIONS .16 .65 .87 .53 1.51
- -------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.66) (.63) (.63) (.63) (.68)
Distributions in excess of
net investment income -- -- -- -- (.03)
TOTAL DISTRIBUTIONS (.66) (.63) (.63) (.63) (.71)
NET ASSET VALUE, END OF YEAR $9.97 $10.47 $10.45 $10.21 $10.31
TOTAL RETURN(2) 1.54% 6.37% 8.82% 5.56% 16.18%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $67,372 $72,870 $71,596 $73,867 $69,759
Average net assets (000) $70,244 $73,737 $71,757 $72,214 $65,149
RATIOS TO AVERAGE NET ASSETS:
Expenses .80% .70% .88% .91% .85%(1)
Net investment income 6.31% 6.14% 6.21% 6.44% 6.79%(1)
Portfolio turnover 14% 24% 128% 102% 154%
</TABLE>
(1) Net of expense subsidies. 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 year reported.
70 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 74
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
The financial highlights for the three years ended December 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended December 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO (FISCAL YEARS ENDED 12-31)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<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 .045 .048 .049 .045 .051(1)
TOTAL FROM INVESTMENT OPERATIONS .045 .048 .049 .045 .051
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.045) (.048) (.049) (.045) (.051)
TOTAL DISTRIBUTIONS (.045) (.048) (.049) (.045) (.051)
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
TOTAL RETURN(2) 4.67% 4.88% 4.95% 4.53% 5.25%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $85,722 $138,848 $42,326 $27,397 $18,855
Average net assets (000) $196,853 $106,500 $37,675 $19,132 $20,173
RATIOS TO AVERAGE NET ASSETS:
Expenses .43% .55% .65% .89% .75%(1)
Net investment income 4.64% 4.85% 4.91% 4.49% 5.18%(1)
</TABLE>
(1) Net of expense subsidies. 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 year reported.
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<PAGE> 75
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.
72 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 76
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is strong. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as
high as for issues designated A-1.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or supporting institutions) are considered to
have a superior capacity for repayment of senior short-term debt obligations.
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<PAGE> 77
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.
74 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 78
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
75
<PAGE> 79
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
76 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 80
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> 81
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.
78 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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(d) The Trust's semi-annual and annual report which will include
financial statements for the Trust and investment management fees paid by
each Portfolio.
(e) A written quarterly monitoring report (the Quarterly Account
Monitor) containing a record of the performance of the Plan's assets
invested in the Target Program, the rates of return received by the Plan
with respect to such investments, the Plan's actual portfolio with a
breakdown of investments made in each Portfolio, year to date and
cumulative realized gains and losses and income received from each
Portfolio, a summary of purchase, sale and exchange activity, dividends and
interest received or reinvested and market commentary. The Quarterly
Account Monitor will also contain an analysis and an evaluation of a Plan
investor's account to ascertain whether the Plan's investment objectives
have been met and recommending, if required, changes in Portfolio
allocations.
(1) In the case of a section 404(c) Plan where the Independent
Plan Fiduciary has established an omnibus account in the name of the
Plan (the Undisclosed Account) with Prudential Securities, the
Quarterly Account Monitor will be provided to the Independent Plan
Fiduciary.
(2) In the case of a section 404(c) Plan where the Independent
Plan Fiduciary opens an account for each Plan participant (the
Disclosed Account), the Quarterly Account Monitor will be furnished to
each participant and will set forth information pertaining to the
participant's individual account.
(f) Written disclosures to the Independent Plan Fiduciary, on a
quarterly and annual basis, of the (1) percentage of each Portfolio's
brokerage commissions that are paid to Prudential Securities and (2) the
average brokerage commission per share paid by each Portfolio to Prudential
Securities, as compared to the average brokerage commission per share paid
by the Trust to brokers other than Prudential Securities, both expressed as
cents per share.
(g) Periodic meetings with Financial Advisors, Independent Plan
Fiduciaries or if applicable, participants of Section 404(c) Plans, to
discuss the Quarterly Account Monitor or other questions that may arise.
(12) PMF maintains, for a period of six years, the records necessary to
enable the persons described in paragraph (13) of this section to determine
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whether the conditions of this exemption have been met, except that (a) a
prohibited transaction will not be considered to have occurred if, due to
circumstances beyond the control of PMF and/or its affiliates, the records
are lost or destroyed prior to the end of the six year period, and (b) no
party in interest other than PMF shall be subject to the civil penalty that
may be assessed under section 502(i) of the Act, or to the taxes imposed by
section 4975(a) and (b) of the Code, if the records are not maintained, or
are not available for examination as required by paragraph (13) below.
(13) (a) Except as provided in section (b) of this paragraph and
notwithstanding any provisions of subsections (a)(2) and (b) of section 504
of the Act, the records referred to in paragraph (14) of this section are
unconditionally available at their customary location during normal
business hours by:
(1) Any duly authorized employee or representative of the
Department or the Internal Revenue Service (the Service);
(2) Any fiduciary of a participating Plan or any duly authorized
representative of such fiduciary;
(3) Any contributing employer to any participating Plan or any
duly authorized employee representative of such employer; and
(4) Any participant or beneficiary of any participating Plan, or
any duly authorized representative of such participant or beneficiary.
(b) None of the persons described above in subparagraphs (2)-(4) of
this paragraph (13) are authorized to examine the trade secrets of PMF or
commercial or financial information which is privileged or confidential.
SECTION III. DEFINITIONS
For purposes of this exemption:
(1) An "affiliate" of Prudential Securities includes -
(a) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with
Prudential Securities. (For purposes of this subsection, the term "control"
means the power to exercise a controlling influence over the management or
policies of a person other than an individual.)
(b) Any officer, director or partner in such person, and
(c) Any corporation or partnership of which such person is an officer,
director or a 5 percent partner or owner.
(2) An "Independent Plan Fiduciary" is a Plan fiduciary which is
independent of Prudential Securities and its affiliates and is either
80 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 84
(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.
82 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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The Target Program is designed for mid-sized investors with assets of
$10,000 - $1 million. To participate in the Trust, each investor must open a
brokerage account with Prudential Securities by making a current, minimum
initial investment of $10,000.(3)
Although PMF anticipates that investors in the Trust will consist of
institutions and individuals, it is proposed that prospective investors include
Plans for which PMF may or may not currently maintain investment accounts. A
majority of these Plans may be IRAs or Keogh Plans. In addition, it is proposed
that Plans for which PMF or an affiliate serves as a prototype sponsor and/or a
nondiscretionary trustee or custodian be permitted to invest in the Trust.(4)
The applicants represent that the initial purchase of shares in the Trust
by a Plan may give rise to a prohibited transaction where PMF or an affiliate
has a party in interest relationship with the Plan. PMF also acknowledges that a
prohibited transaction could arise upon a subsequent purchase or redemption of
shares in the Trust by a participating Plan inasmuch as the party in interest
relationship between PMF and the Plan may have been established at that point.
Accordingly, the applicants have requested retroactive exemptive relief
from the Department with respect to the purchase and redemption from Prudential
Securities of shares in the Trust by a participating Plan where
- ----------
(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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<PAGE> 87
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.
84 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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has established a Disclosed Account in the name of each Plan participant (such
as in a section 404(c) Plan), Prudential Securities will furnish copies of the
Investor Profile Questionnaire to each of the Plan participants for response.
However, if the Independent Plan fiduciary establishes an Undisclosed Account
with Prudential Securities in the name of the Plan, Prudential Securities will
provide the Independent Plan Fiduciary, upon oral or written request and at no
additional cost, with sufficient copies of the Investor Profile Questionnaire so
that the Independent Plan Fiduciary may distribute such questionnaire to Plan
participants. Prudential Securities, if requested, will also perform, at no
additional cost, the asset allocation analyses for each of these participants.
6. Based upon data obtained from the Investor Profile Questionnaire,
Prudential Securities evaluates the investor's risk tolerances and financial
goals. Prudential Securities then provides investment advice as to the
appropriate mix of investment Portfolios of the Trust that are designed to
balance the investor's goals, objectives and risk tolerances as part of a
long-term investment strategy.
The applicants represent that Prudential Securities does not have any
discretionary authority or control with respect to the allocation of an
investor's assets among the Portfolios. In the case of an IRA or Keogh Plan, the
applicants represent that all of Prudential Securities' recommendations and
evaluations are presented to the Independent Plan Fiduciary and are implemented
only if accepted 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
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<PAGE> 89
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."
86 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 90
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> 91
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.
88 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 92
client's actual portfolio with a breakdown of investments made in each
Portfolio, year to date and cumulative realized gains and losses and income
received from each Portfolio, a summary of purchase, sale and exchange activity
and dividends and interest received or reinvested as well as a market
commentary. In addition, the Quarterly Account Monitor will contain an analysis
and an evaluation of a Plan investor's account to ascertain whether the Plan's
investment objectives have been met and recommending, if required, changes in
Portfolio allocations. The Quarterly Account Monitor is described in the summary
of the Target Program attached to the front of the Trust's Prospectus.
If an Independent Plan Fiduciary of a section 404(c) Plan opens a Disclosed
Account for each Plan participant, such participant will receive a Quarterly
Account Monitor reflecting information that pertains to the participant's
individual account. However, if an Independent Plan Fiduciary elects to
establish an Undisclosed Account with Prudential Securities, then Prudential
Securities will provide the Quarterly Account Monitor to the Independent Plan
Fiduciary. Such report will contain information relative to the Plan's account.
In addition, on both a quarterly and annual basis, commencing with the
first quarterly report due after this notice of proposed exemption is issued,
Prudential Securities will provide, as applicable, an Independent Plan Fiduciary
or a section 404(c) Plan participant with written disclosures of (a) the
percentage of each Portfolio's aggregate brokerage commissions that are paid to
Prudential Securities and (b) the average brokerage commission per share paid by
each Portfolio to Prudential Securities, as compared to the average brokerage
commission per share paid by each Portfolio to brokers other than Prudential
Securities, both expressed as cents per share. With respect to a Disclosed
Account established for a section 404(c) Plan participant, Prudential Securities
will provide the brokerage report to the participant and not to the Independent
Plan Fiduciary.
Further, the Independent Plan Fiduciary or section 404(c) Plan participant,
as applicable, will have access to a Financial Advisor for the discussion of any
questions that may arise.
13. A Plan wishing to redeem Trust shares must communicate such request in
writing or by telephone to Prudential Securities. Redemption requests received
in proper form prior to the close of trading on the New York Stock Exchange (the
NYSE) will be effected at the net asset value per share determined on that day.
Redemption requests received after the close of regular trading on the NYSE will
be effected at the net asset value at the
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<PAGE> 93
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.
90 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
<PAGE> 94
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> 95
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.
92 The Target Portfolio Trust [PHONE GRAPHIC] (800) 982-4467
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<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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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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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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<PAGE> 101
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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<PAGE> 103
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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<PAGE> 105
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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<PAGE> 109
.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.)
107
<PAGE> 111
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 20549-0102
BY ELECTRONIC REQUEST:
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON:
Public Reference Room in Washington, DC
(For hours of operation, call 1-202-942-8090
VIA THE INTERNET:
on the EDGAR Database at http://www.sec.gov
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUSIP NASDAQ
Numbers: Symbols:
<S> <C> <C>
Large Capitalization
Growth -- 875921-20-7 TALGX
Large Capitalization
Value -- 875921-10-8 TALVX
Small Capitalization
Growth -- 875921-40-5 TASGX
Small Capitalization
Value -- 875921-30-6 TASVX
International Equity -- 875921-50-4 TAIEX
International Bond -- 875921-87-6 TIBPX
Total Return Bond -- 875921-88-4 TATBX
Intermediate-Term
Bond -- 875921-80-1 TAIBX
Mortgaged Backed
Securities -- 875921-70-2 TGMBX
U.S. Government
Money Market -- 875921-60-3 PVGXX
</TABLE>
Investment Company Act File No:
811-7064
<PAGE> 112
THE TARGET PORTFOLIO TRUST(R)
Statement of Additional Information
May 1, 2000
The Target Portfolio Trust(R) (the Trust) is an open-end, management
investment company currently composed of ten separate investment portfolios (the
Portfolios) professionally managed by Prudential Investments Fund Management LLC
(PIFM or the Manager). Each Portfolio benefits from discretionary advisory
services provided by an investment adviser (each, an Adviser, collectively, the
Advisers) identified, retained, supervised and compensated by the Manager. The
Trust consists of the following ten Portfolios:
<TABLE>
<S> <C>
Equity Portfolios Income Portfolios
- Large Capitalization Growth Portfolio - International Bond Portfolio
- Large Capitalization Value Portfolio - Total Return Bond Portfolio
- Small Capitalization Growth Portfolio - Intermediate-Term Bond Portfolio
- Small Capitalization Value Portfolio - Mortgage Backed Securities Portfolio
- International Equity Portfolio - U.S. Government Money Market Portfolio
</TABLE>
The Trust's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Trust's Prospectus dated May 1, 2000, a copy of
which may be obtained from the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
History of the Trust........................................ B-2
Description of the Portfolios, Their Investments and
Risks..................................................... B-2
Investment Restrictions..................................... B-34
Management of the Trust..................................... B-36
Control Persons and Principal Holders of Securities......... B-39
Investment Advisory and Other Services...................... B-40
Brokerage Allocation and Other Practices.................... B-46
Capital Shares, Other Securities and Organization........... B-50
Purchase, Redemption and Pricing of Shares.................. B-50
Shareholder Investment Account.............................. B-51
Net Asset Value............................................. B-53
Taxes, Dividends and Distributions.......................... B-54
Performance Information..................................... B-58
Financial Statements........................................ B-63
Report of Independent Accountants........................... B-110
Appendix I -- Historical Performance Data................... I-1
Appendix II -- General Investment Information............... II-1
Appendix III -- Glossary of Indexes......................... III-1
- -------------------------------------------------------------------
</TABLE>
TMF 158 B
<PAGE> 113
HISTORY OF THE TRUST
The Trust was organized as an unincorporated business trust in 1992 under
the laws of the State of Delaware.
DESCRIPTION OF THE PORTFOLIOS, THEIR INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Trust is an open-end management investment
company. Each of the Portfolios except for the International Bond Portfolio is
classified as a diversified fund. The International Bond Portfolio is a
non-diversified fund.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objectives of the Portfolios are set forth in the Trust's Prospectus. This
section provides additional information on the principal investment policies and
strategies of the Portfolios, as well as information on certain non-principal
investment policies and strategies. The Portfolios may not be successful in
achieving their respective objectives and you could lose money.
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in U.S. government securities.
U.S. TREASURY SECURITIES. U.S. Treasury securities include bills, notes,
bonds and other debt securities issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
OBLIGATIONS ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. Securities issued or guaranteed by agencies or
instrumentalities of the U.S. government include, but are not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Federal Housing
Administration, Farmers Home Administration and the Export-Import Bank are
backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Trust must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Such securities include obligations issued by the Student Loan
Marketing Association (SLMA), FNMA and FHLMC, each of which may borrow from the
U.S. Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations.
STRIPPED U.S. GOVERNMENT SECURITIES. A Portfolio may invest in component
parts of U.S. government securities, namely either the corpus (principal) of
such obligations or one of the interest payments scheduled to be paid on such
obligations. These obligations may take the form of (1) obligations from which
the interest coupons have been stripped; (2) the interest coupons that are
stripped; and (3) book-entries at a Federal Reserve member bank representing
ownership of obligation components.
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES. A Portfolio may invest in mortgage-backed
securities and other derivative mortgage products, including those representing
an undivided ownership interest in a pool of mortgages, e.g., GNMA, FNMA and
FHLMC certificates where the U.S. government or its agencies or
instrumentalities guarantees the payment of interest and principal of these
securities. However, these guarantees do not extend to the securities' yield or
value, which are likely to vary inversely with fluctuations in interest rates,
nor do these guarantees extend to the yield or value of a Portfolio's shares.
See "Mortgage-Backed Securities and Asset-Backed Securities" below.
Mortgages backing the securities which may be purchased by a Portfolio
include conventional thirty-year fixed-rate mortgages, graduated payment
mortgages, fifteen-year mortgages, adjustable
B-2
<PAGE> 114
rate mortgages and balloon payment mortgages. A balloon payment mortgage backed
security is an amortized mortgage security with installments of principal and
interest, the last installment of which is predominantly principal. All of these
mortgages can be used to create "pass-through securities." A pass-through
security is formed when mortgages are pooled together and undivided interests in
the pool or pools are sold. The cash flow from the mortgages is passed through
to the holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an undivided mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. The remaining expected average life of a pool of
mortgage loans underlying a mortgage backed security is a prediction of when the
mortgage loans will be repaid and is based upon a variety of factors, such as
the demographic and geographic characteristics of the borrowers and the
mortgaged properties, the length of time that each of the mortgage loans has
been outstanding, the interest rates payable on the mortgage loans and the
current interest rate environment.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, a Portfolio may also invest in mortgage pass-through
securities issued by the U.S. government or its agencies and instrumentalities,
commonly referred to as mortgage-backed security strips or MBS strips. MBS
strips are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Portfolio may not fully recoup its initial investment in IOs. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, a Portfolio reinvests the prepaid amounts in
securities, the yields which reflect interest rates prevailing at that time.
Therefore, a Portfolio's ability to maintain a portfolio of high-yielding
mortgage-backed securities will be adversely affected to the extent that
prepayments of mortgages are reinvested in securities which have lower yields
than the prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium generally will result in capital losses.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending the
projected average maturity of the mortgage-backed securities. This maturity
extension risk may effectively change a security which was considered short- or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short-or intermediate-term securities.
ZERO COUPON SECURITIES. Zero coupon U.S. government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon U.S. government securities do not require the
periodic payment of interest. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash.
B-3
<PAGE> 115
These investments may experience greater volatility in market value than U.S.
government securities that make regular payments of interest. A Portfolio
accrues income on these investments for tax and accounting purposes, which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Portfolio's distribution obligations, in which case the Portfolio will
forego the purchase of additional income producing assets with these funds. Zero
coupon U.S. government securities include STRIPS and CUBES, which are issued by
the U.S. Treasury as component parts of U.S. Treasury bonds and represent
scheduled interest and principal payments on the bonds.
SPECIAL CONSIDERATIONS. Fixed-income U.S. government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. government
securities will change as interest rates fluctuate. To the extent U.S.
government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed-rate U.S. government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. government securities
will not affect investment income from those securities, they may affect the net
asset value of a Portfolio.
At a time when a Portfolio has written call options on a portion of its
U.S. government securities, its ability to profit from declining interest rates
will be limited. Any appreciation in the value of the securities held in the
Portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by a Portfolio. The termination of
option positions under these conditions would generally result in the
realization of capital losses, which would reduce a Portfolio's capital gains
distribution. Accordingly, a Portfolio would generally seek to realize capital
gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities.
CUSTODIAL RECEIPTS
Each Portfolio may invest in receipts evidencing the component parts
(corpus or coupons) of U.S. government obligations that have not actually been
stripped. Such receipts evidence ownership of component parts of U.S. government
obligations (corpus or coupons) purchased by a third party (typically an
investment banking firm) and held on behalf of the third party in physical or
book entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. These custodial receipts include
"Treasury Receipts," "Treasury Investment Growth Receipts" (TIGRs) and
"Certificates of Accrual on Treasury Securities" (CATS). Each Portfolio will not
invest more than 5% of its net assets in such custodial receipts.
Custodial receipts held by a third party are not issued or guaranteed by
the United States government and are not considered U.S. government securities.
Each Portfolio other than the U.S. Government Money Market Portfolio may also
invest in such custodial receipts.
MONEY MARKET INSTRUMENTS
Each Portfolio (other than the U.S. Government Money Market Portfolio) may
invest in high-quality money market instruments, including commercial paper of a
U.S. or non-U.S. company or foreign government securities, certificates of
deposit, bankers' acceptances and time deposits of domestic and foreign banks,
and obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities. The U.S. Government Money Market Portfolio will normally
limit its investments in money market instruments to securities issued or
guaranteed by the U.S. government or its agencies. Money market obligations will
be generally U.S. dollar denominated, except with respect to the International
Bond Portfolio, where these instruments may also be denominated
B-4
<PAGE> 116
in foreign currencies. The Mortgage Backed Securities Portfolio will limit its
investment in money market investments to those issued by U.S. issuers.
Commercial paper will be rated, at the time of purchase, at least A-2 by
Standard & Poor's Ratings Group (S&P) or Prime-2 by Moody's Investors Service
(Moody's), or the equivalent by another NRSRO or, if not rated, issued by an
entity having an outstanding unsecured debt issue rated at least A or A-2 by S&P
or A or Prime-2 by Moody's or the equivalent by another NRSRO. The International
Bond Portfolio will only invest in commercial paper rated at least A1/P1 by S&P
or Moody's or the equivalent by another NRSRO.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Large Capitalization Value Portfolio, Small Capitalization Value
Portfolio, International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in corporate and other debt obligations. Except
where otherwise indicated, each Portfolio will invest in securities rated A or
better or determined by the Adviser to be of comparable quality. These debt
securities may have adjustable or fixed rates of interest and in certain
instances may be secured by assets of the issuer. Adjustable rate corporate debt
securities may have features similar to those of adjustable rate mortgage backed
securities, but corporate debt securities, unlike mortgage backed securities,
are not subject to prepayment risk other than through contractual call
provisions which generally impose a penalty for prepayment. Fixed-rate debt
securities may also be subject to call provisions.
The market value of fixed-income obligations of the Portfolios will be
affected by general changes in interest rates, which will result in increases or
decreases in the value of the obligations held by the Portfolios. The market
value of the obligations held by a Portfolio can be expected to vary inversely
with changes in prevailing interest rates. Investors also should recognize that,
in periods of declining interest rates, a Portfolio's yield will tend to be
somewhat higher than prevailing market rates and, in periods of rising interest
rates, a Portfolio's yield will tend to be somewhat lower. Also, when interest
rates are falling, the inflow of net new money to a Portfolio from the
continuous sale of its shares will tend to be invested in instruments producing
lower yields than the balance of its portfolio, thereby reducing the Portfolio's
current yield. In periods of rising interest rates, the opposite can be expected
to occur. In addition, securities in which a Portfolio may invest may not yield
as high a level of current income as might be achieved by investing in
securities with less liquidity, less creditworthiness or longer maturities.
Ratings made available by S&P, Moody's and other NRSRO's are relative and
subjective and are not absolute standards of quality. Although these ratings are
initial criteria for selection of portfolio investments, each Adviser will also
make its own evaluation of these securities on behalf of the Portfolio. Among
the factors that will be considered are the long-term ability of the issuers to
pay principal and interest and general economic trends.
MEDIUM AND LOWER-RATED SECURITIES. The Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each invest in
medium (i.e., rated Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO) and lower-rated securities (i.e., rated lower than Baa by Moody's or
lower than BBB by S&P or the equivalent by another NRSRO). However, no Portfolio
will purchase a security rated lower than B by Moody's or S&P or the equivalent
by another NRSRO. Securities rated Baa by Moody's or BBB by S&P or the
equivalent by another NRSRO, although considered investment grade, possess
speculative characteristics, including the risk of default, and changes in
economic or other conditions are more likely to impair the ability of issuers of
these securities to make interest and principal payments than is the case with
respect to issuers of higher-grade bonds.
Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds" (i.e., securities
rated lower than Baa by Moody's or BBB by S&P or the equivalent by another
NRSRO), offer a higher current yield than is offered by higher-rated securities,
but also (i) will likely have some quality and protective characteristics that,
in the
B-5
<PAGE> 117
judgment of the rating organizations, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (ii) are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The market values of
certain of these securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions than higher-quality
bonds. In addition, medium and lower-rated securities and comparable unrated
securities generally present a higher degree of credit risk. The risk of loss
due to default by these issuers is significantly greater because medium and
lower-rated securities and unrated securities of comparable quality generally
are unsecured and frequently are subordinated to the prior payment of senior
indebtedness. The Advisers, under the supervision of the Manager and the
Trustees, in evaluating the creditworthiness of an issue whether rated or
unrated, take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.
In addition, the market value of securities in lower-rated categories is
more volatile than that of higher-quality securities, and the markets in which
medium and lower-rated or unrated securities are traded are more limited than
those in which higher-rated securities are traded. The existence of limited
markets may make it more difficult for each Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. Moreover, the lack of a liquid trading market may restrict the
availability of securities for a Portfolio to purchase and may also have the
effect of limiting the ability of a Portfolio to sell securities at their fair
value either to meet redemption requests or to respond to changes in the economy
or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Portfolio may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of bonds moves
inversely with movements in interest rates, in the event of rising interest
rates the value of the securities held by a Portfolio may decline
proportionately more than a portfolio consisting of higher-rated securities. If
a Portfolio experiences unexpected net redemptions, it may be forced to sell its
higher-rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Portfolio and increasing the exposure of the Portfolio to
the risks of lower-rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates. See "Description of Security Ratings" in the
Prospectus.
Subsequent to its purchase by a Portfolio, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of these securities by the
Portfolio, but the Adviser will consider this event in its determination of
whether the Portfolio should continue to hold the securities.
B-6
<PAGE> 118
During the fiscal year ended December 31, 1999, the monthly dollar-weighted
average ratings of the debt obligations held by the International Bond
Portfolio, the Total Return Bond Portfolio and the Intermediate-Term Bond
Portfolio, expressed as a percentage of each Portfolio's total investments, were
as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
- ------- ---------------------------------------------------------
INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
-------------- -------------- -----------------
<S> <C> <C> <C>
AAA/Aaa 83.1% 59.8% 40.7%
AA/Aa 16.9% 1.4% --
A/A -- 16.9% 29.9%
BBB/Baa -- 15.1% 16.5%
BB/Ba -- 6.8% 7.8%
B/B -- -- 0.9%
CCC/Caa -- -- --
CC/Ca -- -- --
C/C -- -- --
Unrated -- 4.2%(1)
- -------------------------------------------------------------------------------
</TABLE>
(1) 4.2% of the debt obligations held by the Portfolio
were unrated, but were deemed comparable to AAA/Aaa
rated obligations by the sub-adviser.
COMMERCIAL PAPER. Each Portfolio may invest in commercial paper.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. A variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving periodically
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender pursuant to which the lender may
determine to invest varying amounts.
ADJUSTABLE RATE SECURITIES. The Large Capitalization Value Portfolio,
Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each invest in
adjustable rate securities. Adjustable rate securities are debt securities
having interest rates which are adjusted or reset at periodic intervals ranging
from one month to three years. The interest rate of an adjustable rate security
typically responds to changes in general market levels of interest. The interest
paid on any particular adjustable rate security is a function of the index upon
which the interest rate of that security is based.
The adjustable rate feature of the securities in which a Portfolio may
invest will tend to reduce sharp changes in a Portfolio's net asset value in
response to normal interest rate fluctuations. As the coupon rates of a
Portfolio's adjustable rate securities are reset periodically, yields of these
portfolio securities will reflect changes in market rates and should cause the
net asset value of a Portfolio's shares to fluctuate less dramatically than that
of a fund invested in long-term fixed-rate securities. However, while the
adjustable rate feature of such securities will tend to limit sharp swings in a
Portfolio's net asset value in response to movements in general market interest
rates, it is anticipated that during periods of fluctuations in interest rates,
the net asset value of a Portfolio will fluctuate.
INFLATION-INDEXED BONDS. The Total Return Bond and Intermediate-Term Bond
Portfolios may invest in inflation-indexed bonds issued by governmental entities
and corporations. Inflation-indexed bonds are fixed income securities whose
principal value is periodically adjusted according to the rate of inflation.
Such bonds generally are issued at an interest rate lower than typical bonds,
but are expected to retain their principal value over time. The interest rate on
these bonds is fixed at issuance, but over the life of the bond this interest
may be paid on an increasing principal value, which has been adjusted for
inflation.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
B-7
<PAGE> 119
FOREIGN SECURITIES
The International Equity Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each invest in
foreign equity and debt securities, including securities of foreign
corporations, obligations of foreign branches of U.S. banks and securities
issued by foreign governments. For purposes of this policy, foreign companies
and financial institutions are those that are organized under the laws of a
foreign country, those that derive more than 50% of their revenues from
activities in foreign countries, and companies and financial institutions that
have at least 50% of their assets located abroad.
A Portfolio's investments in foreign government securities may include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, semi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, the Government Entities)
of countries considered stable by an Adviser. A "supranational entity" is an
entity constituted by the national governments of several countries to promote
economic development. Examples of such supranational entities include, among
others, the World Bank, the European Investment Bank and the Asian Development
Bank. Debt securities of "semi-governmental entities" are issued by entities
owned by a national, state, or equivalent government or are obligations of a
political unit that are not backed by the national government's "full faith and
credit" and general taxing powers. Examples of semi-governmental issuers
include, among others, the Province of Ontario and the City of Stockholm.
Foreign government securities also include mortgage-backed securities issued by
foreign government entities including semi-governmental entities.
A portfolio may invest in mortgage-backed securities issued or guaranteed
by foreign government entities including semi-governmental entities, and Brady
Bonds, which are long term bonds issued by government entities in developing
countries as part of a restructuring of their commercial loans.
The values of foreign investments are affected by changes in currency rates
or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
CURRENCY RISKS. Because the majority of the securities purchased by the
International Equity and International Bond Portfolios are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect each Portfolio's net asset value; the value of interest
earned; gains and losses realized on the sale of securities; and net investment
income and capital gain, if any, to be distributed to shareholders by each
Portfolio. If the value of a foreign currency rises against the U.S. dollar, the
value of a Portfolio's assets denominated in that currency will increase;
correspondingly, if the value of a foreign currency declines against the U.S.
dollar, the value of a Portfolio's assets denominated in that currency will
decrease. Under the Internal Revenue Code, the Portfolios are required to
separately account for the foreign currency component of gains or losses, which
will usually be viewed under the Internal Revenue Code as items of ordinary and
distributable income or loss, thus affecting the Portfolios' distributable
income.
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions.
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Although the International Equity and International Bond Portfolios value their
assets daily in U.S. dollars, the Portfolios will not convert their holdings of
foreign currencies to U.S. dollars daily. When a Portfolio converts its holdings
to another currency, it may incur conversion costs. Foreign exchange dealers may
realize a profit on the difference between the price at which they buy and sell
currencies.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES. On January 1, 1999, 11 of the 15 member states of the European
Monetary Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal tender
of the member states. During the transition period, the Portfolios will treat
the euro as a separate currency from the national currency of any member state.
The adoption by the member states of the euro will eliminate the
substantial currency risk among member states and will likely affect the
investment process and considerations of the Portfolios' investment advisers. To
the extent a Portfolio holds non-U.S. dollar-denominated securities, including
those denominated in the euro, the Portfolio will still be subject to currency
risk due to fluctuations in those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term ramifications
can be expected, such as changes in economic environment and changes in behavior
of investors, all of which will impact a Portfolio's investments.
MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE-BACKED SECURITIES -- GENERAL. The Mortgage Backed Securities
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each invest in mortgage-backed securities.
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans secured
by real property. There are currently three basic types of mortgage-backed
securities: (1) those issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities, such as GNMA, FNMA and FHLMC, described under
"U.S. Government Securities" above; (2) those issued by private issuers that
represent an interest in or are collateralized by mortgage-backed securities
issued or guaranteed by the U.S. government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a government guarantee but usually having some form of
private credit enhancement. In addition, the International Bond Portfolio may
invest in mortgage-related securities issued or guaranteed by foreign, national,
state or provincial governmental instrumentalities, including semi-governmental
agencies.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities which evidence an
undivided interest in a pool or pools of mortgages. GNMA Certificates that the
Portfolios purchase are the "modified pass-through" type, which entitle the
holder to receive timely payment of all interest and principal payments due on
the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of
whether or not the mortgagor actually makes the payment. The GNMA Certificates
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (1) fixed rate level payment mortgage loans; (2) fixed rate
graduated payment mortgage loans; (3) fixed rate growing equity mortgage loans;
(4) fixed rate mortgage loans secured by manufactured (mobile) homes; (5)
mortgage loans on multifamily residential properties under construction; (6)
mortgage loans on completed multifamily projects; (7) fixed rate mortgage loans
as to which escrowed funds are used to reduce the borrower's monthly payments
during the early years of the mortgage loans ("buydown" mortgage loans); (8)
mortgage loans that provide for adjustments in payments based on periodic
changes in interest rates or in other payment terms of the mortgage loans; and
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(9) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans
or VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one-to-four family housing units.
FNMA CERTIFICATES. The Federal National Mortgage Association (FNMA) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. FNMA provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. FNMA acquires
funds to purchase home mortgage loans from many capital market investors that
may not ordinarily invest in mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. government.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) is a
corporate instrumentality of the United States created pursuant to the Emergency
Home Finance Act of 1970, as amended (the FHLMC Act). Its purpose is to promote
development of a nationwide secondary market in conventional residential
mortgages. The principal activity of FHLMC consists of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.
FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool. FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.
FHLMC CERTIFICATES. FHLMC guarantees to each registered holder of the
FHLMC Certificate the timely payment of interest at the rate provided for by
such FHLMC Certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC Certificate ultimate collection of all principal on
the related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal. The obligations
of FHLMC under its guarantee are obligations solely of FHLMC and are not backed
by the full faith and credit of the U.S. government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline.
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In addition, to the extent such mortgage securities are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments generally will
result in some loss of the holders' principal to the extent of the premium paid.
On the other hand, if such mortgage securities are purchased at a discount, an
unscheduled prepayment of principal will increase current and total returns and
will accelerate the recognition of income which when distributed to shareholders
will be taxable as ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
(ARMs) are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. Generally, ARMs have a specified maturity
date and amortize principal over their life. In periods of declining interest
rates, there is a reasonable likelihood that ARMs will experience increased
rates of prepayment of principal.
The amount of interest on an ARM is calculated by adding a specified
amount, the "margin," to the index, subject to limitations on the maximum and
minimum interest that can be charged. Because the interest rate on ARMs
generally moves in the same direction as market interest rates, the market value
of ARMs tends to be more stable than that of long-term fixed rate securities.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed-rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, such
securities generally are structured with one or more types of credit
enhancement. See "Types of Credit Enhancement" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. CMOs are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral collectively
hereinafter referred to as "Mortgage Assets"). Multiclass pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal and interest on the Mortgage Assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (REMIC). All future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.
A Portfolio also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
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structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on a Securities and Exchange Commission (Commission)
interpretation, a Portfolio's investments in certain qualifying collateralized
mortgage obligations (CMOs), including CMOs that have elected to be treated as
REMICs, are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset
issuers, that (1) invest primarily in mortgage-backed securities, (2) do not
issue redeemable securities, (3) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (4) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Portfolio selects CMOs or REMICs that do not
meet the above requirements, the Portfolio may not invest more than 10% of its
assets in all such entities, may not invest more than 5% of its total assets in
a single entity, and may not acquire more than 3% of the voting securities of
any single such entity.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
or MBS strips are derivative multiclass mortgage securities. In addition to MBS
strips issued by agencies or instrumentalities of the U.S. government, a
Portfolio may purchase MBS strips issued by private originators of, or investors
in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. See "U.S.
Government Securities--Mortgage-Related Securities Issued or Guaranteed by U.S.
Government Agencies and Instrumentalities" above.
ASSET-BACKED SECURITIES. The Large Capitalization Value Portfolio, Small
Capitalization Value Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in asset-backed securities. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. A
Portfolio may invest in these and other types of asset-backed securities that
may be developed in the future. Asset-backed securities present certain risks
that are not presented by mortgage backed securities. Primarily, these
securities do not have the benefit of a security interest in the related
collateral. Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, some of which may reduce the ability to obtain full payment. In the case
of automobile receivables, the security interests in the underlying automobiles
are often not transferred when the pool is created, with the resulting
possibility that the collateral could be resold. In general, these types of
loans are of shorter average life than mortgage loans and are less likely to
have substantial prepayments.
TYPES OF CREDIT ENHANCEMENT. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support which fall into two categories: (1) liquidity protection and (2)
protection against losses resulting from ultimate default by an obligor on the
underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to seek to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default seeks to ensure ultimate
payment of the obligations on at least a portion of the assets in the pool. This
protection may be provided through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through various
means of structuring the transaction or through a combination of such
approaches. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquencies
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or losses in excess of those anticipated could adversely affect the return on an
investment in a security. A Portfolio will not pay any additional fees for
credit support, although the existence of credit support may increase the price
of a security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. The yield characteristics of mortgage-backed and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a Portfolio purchases such a security at a premium, a prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity. Alternatively, if a Portfolio purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. Moreover, slower than
expected prepayments may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally lead to increased volatility of net asset value
because they tend to fluctuate more widely in response to changes in interest
rates than short- or intermediate-term securities. A Portfolio may invest a
portion of its assets in derivative mortgage-backed securities such as MBS
Strips which are highly sensitive to changes in prepayment and interest rates.
Each Adviser will seek to manage these risks (and potential benefits) by
diversifying its investments in such securities and, in certain circumstances,
through hedging techniques.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed-rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rates as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed-income securities from declining interest rates because of the risk
of prepayment. During periods of rising interest rates, the rate of prepayment
of mortgages underlying mortgage-backed securities can be expected to decline,
extending the projected average maturity of the mortgage-backed securities. This
maturity extension risk may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
CONVERTIBLE SECURITIES
Each Portfolio, other than the U.S. Government Money Market Portfolio, may
invest in convertible securities. A convertible security is typically a bond,
debenture, corporate note, preferred stock or other similar security which may
be converted at a stated price within a specified period of time into a
specified number of shares of common stock or other equity securities of the
same or a different issuer. Convertible securities are generally senior to
common stocks in a corporation's capital structure, but are usually subordinated
to similar nonconvertible securities. While providing a fixed income stream
(generally higher in yield than the income derivable from a common stock but
lower than that afforded by a similar nonconvertible security), a convertible
security also affords an investor the opportunity, through its conversion
feature, to participate in the capital appreciation attendant upon a market
price advance in the convertible security's underlying
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common stock. Convertible securities also include preferred stocks, which
technically are equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying common stock rises, whereas it tends to decrease as the market value
of the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
LOAN PARTICIPATIONS
The Intermediate-Term Bond Portfolio and Total Return Bond Portfolio may
invest up to 5% of net assets in high quality participation interests having
remaining maturities not exceeding one year in loans extended by banks to United
States and foreign companies. In a typical corporate loan syndication, a number
of lenders, usually banks (co-lenders), lend a corporate borrower a specified
sum pursuant to the terms and conditions of a loan agreement. One of the
co-lenders usually agrees to act as the agent bank with respect to the loan. The
loan agreement among the corporate borrower and the co-lenders identifies the
agent bank as well as sets forth the rights and duties of the parties. The
agreement often (but not always) provides for the collateralization of the
corporate borrower's obligations thereunder and includes various types of
restrictive covenants which must be met by the borrower.
The participation interests acquired by a Portfolio may, depending on the
transaction, take the form of a direct or co-lending relationship with the
corporate borrower, an assignment of an interest in the loan by a co-lender or
another participant, or a participation in the seller's share of the loan.
Typically, the Portfolio will look to the agent bank to collect principal of and
interest on a participation interest, to monitor compliance with loan covenants,
to enforce all credit remedies, such as foreclosures on collateral, and to
notify co-lenders of any adverse changes in the borrower's financial condition
or declarations of insolvency. The agent bank in such cases will be qualified to
serve as a custodian for a registered investment company such as the Trust. The
agent bank is compensated for these services by the borrower pursuant to the
terms of the loan agreement.
When a Portfolio acts as co-lender in connection with a participation
interest or when the Portfolio acquires a participation interest the terms of
which provide that the Portfolio will be in privity with the corporate borrower,
the Portfolio will have direct recourse against the borrower in the event the
borrower fails to pay scheduled principal and interest. In cases where the
Portfolio lacks such direct recourse, the Portfolio will look to the agent bank
to enforce appropriate credit remedies against the borrower.
The Portfolios believe that the principal credit risk associated with
acquiring participation interests from a co-lender or another participant is the
credit risk associated with the underlying corporate borrower. A Portfolio may
incur additional credit risk, however, when a Portfolio is in the position of
participant rather than a co-lender because the Portfolio must assume the risk
of insolvency of the co-lender from which the participation interest was
acquired and that of any person interpositioned between the Portfolio and the
co-lender. However, in acquiring participation interests, the Portfolio will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the participation interest meets the
Portfolio's high quality standard and will continue to do so as long as it holds
a participation. For purposes of a Portfolio's requirement to maintain
diversification for tax purposes, the issuer of a loan participation will be the
underlying borrower. In cases where a Portfolio does not have recourse directly
against the
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borrower, both the borrower and each agent bank and co-lender interposed between
the Portfolio and the borrower will be deemed issuers of the loan participation
for tax diversification purposes.
For purposes of each Portfolio's fundamental investment restriction against
investing 25% or more of its total assets in any one industry, a Portfolio will
consider all relevant factors in determining who is the issuer of a loan
participation including the credit quality of the underlying borrower, the
amount and quality of the collateral, the terms of the loan participation
agreement and other relevant agreements (including any intercreditor
agreements), the degree to which the credit of such intermediary was deemed
material to the decision to purchase the loan participation, the interest
environment, and general economic conditions applicable to the borrower and such
intermediary.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements whereby the seller of
the security agrees to repurchase that security from a Portfolio at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. Each Portfolio does not currently intend to invest in repurchase
agreements whose maturities exceed one year. The resale price is in excess of
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time a Portfolio's money is invested in the repurchase agreement. A
Portfolio's repurchase agreements will at all times be fully collateralized in
an amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of instruments declines, a Portfolio will
require additional collateral. In the event of a default, insolvency or
bankruptcy by a seller, the Portfolio will promptly seek to liquidate the
collateral. In such circumstances, the Portfolio could experience a delay or be
prevented from disposing of the collateral. To the extent that the proceeds from
any sale of such collateral upon a default in the obligation to repurchase are
less than the resale price, the Portfolio will suffer a loss.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio
and Total Return Bond Portfolio may each enter into reverse repurchase
agreements and dollar rolls. The proceeds from such transactions will be used
for the clearance of transactions or to take advantage of investment
opportunities.
Reverse repurchase agreements involve sales by a Portfolio of securities
concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price. During the reverse repurchase agreement period,
the Portfolio continues to receive principal and interest payments on these
securities.
Dollar rolls involve sales by a Portfolio of securities for delivery in the
current month and a simultaneous contract to repurchase substantially similar
(same type and coupon) securities on a specified future date from the same
party. During the roll period, a Portfolio forgoes principal and interest paid
on the securities. A Portfolio is compensated by the difference between the
current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.
A Portfolio will segregate with its custodian cash or other liquid assets
equal in value to its obligations in respect of reverse repurchase agreements
and dollar rolls. Reverse repurchase agreements and dollar rolls involve the
risk that the market value of the securities retained by a Portfolio may decline
below the price of the securities a Portfolio has sold but is obligated to
repurchase under the agreement. If the buyer of securities under a reverse
repurchase agreement or dollar roll files for bankruptcy or becomes insolvent, a
Portfolio's use of the proceeds of the
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agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce a Portfolio's obligation to repurchase
the securities.
Reverse repurchase agreements and dollar rolls, including covered dollar
rolls, are speculative techniques involving leverage and are considered
borrowings by a Portfolio for purposes of the percentage limitations applicable
to borrowings. See "Borrowing" below.
INTEREST RATE SWAP TRANSACTIONS
The Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
International Bond Portfolio and Total Return Bond Portfolio may each enter into
interest rate swap transactions. Interest rate swaps involve the exchange by a
Portfolio with another party of their respective commitments to pay or receive
interest, for example, an exchange of floating rate payments for fixed-rate
payments. A Portfolio expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities a
Portfolio anticipates purchasing at a later date. A Portfolio intends to use
these transactions as a hedge and not as a speculative investment.
Each Portfolio may enter into either asset-based interest rate swaps or
liability-based interest rate swaps, depending on whether it is hedging its
assets or its liabilities. A Portfolio will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with a
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. Since these hedging transactions are entered into for good faith
hedging purposes and cash or other liquid assets are segregated, the Manager and
the Advisers believe such obligations do not constitute senior securities and,
accordingly, will not treat them as being subject to the borrowing restrictions
applicable to each Portfolio. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of cash or other liquid
assets having an aggregate net asset value at least equal to the accrued excess
will be segregated by a custodian that satisfies the requirements of the
Investment Company Act. To the extent that a Portfolio enters into interest rate
swaps on other than a net basis, the amount segregated will be the full amount
of a Portfolio's obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis. The Portfolios will not enter into any interest rate
swaps unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction. If
there is a default by the other party to such a transaction, a Portfolio will
have contractual remedies pursuant to the agreement related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Adviser is incorrect in its
forecast of market values, interest rates and other applicable factors, the
investment performance of a Portfolio would diminish compared to what it would
have been if this investment technique was never used.
A Portfolio may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that a
Portfolio is contractually obligated to make. This amount will not exceed 5% of
a Portfolio's net assets. If the other party to an interest rate swap defaults,
a Portfolio's risk of loss consists of the net amount of interest payments that
a Portfolio is contractually entitled to receive. Since interest rate swaps are
individually negotiated, a Portfolio expects to achieve an acceptable degree of
correlation between its rights to receive interest on its portfolio securities
and its rights and obligations to receive and pay interest pursuant to interest
rate swaps.
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ILLIQUID SECURITIES
Each Portfolio may hold up to 15% of its net assets in illiquid securities,
except for the U.S. Government Money Market Portfolio, which may hold up to 10%
of its net assets in illiquid securities. If a Portfolio were to exceed this
limit, the Adviser would take prompt action to reduce the Portfolio's holdings
in illiquid securities to no more than 15% of its net assets (10% of net assets
for the U.S. Government Money Market Portfolio), as required by applicable law.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days, and securities that are not readily marketable in
securities markets either within or outside of the United States and securities
that have legal or contractual restrictions on resale (restricted securities).
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Manager anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result of
this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Trustees. The Advisers will monitor the liquidity
of such restricted securities subject to the supervision of the Trustees. In
reaching liquidity decisions, the Advisers will consider, among others, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (that is, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). In addition, in order for
commercial paper that is issued in reliance on Section 4(2) of the Securities
Act to be considered liquid, (a) it must be rated in one of the two highest
rating
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categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of the Adviser; and (2) it
must not be "traded flat" (i.e., without accrued interest) or in default as to
principal or interest. The Portfolio's investments in Rule 144A securities could
have the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing Rule 144A
securities.
The staff of the Commission has taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Portfolio and the
counterparty have provided for the Portfolio, at the Portfolio's election, to
unwind the over-the-counter option. The exercise of such an option ordinarily
would involve the payment by the Portfolio of an amount designated to effect the
counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the assets used as "cover" as "liquid." However, with respect
to U.S. government securities, a Portfolio may treat the securities it uses as
"cover" for written OTC options on U.S. government securities as liquid provided
it follows a specified procedure. A Portfolio may sell such OTC options only to
qualified dealers who agree that a Portfolio may repurchase any options it
writes for a maximum price to be calculated by a predetermined formula. In such
cases, OTC options would be considered liquid only to the extent that the
maximum repurchase price under the formula exceeds the intrinsic value of the
option.
When a Portfolio enters into interest rate swaps on other than a net basis,
the entire amount of the Portfolio's obligations, if any, with respect to such
interest rate swaps will be treated as illiquid. To the extent that a Portfolio
enters into interest rate swaps on a net basis, the net amount of the excess, if
any, of the Portfolio's obligations over its entitlements with respect to each
interest rate swap will be treated as illiquid. The Portfolios will also treat
non-U.S. government POs and IOs as illiquid securities so long as the staff of
the Commission maintains its position that such securities are illiquid.
INVESTMENT COMPANY SECURITIES
The Portfolios may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share (money market funds). The Portfolios may also
invest in securities issued by other investment companies with similar
investment objectives. The International Equity and International Bond
Portfolios may purchase shares of investment companies investing primarily in
foreign securities, including so-called "country funds." Country funds have
portfolios consisting primarily of securities of issuers located in one foreign
country. Securities of other investment companies will be acquired within the
limits prescribed by the Investment Company Act. As a shareholder of another
investment company, a Portfolio would bear, along with other shareholders, its
pro rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the expenses each Portfolio bears
in connection with its own operations.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The International Equity Portfolio, Mortgage Backed Securities Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return. A Portfolio, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the use
of foreign currency forward contracts, options, futures contracts and options
thereon. A Portfolio's ability to use these strategies may be limited by various
factors, such as market conditions, regulatory limits and tax considerations,
and there can be no assurance that any of these strategies will succeed. See
"Taxes, Dividends and Distributions." If new financial products and risk
management techniques are developed, each Portfolio may use them to the extent
consistent with its investment objectives and policies.
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RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT
STRATEGIES -- GENERAL. Participation in the options and futures markets and in
currency exchange transactions involves investment risks and transaction costs
to which a Portfolio would not be subject absent the use of these strategies. A
Portfolio, and thus its investors, may lose money through any unsuccessful use
of these strategies. If an Adviser's predictions of movements in the direction
of the securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to a Portfolio may leave the Portfolio in a worse position
than if such strategies were not used. Risks inherent in the use of these
strategies include (1) dependence on the Advisor's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the risk that the counterparty may be unable to complete the transaction;
and (6) the possible inability of a Portfolio to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for a Portfolio to sell a portfolio security at a disadvantageous
time, due to the need for a Portfolio to maintain "cover" or to segregate assets
in connection with hedging transactions.
OPTIONS TRANSACTIONS. A Portfolio may purchase and write (that is, sell)
put and call options on securities, currencies and financial indexes that are
traded on U.S. and foreign securities exchanges or in the over-the-counter
market (OTC) to seek to enhance return or to protect against adverse price
fluctuations in securities in its portfolio. These options will be on debt
securities, aggregates of debt securities, financial indexes (for example, S&P
500) and U.S. government securities. The International Bond Portfolio and
International Equity Portfolio may also purchase and write put and call options
on foreign currencies and foreign currency futures. A Portfolio may write
covered put and call options to attempt to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the value
of a security that it owns against a decline in market value and purchase call
options in an effort to protect against an increase in price of securities or
currencies it intends to purchase. A Portfolio may also purchase put and call
options to offset previously written put and call options of the same series.
A call option gives the purchaser, in exchange for a premium paid, the
right for a specified period of time to purchase the securities or currency
subject to the option at a specified price (the exercise price or strike price).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When a Portfolio writes a call
option, the Portfolio gives up the potential for gain on the underlying
securities or currency in excess of the exercise price of the option during the
period that the option is open. There is no limitation on the amount of call
options a Portfolio may write.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Portfolio, as the writer of a put option, might, therefore,
be obligated to purchase the underlying securities or currency for more than
their current market price.
A Portfolio will write only "covered" options. A written option is covered
if, so long as the Portfolio is obligated under the option, it (1) owns an
offsetting position in the underlying security or currency or (2) segregates
cash or other liquid assets, in an amount equal to or greater than its
obligation under the option. Under the first circumstance, the Portfolio's
losses are limited because it owns the underlying security; under the second
circumstance, in the case of a written call option, the Portfolio's losses are
potentially unlimited. A Portfolio may only write covered put options to the
extent that cover for such options does not exceed 25% of the Portfolio's net
assets. A Portfolio will
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not purchase an option if, as a result of such purchase, more than 20% of its
total assets would be invested in premiums for options and options on futures.
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the exercise price or strike price). By writing a call option,
the Portfolio becomes obligated during the term of the option, upon exercise of
the option, to deliver the underlying securities or a specified amount of cash
to the purchaser against receipt of the exercise price. When a Portfolio writes
a call option, the Portfolio loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Portfolio becomes
obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The
Portfolio might, therefore, be obligated to purchase the underlying securities
for more than their current market price.
The writer of an option retains the amount of the premium, although this
amount may be offset or exceeded, in the case of a covered call option, by an
increase and, in the case of a covered put option, by a decline in the market
value of the underlying security during the option period.
A Portfolio may wish to protect certain portfolio securities against a
decline in market value at a time when put options on those particular
securities are not available for purchase. The Portfolio may therefore purchase
a put option on other securities, the values of which the Adviser expects will
have a high degree of positive correlation to the values of such portfolio
securities. If the Adviser's judgment is correct, changes in the value of the
put options should generally offset changes in the value of the portfolio
securities being hedged. If the Adviser's judgment is not correct, the value of
the securities underlying the put option may decrease less than the value of the
Portfolio's investments and therefore the put option may not provide complete
protection against a decline in the value of the Portfolio's investments below
the level sought to be protected by the put option.
A Portfolio may similarly wish to hedge against appreciation in the value
of debt securities that it intends to acquire at a time when call options on
such securities are not available. The Portfolio may, therefore, purchase call
options on other debt securities the values of which the Adviser expects will
have a high degree of positive correlation to the values of the debt securities
that the Portfolio intends to acquire. In such circumstances the Portfolio will
be subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Portfolio is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Portfolio.
A Portfolio may write options on securities in connection with
buy-and-write transactions; that is, the Portfolio may purchase a security and
concurrently write a call option against that security. If the call option is
exercised, the Portfolio's maximum gain will be the premium it received for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the option.
If the option is not exercised and the price of the underlying security
declines, the amount of the decline will be offset in part, or entirely, by the
premium received.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. A Portfolio may also buy and write
straddles (i.e., a combination of a call and a put written on the same security
at the same strike price where the same segregated collateral is considered
"cover" for both the put and the call). In such cases, a Portfolio will
segregate with its Custodian cash or other liquid assets equivalent to the
amount, if any, by which the put is "in-the-money, "i.e., the amount by which
the exercise price of the put exceeds the current market value of the
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underlying security. It is contemplated that a Portfolio's use of straddles will
be limited to 5% of the Portfolio's net assets (meaning that the securities used
for cover or segregated as described above will not exceed 5% of the Portfolio's
net assets at the time the straddle is written). The writing of a call and a put
on the same security at the same stock price where the call and put are covered
by different securities is not considered a straddle for the purposes of this
limit. Buy-and-write transactions using in-the-money call options may be used
when it is expected that the price of the underlying security will remain flat
or decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. A buy-and-write transaction using an out-of-the-money call option may be
used when it is expected that the premium received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call option is exercised in such a
transaction, the Portfolio's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Portfolio's purchase price of the security and the exercise price of the option.
If the option is not exercised and the price of the underlying security
declines, the amount of the decline will be offset in part, or entirely, by the
premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to the fulfillment of every exchange-traded option transaction. In
contrast, OTC options are contracts between the Portfolio and its counter-party
with no clearing organization guarantee. Thus, when the Portfolio purchases an
OTC option, it relies on the dealer from which it has purchased the OTC option
to make or take delivery of the securities underlying the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Portfolio as
well as the loss of the expected benefit of the transaction. As such, the value
of an OTC option is particularly dependent upon the financial viability of the
OTC counterparty.
Exchange traded options generally have a continuous liquid market while OTC
options may not. When a Portfolio writes an OTC option, it generally will be
able to close out the OTC options prior to its expiration only by entering into
a closing purchase transaction with the dealer to which the Portfolio originally
wrote the OTC option. While the Portfolio will enter into OTC options only with
dealers which agree to, and which are expected to be capable of, entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. Until the Portfolio is able to effect a closing
purchase transaction in a covered OTC call option the Portfolio has written, it
will not be able to liquidate securities used as cover until the option expires
or is exercised or different cover is substituted. In the event of insolvency of
the counter party, the Portfolio may be unable to liquidate an OTC option. With
respect to options written by a Portfolio, the inability to enter into a closing
purchase transaction could result in material losses to the Portfolio.
OTC options purchased by a Portfolio will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Portfolio will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the
Portfolio may repurchase any OTC options it writes for a maximum price to be
calculated by
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a formula set forth in the option agreement. The "cover" for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
A call option written by the Portfolio is "covered" if the Portfolio owns
the security underlying the option or has an absolute and immediate right to
acquire that security without additional consideration (or for additional
consideration segregated by its Custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Portfolio
holds on a share-for-share basis a call on the same security as the call written
where the exercise price of the call held is equal to or less than the exercise
price of the call written; where the exercise price of the call held is greater
than the exercise price of the call written, the Portfolio will segregate cash
or other liquid assets with its Custodian. A put option written by the Portfolio
is "covered" if the Portfolio holds on a share-for-share basis a put on the same
security as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written; otherwise the Portfolio
will segregate cash or other liquid assets with its Custodian equivalent in
value to the exercise price of the option. This means that so long as the
Portfolio is obligated as the writer of a call option, it will own the
underlying securities subject to the option or an option to purchase the same
underlying securities, having an exercise price equal to or less than the
exercise price of the "covered" option, or will segregate with its Custodian for
the term of the option cash or other liquid assets having a value equal to or
greater than the exercise price of the option. In the case of a straddle written
by the Portfolio, the amount segregated will equal the amount, if any, by which
the put is "in-the-money."
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not
currently traded on any exchange. However, the Mortgage Backed Securities
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each purchase and write such options should
they commence trading on any exchange and may purchase or write OTC Options on
GNMA certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Portfolio, as a writer of a covered
GNMA call holding GNMA Certificates as "cover" to satisfy its delivery
obligation in the event of assignment of an exercise notice, may find that its
GNMA Certificates no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the Portfolio will enter into a closing
purchase transaction or will purchase additional GNMA Certificates from the same
pool (if obtainable) or replacement GNMA Certificates in the cash market in
order to remain covered.
A GNMA Certificate held by a Portfolio to cover an option position in any
but the nearest expiration month may cease to represent cover for the option in
the event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Portfolio will no longer be covered, and the Portfolio will either enter
into a closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Portfolio closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. Although the Portfolio will generally purchase or write only
those options for which there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some exchange-traded
options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the Portfolio would have to exercise its exchange-traded options in
order to realize any profit and may incur transaction costs in connection
therewith. If the Portfolio as a covered call option writer is unable to effect
a closing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
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Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date, to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
In the event of the bankruptcy of a broker through which the Portfolio
engages in options transactions, the Portfolio could experience delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin deposits with the broker. Similarly,
in the event of the bankruptcy of the writer of an OTC option purchased by the
Portfolio, the Portfolio could experience a loss of all or part of the value of
the option. Transactions are entered into by the Portfolio only with brokers or
financial institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
OPTIONS ON SECURITIES INDEXES. The International Equity Portfolio,
Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio, Total
Return Bond Portfolio and International Bond Portfolio each may purchase and
write call and put options on securities indexes in an attempt to hedge against
market conditions affecting the value of securities that the Portfolio owns or
intends to purchase, and not for speculation. Through the writing or purchase of
index options, the Portfolio can achieve many of the same objectives as through
the use of options on individual securities. Options on securities indexes are
similar to options on a security except that, rather than the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Portfolio owns or intends to purchase will probably not
correlate perfectly with movements in the level of an index and, therefore, the
Portfolio bears the risk that a loss on an index option would not be completely
offset by movements in the price of such securities.
When a Portfolio writes an option on a securities index, it will be
required to deposit with its Custodian, and mark-to-market, eligible securities
equal in value to 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
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Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Portfolio may expire worthless, in which case the Portfolio
would lose the premium paid therefor.
RISKS OF OPTIONS ON INDEXES. A Portfolio's purchase and sale of options on
indexes will be subject to risks described above under "Risks of Options
Transactions." In addition, the distinctive characteristics of options on
indexes create certain risks that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Portfolio would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to the Portfolio. It is the policy of each
Portfolio to purchase or write options only on indexes which include a number of
stocks sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. A
Portfolio will not purchase or sell any index option contract unless and until,
in the Adviser's opinion, the market for such options has developed sufficiently
that the risk in connection with such transactions is no greater than the risk
in connection with options on securities in the index.
SPECIAL RISKS OF WRITING CALLS ON INDEXES. Because exercises of index
options are settled in cash, a call writer such as a Portfolio cannot determine
the amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, a Portfolio will write call options on indexes only under the
circumstances described herein.
Price movements in a Portfolio's security holdings probably will not
correlate precisely with movements in the level of the index and, therefore, the
Portfolio bears the risk that the price of the securities held by the Portfolio
may not increase as much as the index. In such event, the Portfolio would bear a
loss on the call which is not completely offset by movements in the price of the
Portfolio's security holdings. It is also possible that the index may rise when
the Portfolio's stocks do not rise. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its portfolio and might also experience a loss in its portfolio. However,
because the value of a diversified portfolio will, over time, tend to move in
the same direction as the market, movements in the value of the Portfolio in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
Unless a Portfolio has other liquid assets which are sufficient to satisfy
the exercise of a call, the Portfolio would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be settled
within hours after receiving the notice of exercise, if the Portfolio fails to
anticipate an exercise, it may have to borrow from a bank pending settlement of
the sale of securities in its portfolio and would incur interest charges
thereon.
When a Portfolio has written a call, there is also a risk that the market
may decline between the time the Portfolio has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the Portfolio is able to sell stocks in its portfolio. As
with stock options, the Portfolio will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on stock
where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its investment portfolio in
order to make settlement in cash, and the price of such securities might decline
before they can be sold. This timing risk makes certain strategies involving
more than one option substantially more risky with index options than with stock
options. For example, even if an index call which the Portfolio has written is
"covered" by an index call held by the Portfolio with the same strike price,
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the Portfolio will bear the risk that the level of the index may decline between
the close of trading on the date the exercise notice is filed with the clearing
corporation and the close of trading on the date the Portfolio exercises the
call it holds or the time the Portfolio sells the call which, in either case,
would occur no earlier than the day following the day the exercise notice was
filed.
If the Portfolio holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that the
level of the underlying index may change before closing. If such a change causes
the exercised option to fall out-of-the-money, the Portfolio will be required to
pay the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer. Although the
Portfolio may be able to minimize this risk by withholding exercise instructions
until just before the daily cutoff time or by selling rather than exercising an
option when the index level is close to the exercise price, it may not be
possible to eliminate this risk entirely because the cutoff times for index
options may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
FUTURES CONTRACTS. The International Equity Portfolio, Intermediate-Term
Bond Portfolio, Mortgage Backed Securities Portfolio, Total Return Bond
Portfolio and International Bond Portfolio may each enter into futures contracts
and related options which are traded on a commodities exchange or board of trade
to reduce certain risks of its investments and to attempt to enhance returns, in
each case in accordance with regulations of the Commodity Futures Trading
Commission. The Portfolios, and thus their investors, may lose money through any
unsuccessful use of these strategies.
As a purchaser of a futures contract (futures contract), a Portfolio incurs
an obligation to take delivery of a specified amount of the obligation
underlying the futures contract at a specified time in the future for a
specified price. As a seller of a futures contract, the Portfolio incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. A Portfolio may purchase
futures contracts on debt securities, aggregates of debt securities, financial
indexes and U.S. government securities including futures contracts or options
linked to LIBOR.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the
Portfolio will be able to enter into a closing transaction.
When a Portfolio enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction an "initial margin" of cash or other liquid
securities equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a brokers' client but is, rather, a good faith deposit on a futures
contract which will be returned to the Portfolio upon the proper termination of
the futures contract. The margin deposits made are marked-to-market daily and
the Portfolio may
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segregate with its Custodian, cash or U.S. government securities, called
"variation margin," in the name of the broker, which are reflective of price
fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Mortgage Backed Securities Portfolio, Total
Return Bond Portfolio and International Bond Portfolio may each purchase call
and put options on futures contracts which are traded on an exchange and enter
into closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid), and the writer the obligation, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
during the term of the option. Upon exercise of the option, the assumption of an
offsetting futures position by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on the futures contract.
A Portfolio may only write "covered" put and call options on futures
contracts. A Portfolio will be considered "covered" with respect to a call
option it writes on a futures contract if the Portfolio owns the assets which
are deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or if it segregates with its Custodian for the
term of the option cash or other liquid assets equal to the fluctuating value of
the optioned future. The Portfolio will be considered "covered" with respect to
a put option it writes on a futures contract if it owns an option to sell that
futures contract having a strike price equal to or greater than the strike price
of the "covered" option, or if it segregates with its Custodian for the term of
the option cash or other liquid assets at all times equal in value to the
exercise price of the put (less any initial margin deposited by the Portfolio
with its Custodian with respect to such option). There is no limitation on the
amount of the Portfolio's assets which can be segregated.
A Portfolio will purchase options on futures contracts for identical
purposes to those set forth above for the purchase of a futures contract
(purchase of a call option or sale of a put option) and the sale of a futures
contract (purchase of a put option or sale of a call option), or to close out a
long or short position in futures contracts. If, for example, the Adviser wished
to protect against an increase in interest rates and the resulting negative
impact on the value of a portion of its U.S. government securities holdings, it
might purchase a put option on an interest rate futures contract, the underlying
security which correlates with the portion of the securities holdings the
Adviser seeks to hedge.
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES. A Portfolio may
purchase or sell futures contracts or purchase related options thereon for bona
fide hedging transactions without limit. In addition, the Portfolios may use
futures contracts and options thereon for any other purpose to the extent that
the aggregate initial margin and option premium does not exceed 5% of the market
value of the Portfolio's total assets. There is no overall limitation on the
percentage of the Portfolio's assets which may be subject to a hedge position.
Subject to these limitations and in accordance with the regulations of the
Commodity Futures Trading Commission (CFTC) the Portfolio is exempt from
registration as a commodity pool operator.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. A
Portfolio's successful use of futures contracts and related options depends upon
the investment adviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities or currencies being
hedged is imperfect and there is a risk that the value of the securities or
currencies being hedged may increase or decrease at a greater rate than a
specified futures contract resulting in losses to a Portfolio.
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A Portfolio may sell a futures contract to protect against the decline in
the value of securities or currencies held by the Portfolio. However, it is
possible that the futures market may advance and the value of securities held in
the Portfolio's portfolio may decline. If this were to occur, the Portfolio
would lose money on the futures contracts and also experience a decline in value
in its portfolio securities.
If a Portfolio purchases a futures contract to hedge against the increase
in value of securities it intends to buy, and the value of such securities
decreases, then the Portfolio may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
In order to assure that the Portfolio is entering into transactions in
futures contracts for hedging purposes as such term is defined by the CFTC,
either: (1) a substantial majority (i.e., approximately 75%) of all anticipatory
hedge transactions (transactions in which the Portfolio does not own at the time
of the transaction, but expects to acquire, the securities underlying the
relevant futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities which are the subject of the hedge, or
(2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the
Portfolio; (b) cash held by the Portfolio; (c) cash proceeds due to the
Portfolio on investments within thirty days; (d) the margin deposited on the
contracts; and (e) any unrealized appreciation in the value of the contracts.
If a Portfolio maintains a short position in a futures contract, it will
cover this position by segregating with its Custodian, cash or other liquid
assets equal in value (when added to any initial or variation margin on deposit)
to the market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the Portfolio to purchase the
same contract at a price no higher than the price at which the short position
was established.
In addition, if a Portfolio holds a long position in a futures contract, it
will segregate cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) with its
Custodian. Alternatively, the Portfolio could cover its long position by
purchasing a put option on the same futures contract with an exercise price as
high or higher than the price of the contract held by the Portfolio.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Portfolio
would continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Portfolio has insufficient
cash, it may be disadvantageous to do so. In addition, the Portfolio may be
required to take or make delivery of the instruments underlying futures
contracts it holds at a time when it is disadvantageous to do so. The ability to
close out options and futures positions could also have an adverse impact on the
Portfolio's ability to hedge its portfolio effectively.
In the event of the bankruptcy of a broker through which the Portfolio
engages in transactions in futures or options thereon, the Portfolio could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Transactions are entered into by the Portfolio only with
brokers or financial institutions deemed creditworthy by the Adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Portfolio's securities. One such
risk which may arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts (and thereby the futures contract prices) may correlate
imperfectly with the behavior of the cash prices of the Portfolio's portfolio
securities. Another such risk is that prices of futures contracts may not move
in tandem with the changes in prevailing interest rates against which
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the Portfolio seeks a hedge. A correlation may also be distorted by the fact
that the futures market is dominated by short-term traders seeking to profit
from the difference between a contract or security price objective and their
cost of borrowed funds. Such distortions are generally minor and would diminish
as the contract approached maturity.
Successful use of futures contracts is also subject to the ability of an
Adviser to forecast movements in the direction of the market and interest rates
and other factors affecting equity securities and currencies generally. In
addition, there may exist an imperfect correlation between the price movements
of futures contracts purchased by the Portfolio and the movements in the prices
of the securities which are the subject of the hedge. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities and futures market could
result. Price distortions could also result if investors in futures contracts
elect to make or take delivery of underlying securities rather than engage in
closing transactions due to the resultant reduction in the liquidity of the
futures market. In addition, due to the fact that, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the Adviser may still not result in a successful hedging
transaction.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the
Portfolio because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when the purchase
of a call or put option on a futures contract would result in a loss to the
Portfolio notwithstanding that the purchase or sale of a futures contract would
not result in a loss, as in the instance where there is no movement in the
prices of the futures contracts or underlying U.S. Government securities.
OPTIONS ON CURRENCIES. Instead of purchasing or selling futures, options
on futures or forward currency exchange contracts, the International Equity
Portfolio, Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and
International Bond Portfolio may each attempt to accomplish similar objectives
by purchasing put or call options on currencies either on exchanges or in
over-the-counter markets or by writing put options or covered call options on
currencies. A put option gives the Portfolio the right to sell a currency at the
exercise price until the option expires. A call option gives the Portfolio the
right to purchase a currency at the exercise price until the option expires.
Both options serve to insure against adverse currency price movements in the
underlying portfolio assets designated in a given currency.
RISKS OF OPTIONS ON FOREIGN CURRENCIES. Because there are two currencies
involved, developments in either or both countries affect the values of options
on foreign currencies. Risks include government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantity of currency underlying option contracts represent odd lots in a market
dominated by transactions between banks; this can mean extra transaction costs
upon exercise. Option markets may be closed while round-the-clock interbank
currency markets are open, and this can create price and rate discrepancies.
FOREIGN CURRENCY FORWARD CONTRACTS. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each enter into foreign currency forward contracts to protect
the value of its portfolio against future changes in the level of currency
exchange rates. A Portfolio may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of
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days agreed upon by the parties from the date of the contract at a price set on
the date of the contract.
A Portfolio's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Portfolio generally arising in connection with
the purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Portfolio expenses. Position hedging is (1) the sale of
a foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency (cross-hedge) or (2) the purchase of a foreign
currency when the Adviser believes that the U.S. dollar may decline against that
foreign currency. Although there are no limits on the number of forward
contracts which a Portfolio may enter into, a Portfolio may not position hedge
with respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any purchase or sale of foreign
currency) of the securities being hedged.
The precise matching of forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. A Portfolio does not intend
to enter into such forward contracts to protect the value of its portfolio
securities on a regular or continuous basis. A Portfolio does not intend to
enter into such forward contracts or maintain a net exposure to such contracts
where the consummation of the contracts would obligate the Portfolio to deliver
an amount of foreign currency in excess of the value of the Portfolio's
securities holdings or other assets denominated in that currency.
The Portfolio generally will not enter into a forward contract with a term
of greater than one year. At the maturity of a forward contract, the Portfolio
may either sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and terminate its contractual obligation
to deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Portfolio is obligated to deliver, then it would be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio would incur a gain or a loss to the extent
that there has been movement in forward contract prices. Should forward contract
prices decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Portfolio will suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
A Portfolio's dealing in foreign currency forward contracts will generally
be limited to the transactions described above. Of course, a Portfolio is not
required to enter into such transactions with regard to its foreign
currency-denominated securities. Also this method of protecting the value of a
Portfolio's securities holdings against a decline in the value of a currency
does not eliminate
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fluctuations in the underlying prices of the securities which are unrelated to
exchange rates. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they tend to limit
any potential gain which might result should the value of such currency
increase.
Although the Portfolio values its assets daily in terms of U.S. dollars, it
does not intend physically to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
The Adviser may use foreign currency hedging techniques, including
cross-currency hedges, to attempt to protect against declines in the U.S. dollar
value of income available for distribution to shareholders and declines in the
net asset value of a Portfolio's shares resulting from adverse changes in
currency exchange rates. For example, the return available from securities
denominated in a particular foreign currency would diminish in the event the
value of the U.S. dollar increased against such currency. Such a decline could
be partially or completely offset by an increase in value of a position hedge
involving a foreign currency forward contract to (1) sell the currency in which
the position being hedged is denominated, or a currency bearing a substantial
correlation to the value of such currency, or (2) purchase either the U.S.
dollar or a foreign currency expected to perform better than the currency being
sold. Position hedges may, therefore, provide protection of net asset value in
the event of a general rise in the U.S. dollar against foreign currencies.
However, a cross-currency hedge cannot protect against exchange rates perfectly,
and if the Adviser is incorrect in its judgment of future exchange rate
relationships, the Portfolio could be in a less advantageous position than if
such a hedge had not been established.
INDEXED COMMERCIAL PAPER. The International Equity Portfolio,
Intermediate-Term Bond Portfolio, Total Return Bond Portfolio and International
Bond Portfolio may each invest in commercial paper which is indexed to certain
specific foreign currency exchange rates. The terms of such commercial paper
provide that its principal amount is adjusted upwards or downwards (but not
below zero) at maturity to reflect changes in the exchange rate between two
currencies while the obligation is outstanding. A Portfolio will purchase such
commercial paper with the currency in which it is denominated and, at maturity,
will receive interest and principal payments thereon in that currency, but the
amount of principal payable by the issuer at maturity will change in proportion
to the change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
With respect to its investments in this type of commercial paper, a Portfolio
will segregate cash or other liquid assets having a value at least equal to the
aggregate principal amount of outstanding commercial paper of this type. While
such commercial paper entails the risk of loss of principal, the potential for
realizing gains as a result of changes in foreign currency exchange rates
enables the Portfolio to hedge (or cross-hedge) against a decline in the U.S.
dollar value of investments denominated in foreign currencies while providing an
attractive money market rate of return.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK
INDEXES, FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES. A
Portfolio may write put and call options on stocks only if they are covered, and
such options must remain covered so long as the Portfolio is obligated as a
writer. A Portfolio will write put options on foreign currencies and futures
contracts on foreign currencies for bona fide hedging purposes only if there is
segregated with the Portfolio's Custodian an amount of cash or other liquid
assets equal to or greater than the aggregate exercise price of the puts. In
addition, the Portfolio may use futures contracts or related options for
non-hedging or speculative purposes to the extent that aggregate initial margin
and option premiums do not exceed 5% of the market value of the Portfolio's
assets. A Portfolio does
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not intend to purchase options on equity securities or securities indexes if the
aggregate premiums paid for such outstanding options would exceed 10% of the
Portfolio's total assets.
Except as described below, a Portfolio will write call options on indices
only if it holds a portfolio of stocks at least equal to the value of the index
times the multiplier times the number of contracts. When a Portfolio writes a
call option on a broadly-based stock market index, the Portfolio will segregate
with its Custodian, or pledge to a broker as collateral for the option, cash or
other liquid assets or "qualified securities" with a market value at the time
the option is written of not less than 100% of the current index value times the
multiplier times the number of contracts.
If a Portfolio has written an option on an industry or market segment
index, it will segregate with its Custodian, or pledge to a broker as collateral
for the option, at least ten "qualified securities," which are stocks of issuers
in such industry or market segment, with a market value at the time the option
is written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Portfolio's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options or
25% of such amount in the case of industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so segregate
or pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a Portfolio writes a call on an index which is
in-the-money at the time the call is written, the Portfolio will segregate with
its Custodian or pledge to the broker as collateral cash or other liquid assets
equal in value to the amount by which the call is in-the-money times the
multiplier times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which a Portfolio has not written a stock call option and which has not been
hedged by the Portfolio by the sale of stock index futures. However, if the
Portfolio holds a call on the same index as the call written where the exercise
price of the call held is equal to or less than the exercise price of the call
written or greater than the exercise price of the call written if the difference
is segregated by the Portfolio in cash or other liquid assets with its
Custodian, it will not be subject to the requirements described in this
paragraph.
A Portfolio may engage in futures contracts and options on futures
transactions as a hedge against changes, resulting from market or political
conditions, in the value of the currencies to which the Portfolio is subject or
to which the Portfolio expects to be subject in connection with future
purchases. A Portfolio may engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio. A Portfolio may write options on futures contracts
to realize through the receipt of premium income a greater return than would be
realized in the Portfolio's securities holdings alone.
OTHER INVESTMENT STRATEGIES
LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
the Mortgage Backed Securities Portfolio, Intermediate-Term Bond Portfolio,
Total Return Bond Portfolio and International Bond Portfolio may each lend
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by a Portfolio, and are at all
times secured by cash or other liquid assets or secured by an irrevocable letter
of credit in favor of the Portfolio in an amount equal to at least 100%
determined daily, of the market value of the loaned securities. The collateral
is segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay a Portfolio an amount equivalent
to any dividend or
B-31
<PAGE> 143
interest paid on such securities and a Portfolio may invest the cash collateral
and earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower. A Portfolio cannot lend more than 33 1/3% of the value
of its total assets (including the amount of the loan collateral).
A loan may be terminated by the borrower or by a Portfolio at any time. If
the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and a Portfolio could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by a Portfolio's Adviser to be
creditworthy pursuant to procedures approved by the Board of Trustees and when
the income which can be earned from such loans justifies the attendant risks.
Upon termination of the loan, the borrower is required to return the securities
to a Portfolio. Any gain or loss in the market price during the loan period
would inure to a Portfolio.
Since voting or consent rights which accompany loaned securities pass to
the borrower, a Portfolio will follow the policy of calling the loaned
securities, in whole or in part as may be appropriate, to permit the exercise of
such rights if the matters involved would have a material effect on a
Portfolio's investment in such loaned securities. A Portfolio may pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Portfolio may purchase
or sell securities on a when-issued or delayed-delivery basis. When-issued or
delayed-delivery transactions arise when securities are purchased or sold by a
Portfolio with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to a Portfolio
at the time of entering into the transaction. The securities so purchased are
subject to market fluctuation and no interest accrues to the purchaser during
this period. While a Portfolio will only purchase securities on a when-issued,
delayed-delivery or forward commitment basis with the intention of acquiring the
securities, a Portfolio may sell the securities before the settlement date, if
it is deemed advisable. At the time a Portfolio makes the commitment to purchase
securities on a when-issued or delayed-delivery basis, a Portfolio will record
the transaction and thereafter reflect the value, each day, of such security in
determining the net asset value of a Portfolio. At the time of delivery of the
securities, the value may be more or less than the purchase price. A Portfolio
will also segregate with a Portfolio's custodian bank cash or other liquid
assets equal in value to commitments for such when-issued or delayed-delivery
securities; subject to this requirement, a Portfolio may purchase securities on
such basis without limit. An increase in the percentage of a Portfolio's assets
committed to the purchase of securities on a when-issued or delayed-delivery
basis may increase the volatility of a Portfolio's net asset value. Subject to
the segregation requirement, a Portfolio may purchase securities without limit.
The Adviser does not believe that a Portfolio's net asset value or income will
be adversely affected by a Portfolio's purchase of securities on such basis.
One form of when-issued or delayed-delivery security that the Mortgage
Backed Securities Portfolio may purchase is a "to be announced" mortgage-backed
security. A "to be announced" mortgage-backed security transaction arises when a
mortgage-backed security, such as a GNMA pass-through security, is purchased or
sold with the specific pools that will constitute that GNMA pass-through
security to be announced on a future settlement date.
SHORT SALES. The Mortgage Backed Securities Portfolio may sell a security
it does not own in anticipation of a decline in the market value of that
security (i.e., make short sales). Generally, to complete the transaction, the
Portfolio will borrow the security to make delivery to the buyer. The Portfolio
is then obligated to replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the
B-32
<PAGE> 144
security was sold by the Portfolio. Until the security is replaced, the
Portfolio is required to pay to the lender any interest which accrues during the
period of the loan. To borrow the security, the Portfolio may be required to pay
a premium which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker to the extent necessary to meet
margin requirements until the short position is closed out. Until the Portfolio
replaces the borrowed security, it will (1) segregate with its Custodian cash or
other liquid assets at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
market value of the security sold short and will not be less than the market
value of the security at the time it was sold short or (2) otherwise cover its
short position.
The Portfolio will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
will be increased, by the amount of any premium or interest paid in connection
with the short sale. No more than 5% of the Portfolio's net assets will be, when
added together: (1) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (2) segregated in connection with
short sales.
The Mortgage Backed Securities Portfolio may also make short sales
against-the-box. A short sale against-the-box is a short sale in which the
Portfolio owns an equal amount of the securities sold short or securities
convertible into or exchangeable for, with or without payment of any further
consideration, such securities; provided that if further consideration is
required in connection with the conversion or exchange, cash or other liquid
assets, in an amount equal to such consideration must be segregated for an equal
amount of the securities of the same issuer as the securities sold short.
BORROWING. The Mortgage Backed Securities Portfolio, Intermediate-Term
Bond Portfolio, Total Return Bond Portfolio and International Bond Portfolio may
each borrow from banks or through dollar rolls or reverse repurchase agreements
an amount equal to no more than 33 1/3% of the value of its total assets
(calculated when the loan is made) from banks for temporary, extraordinary or
emergency purposes, for the clearance of transactions or to take advantage of
investment opportunities. A Portfolio may pledge up to 33 1/3% of its total
assets to secure these borrowings.
The other Portfolios may each borrow from banks or through dollar rolls or
reverse repurchase agreements an amount equal to no more than 20% of the value
of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, or for the clearance of transactions. Each
of these Portfolios may pledge up to 20% of its total assets to secure these
borrowings.
If a Portfolio borrows to invest in securities, or if a Portfolio purchases
securities at a time when borrowings exceed 5% of its total assets, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their cost (including any
interest paid on the money borrowed) to a Portfolio, the net asset value of the
Portfolio's shares will decrease faster than would otherwise be the case. This
is the speculative characteristic known as "leverage." See "Reverse Repurchase
Agreements and Dollar Rolls" above. Except for the International Bond, Total
Return Bond, Intermediate-Term Bond and Mortgage Backed Securities Portfolios,
no Portfolio will purchase securities if its borrowings exceed 5% of its total
assets.
If any Portfolio's asset coverage for borrowings falls below 300%, such
Portfolio will take prompt action (within 3 days) to reduce its borrowings even
though it may be disadvantageous from an investment standpoint to sell
securities at that time.
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<PAGE> 145
SEGREGATED ASSETS
When a Portfolio is required to segregate assets in connection with certain
portfolio transactions, it will designate cash or liquid assets as segregated
with the Trust's Custodian, State Street Bank and Trust Company (State Street).
"Liquid assets" mean cash, U.S. government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions, marked-to-market daily. These include forward contracts,
when-issued and delayed-delivery securities, futures contracts, written options
and options on futures contracts (unless otherwise covered). If collateralized
or otherwise covered, in accordance with Commission guidelines, these will not
be deemed to be senior securities.
(d) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or pending
investment of proceeds from sales of the Portfolios' shares, the Large
Capitalization Growth, Large Capitalization Value, Small Capitalization Growth,
Small Capitalization Value, International Equity, International Bond, Total
Return Bond, Intermediate-Term Bond and Mortgage Backed Securities Portfolios
may invest without limit in money market instruments, including commercial paper
of domestic and foreign corporations, certificates of deposit, bankers'
acceptances and other obligations of domestic and foreign banks, and obligations
issued or guaranteed by the U.S. Government, its instrumentalities and its
agencies. Commercial paper will be rated, at the time of purchase, at least A-2
by S&P or Prime-2 by Moody's, or the equivalent by another NRSRO or, if not
rated, issued by an entity having an outstanding unsecured debt issue rated at
least A or A-2 by S&P or A or Prime-2 by Moody's or the equivalent by another
NRSRO. The International Bond Portfolio will only invest in commercial paper
rated at least A-1 by S&P or Prime-1 by Moody's or the equivalent by another
NRSRO. In addition, the Large Capitalization Value and Small Capitalization
Value Portfolios may invest without limit in corporate and other debt
obligations and the Large Capitalization Growth Portfolio may invest without
limit in repurchase agreements when the Adviser believes that a temporary
defensive position is appropriate.
(e) PORTFOLIO TURNOVER
Portfolio turnover rate is generally the percentage computed by dividing
the lesser of portfolio purchases or sales (excluding all securities, including
options, whose maturities or expiration date at acquisition were one year or
less) by the monthly average value of the long-term portfolio. High portfolio
turnover (100% or more) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by each
Portfolio. See "Brokerage Allocation and Other Practices." In addition, high
portfolio turnover may result in increased short-term capital gains, which when
distributed to shareholders, are treated as ordinary income. See "Taxes,
Dividends, and Distributions." During the fiscal year ended December 31, 1999,
the portfolio turnover rate for the Small Capitalization Growth Portfolio was
substantially higher than for the previous fiscal year. This increase in the
portfolio turnover rate was primarily attributable to the replacement of the
Portfolio's Advisers during 1999 and their subsequent restructuring of its
holdings.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Portfolio's outstanding voting securities. A "majority of the
outstanding voting securities" of a Portfolio, when used in this Statement of
Additional Information, means the lesser of (1) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are present in person
or represented by proxy or (2) more than 50% of the outstanding shares.
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<PAGE> 146
A Portfolio may not:
1. Purchase securities on margin (but the Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Portfolio of initial or variation
margin in connection with options or futures contracts is not considered the
purchase of a security on margin.
2. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Portfolio's net assets would
be (i) deposited as collateral for the obligation to replace securities borrowed
to effect short sales and (ii) allocated to segregated accounts in connection
with short sales. Short sales "against-the-box" are not subject to this
limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Portfolio may borrow from banks or through dollar rolls or reverse
repurchase agreements up to 33 1/3% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes, to
take advantage of investment opportunities or for the clearance of transactions
and may pledge its assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a "when-issued" or delayed
delivery basis, forward foreign currency exchange contracts and collateral
arrangements relating thereto, and collateral arrangements with respect to
futures contracts and options thereon and with respect to the writing of options
and obligations of the Trust to Trustees pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a senior
security subject to this restriction.
4. Purchase any security (other than obligations of the U.S. government,
its agencies and instrumentalities) if as a result (i) except with respect to
the International Bond Portfolio, with respect to 75% of its total assets, more
than 5% of the Portfolio's total assets (determined at the time of investment)
would then be invested in securities of a single issuer, except as permitted by
Section 5(b)(1) of the Investment Company Act of 1940 or any successor provision
on the requirements applicable to diversified investment companies or (ii) 25%
or more of the Portfolio's total assets (determined at the time of investment)
would be invested in one or more issuers having their principal business
activities in the same industry.
5. Buy or sell real estate or interests in real estate, except that the
Portfolio may purchase and sell mortgage-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. The Portfolios may purchase restricted
securities without limit.
7. Make investments for the purpose of exercising control or management.
8. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 33 1/3% of the value of the Portfolio's total
assets. For purposes of this limitation on securities lending, the value of a
Portfolio's total assets includes the collateral received in the transactions.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Portfolio's voting securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Portfolio's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset
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<PAGE> 147
values will not be considered a violation of such policy. However, in the event
that the Portfolio's asset coverage for borrowings falls below 300%, the
Portfolio will take prompt action to reduce its borrowings, as required by
applicable law.
As a matter of non-fundamental operating policy, a Portfolio will not
purchase rights if as a result the Portfolio would then have more than 5% of its
assets (determined at the time of investment) invested in rights.
MANAGEMENT OF THE TRUST
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS+ AND AGE WITH THE TRUST DURING PAST FIVE YEARS
---------------------- ---------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now
Freedom Forum); former Publisher of four
Gannett Newspapers and Vice President of
Gannett Co., Inc.; past Chairman,
Independent Sector, Washington, D.C.
(largest national coalition of philanthropic
organizations); former Chairman of the
American Council for the Arts; former
Director of the Advisory Board of Chase
Manhattan Bank of Rochester.
*Robert F. Gunia (52) Trustee and Executive Vice President and Chief
Vice President Administrative Officer (since June 1999) of
Prudential Investments; Executive Vice
President and Treasurer (since December
1996) of Prudential Investments Fund
Management LLC (PIFM); President (since
April 1999) of Prudential Investment
Management Services LLC (PIMS); formerly
Corporate Vice President (September 1997-
March 1999) of The Prudential Insurance
Company of America (Prudential); Senior Vice
President (March 1987-May 1999) of
Prudential Securities Incorporated
(Prudential Securities); and Chief
Administrative Officer (July 1990-September
1996), Director (January 1989-September
1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual
Fund Management, Inc.
Robert E. LaBlanc (65) Trustee President of Robert E. LaBlanc Associates,
Inc. (telecommunications) since 1981;
formerly General Partner at Salomon
Brothers; formerly Vice Chairman of
Continental Telecom; Director of Salient 3
Communications; Storage Technology
Corporation, Titan Corporation,
TIE/communications, Inc., The Tribune
Company and Chartered Semiconductor
Manufacturing, Ltd.
Douglas H. McCorkindale (60) Trustee President (since September 1997) and Vice
Chairman (since March 1984) of Gannett Co.
Inc.; Director of Continental Airlines,
Inc., Gannett Co. Inc. and Global Crossing
Ltd.
</TABLE>
B-36
<PAGE> 148
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS+ AND AGE WITH THE TRUST DURING PAST FIVE YEARS
---------------------- ---------------- ----------------------
<S> <C> <C>
Thomas T. Mooney (58) Trustee President of the Greater Rochester Metro
55 St. Paul Street Chamber of Commerce; former Rochester City
Rochester, NY 14604 Manager; former Deputy Monroe County
Executive; Trustee of Center for
Governmental Research, Inc.; Director of
Blue Cross of Rochester, Executive Service
Corps of Rochester and Monroe County Water
Authority.
*David R. Odenath, Jr. (42) Trustee and Officer in Charge, President, Chief Executive
Vice President Officer and Chief Operating Officer (since
June 1999), PIFM; Senior Vice President
(since June 1999), Prudential; formerly
Senior Vice President (August 1993-May
1999), PaineWebber Group, Inc.
Stephen Stoneburn (56) Trustee President and Chief Executive Officer,
Quadrant Media Corp. (publishing) (since
June 1996); formerly Senior Vice President
and Managing Director, Cowles Business Media
(January 1993-1995); prior thereto, Senior
Vice President (January 1991-1992) and
Publishing Vice President (May 1989-
December 1990) of Gralla Publications (a
division of United Newspapers, U.K.);
formerly Senior Vice President of Fairchild
Publications, Inc.
*John R. Strangfeld, Jr. Trustee and Chief Executive Officer, Chairman, President
(45) President and Director of The Prudential Investment
Corporation (since January 1990); Executive
Vice President of Prudential Global Asset
Management Group of Prudential (since
February 1998); Chairman of Pricoa Capital
Group (since August 1989); formerly various
positions to Chief Executive Officer of
Private Asset Management Group of Prudential
(November 1994-December 1998).
Clay T. Whitehead (61) Trustee President of National Exchange Inc. (new
business development firm) (since May 1983).
David F. Connor (36) Secretary Assistant General Counsel (since March 1998)
of PIFM; Associate Attorney, Drinker Biddle
& Reath LLP prior thereto.
Grace C. Torres (40) Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March
Financial and 1994) of Prudential Securities; formerly
Accounting First Vice President (March 1994-September
Officer 1996) of Prudential Mutual Fund Management,
Inc.
Stephen M. Ungerman (46) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of
The Prudential Insurance Company of America
(Prudential); formerly First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
</TABLE>
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<PAGE> 149
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS+ AND AGE WITH THE TRUST DURING PAST FIVE YEARS
---------------------- ---------------- ----------------------
<S> <C> <C>
William V. Healey (46) Assistant Vice President and Associate General Counsel
Secretary of Prudential and Chief Legal Officer of
Prudential Investments (since August 1998);
Director, ICI Mutual Insurance Company
(since June 1999); formerly Associate
General Counsel of The Dreyfus Corporation
(Dreyfus), a subsidiary of Mellon Bank, N.A.
(Mellon Bank), and an officer and/or
director of various affiliates of Mellon
Bank and Dreyfus.
</TABLE>
- ---------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential, Prudential Securities or PIFM.
+ Unless otherwise stated, the address of the trustees and officers is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077.
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Advisors and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Trust's officers, who
conduct and supervise the daily business operations of the Trust.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
75.
Pursuant to the Management Agreement with the Trust, the Manager pays all
compensation of officers and employees of the Trust as well as the fees and
expenses of all Trustees of the Trust who are affiliated persons of the Manager.
The Trust currently pays each of its Trustees who is not an affiliated
person of the Manager or a Portfolio's Adviser annual compensation of $8,175, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds upon the boards of which the Trustee may be asked to serve.
Trustees may receive their Trustee's fees pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of Trustee's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an exemptive order
from the Commission, at the daily rate of return of a Portfolio. Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.
The following table sets forth the aggregate compensation paid by the Trust
to the Trustees who are not affiliated with the Manager for the fiscal year
ended December 31, 1999 and the aggregate compensation paid to such Trustees for
service on the Trust's Board and the boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1999.
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<PAGE> 150
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM TRUST
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF TRUSTEE FROM TRUST TO TRUSTEES
- ------------------------------------------------------ ------------ ---------------------------
<S> <C> <C> <C>
Eugene C. Dorsey*..................................... $13,300 $ 81,000 (17/48)**
Robert F. Gunia....................................... -- -- --
Robert E. LaBlanc..................................... $ 8,175 $ 61,250 (20/39)**
Douglas H. McCorkindale*.............................. $12,675 $ 80,000 (24/49)**
Thomas T. Mooney*..................................... $13,850 $129,500 (35/75)**
David R. Odenath, Jr.................................. -- -- --
Stephen Stoneburn..................................... $ 8,175 $ 61,250 (20/39)**
John R. Strangfeld, Jr. .............................. -- -- --
Clay T. Whitehead..................................... $ 8,175 $ 77,000 (38/66)**
</TABLE>
- ---------------
* Total compensation from all the Funds in the Fund Complex for the calendar
year ended December 31, 1999 includes amounts deferred at the election of
Trustees under the Funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $103,574 for Mr.
Dorsey, $97,916 for Mr. McCorkindale, and $135,102 for Mr. Mooney.
** Indicates number of funds/portfolios in the Fund Complex (including the
Trust) to which aggregate compensation relates.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 7, 2000, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
Portfolios.
As of April 7, 2000, the owners, directly or indirectly, of more than 5% of
the outstanding shares of beneficial interest of any Portfolio were as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME ADDRESS PORTFOLIO (% OF PORTFOLIO)
- ---- ------- --------- ----------------
<S> <C> <C> <C>
Prudential Mutual Gateway Center Three International Bond 276,292 (10.0%)
Funds Accounting 100 Mulberry Street
Newark, NJ 07102
Campbell Union High 3235 Union Avenue Mortgage Backed 445,567 (7.26%)
School District San Jose, CA 95124 Securities
Special Building
Fund
Nation Asset Rohcoco Place U.S. Government 20,240,932 (18.16%)
Management, Ltd. Wickhams Cay 1 Money Market
P.O. Box 3140
Road Town, BVI
</TABLE>
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<PAGE> 151
As of April 7, 2000, Prudential Securities was record holder for other
beneficial owners of the following shares of beneficial interest outstanding and
entitled to vote in each Portfolio:
<TABLE>
<CAPTION>
NUMBER OF
PORTFOLIO SHARES
--------- ---------
<S> <C>
Large Capitalization Growth Portfolio....................... 19,618,316 (99.9%)
Large Capitalization Value Portfolio........................ 18,988,785 (99.9%)
Small Capitalization Growth Portfolio....................... 10,475,829 (99.9%)
Small Capitalization Value Portfolio........................ 7,665,671 (97.4%)
International Equity Portfolio.............................. 15,397,688 (99.9%)
International Bond Portfolio................................ 2,744,619 (99.9%)
Intermediate-Term Bond Portfolio............................ 10,891,921 (99.9%)
Total Return Bond Portfolio................................. 6,438,066 (99.9%)
Mortgage Backed Securities Portfolio........................ 6,132,972 (99.9%)
U.S. Government Money Market Portfolio...................... 111,533,561 (99.9%)
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND ADVISERS
The Manager of the Trust is Prudential Investments Fund Management LLC
(PIFM or the Manager) Gateway Center Three, 100 Mulberry Street, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Trust, comprise the Prudential mutual funds. See "How
the Trust is Managed -- Manager" in the Prospectus. As of , 2000,
PIFM managed and/or administered open-end and closed-end management investment
companies with assets of approximately $ billion. According to the
Investment Company Institute, as of December 31, 1999, the Prudential mutual
funds was the largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential mutual funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Trust (the Management
Agreement), PIFM, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's Portfolios, including the purchase,
retention, disposition and loan of securities. The Manager is authorized to
enter into subadvisory agreements for investment advisory services in connection
with the management of the Trust and each Portfolio thereof. The Manager will
continue to have responsibility for all investment advisory services furnished
pursuant to any such investment advisory agreements.
The Manager will review the performance of all Advisers, and make
recommendations to the Trustees with respect to the retention and renewal of
contracts. In connection therewith, PIFM is obligated to keep certain books and
records of the Trust. PIFM also administers the Trust's business affairs and, in
connection therewith, furnishes the Trust with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company (the Custodian), the Trust's custodian,
and PMFS, the Trust's transfer and dividend disbursing agent. The management
services of PIFM for the Trust are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
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<PAGE> 152
The following table sets forth the annual management fee rates currently
paid by each Portfolio to PIFM pursuant to the Management Agreement, and the
amount of such fees retained by PIFM, each expressed as a percentage of the
Portfolio's average daily net assets:
<TABLE>
<CAPTION>
TOTAL AMOUNT RETAINED
PORTFOLIO MANAGEMENT FEE BY MANAGER
--------- -------------- ---------------
<S> <C> <C>
Large Capitalization Growth Portfolio................ 0.60% 0.30%
Large Capitalization Value Portfolio................. 0.60% 0.30%
Small Capitalization Growth Portfolio................ 0.60% 0.20%
Small Capitalization Value Portfolio................. 0.60% 0.20%
International Equity Portfolio....................... 0.70% 0.30%
International Bond Portfolio......................... 0.50% 0.20%
Total Return Bond Portfolio.......................... 0.45% 0.20%
Intermediate-Term Bond Portfolio..................... 0.45% 0.20%
Mortgage Backed Securities Portfolio................. 0.45% 0.20%
U.S. Government Money Market Portfolio............... 0.25% 0.125%
</TABLE>
The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Trust (including the fees
of PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Trust's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Trust's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Trust. No jurisdiction
currently limits the Trust's expenses.
In connection with its management of the business affairs of the Trust,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Trust's personnel
except the fees and expenses of Trustees who are not affiliated persons of PIFM
or the Trust's Advisers;
(b) all expenses incurred by PIFM or by the Trust in connection with
managing the ordinary course of the Trust's business, other than those assumed
by the Trust as described below; and
(c) the fees payable to each Adviser pursuant to the subadvisory agreements
between PIFM and each Adviser (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Trust's Advisers, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager in connection with its obligation of maintaining required records
of the Trust and of pricing the Trust's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Trust, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Trust to governmental agencies, (g) the fees of any trade
associations of which the Trust may be a member, (h) the cost of share
certificates representing shares of the Trust, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Trust and the fees
and expenses involved in registering and maintaining registration of the Trust
and of its shares with the Commission including the preparation and printing of
the Trust's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
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necessary for distribution to the shareholders and (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Trust's business.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Trust in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal years ended December 31, 1999, 1998 and 1997, PIFM received
the following management fees:
<TABLE>
<CAPTION>
MANAGEMENT FEE PAID
------------------------------------------------------------
ANNUALIZED
PERCENTAGE
OF AVERAGE NET
ASSETS AMOUNT
------------------ --------------------------------------
PORTFOLIO 1999 1998 1997 1999 1998 1997
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Large Capitalization Growth Portfolio................ .60% .60% .60% $2,315,968 $1,666,766 $1,453,397
Large Capitalization Value Portfolio................. .60% .60% .60% 1,679,401 1,692,469 1,521,474
Small Capitalization Growth Portfolio................ .60% .60% .60% 903,559 975,926 939,417
Small Capitalization Value Portfolio................. .60% .60% .60% 774,461 922,536 864,964
International Equity Portfolio....................... .70% .70% .70% 1,723,039 1,724,342 1,718,754
International Bond Portfolio......................... .50% .50% .50% 146,497 153,602 175,813
Total Return Bond Portfolio.......................... .45% .45% .45% 296,600 278,041 216,559
Intermediate-Term Bond Portfolio..................... .45% .45% .45% 487,094 455,487 430,089
Mortgage Backed Securities Portfolio................. .45% .45% .45% 316,095 331,815 322,907
U.S. Government Money Market Portfolio............... .25% .25% .25% 492,130 266,250 94,188
</TABLE>
As noted in the Prospectus, subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser manages the securities held
by the portion of the Portfolio it serves in accordance with the Portfolio's
stated investment objectives and policies, makes investment decisions for the
portion of the Portfolio and places orders to purchase and sell securities on
behalf of the portion of the Portfolio it manages.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Investment Company Act) or upon the termination of
the Management Agreement. Each Advisory Agreement may be terminated by the
Trust, PIFM or the Adviser upon not more than 60 days' written notice. Each
Advisory Agreement provides that it will continue in effect for a period of more
than two years from its execution only so long as such continuance is
specifically approved at least annually in accordance with the requirements of
the Investment Company Act.
The Manager and the Trust have received an exemptive order from the
Securities and Exchange Commission which permits the Manager, subject to certain
conditions, to enter into or amend advisory agreements without obtaining
shareholder approval each time. On October 30, 1996 shareholders voted
affirmatively to give the Trust this ongoing authority. With Board approval, the
Manager is permitted to employ new Advisers for the Portfolios, change the terms
of the Portfolios' advisory agreements or enter into a new advisory agreement
with an existing Adviser after events that cause an automatic termination of the
old advisory agreement with that Adviser. Shareholders of a Portfolio continue
to have the right to terminate an advisory agreement for the Portfolio at any
time by a vote of the majority of the outstanding voting securities of the
Portfolio. Shareholders will be notified of any Adviser changes or other
material amendments to advisory agreements that occur under these arrangements.
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The Advisers have agreed to the following fees, which are generally lower
than the fees they charge to institutional accounts for which they serve as
investment adviser.
<TABLE>
<CAPTION>
TOTAL ANNUAL FEE PAID ANNUAL FEE PAID BY THE MANAGER TO
MANAGEMENT BY THE MANAGER THE ADVISER(S) FOR FISCAL YEAR
FEE (AS % OF TO THE ADVISER(S) ENDED DECEMBER 31,
AVERAGE DAILY (AS % OF AVERAGE -----------------------------------
PORTFOLIO NET ASSETS) DAILY NET ASSETS) 1999 1998 1997
--------- ------------- ----------------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 0.60% 0.30% $1,157,984 $833,383 $726,699
Large Capitalization Value
Portfolio........................... 0.60% 0.30% 839,701 846,235 760,737
Small Capitalization Growth
Portfolio........................... 0.60% 0.40% 602,373 487,963 469,709
Small Capitalization Value
Portfolio........................... 0.60% 0.40% 429,427 461,267 432,482
International Equity Portfolio........ 0.70% 0.40% 984,594 985,388 982,146
International Bond Portfolio.......... 0.50% 0.30% 87,899 92,161 105,488
Total Return Bond Portfolio........... 0.45% 0.25% 164,778 154,467 120,311
Intermediate-Term Bond Portfolio...... 0.45% 0.25% 270,608 253,048 238,938
Mortgage Backed Securities Portfolio... 0.45% 0.25% 175,609 184,342 179,393
U.S. Government Money Market
Portfolio........................... 0.25% 0.125% 246,066 133,125 47,094
</TABLE>
The Advisers perform all administrative functions associated with serving
as Adviser to a Portfolio. Subject to the supervision and direction of the
Manager and, ultimately, the Trustees, each Adviser's responsibilities are
limited to managing the securities held by the portion of the Portfolio it
serves in accordance with the Portfolio's stated investment objective and
policies, making investment decisions for that portion of the Portfolio and
placing orders to purchase and sell securities on behalf of the portion of the
Portfolio it manages.
The following sets forth certain information about each of the Advisers:
LARGE CAPITALIZATION GROWTH PORTFOLIO
Columbus Circle Investors (CCI), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, serves as one of two Advisers to the Large
Capitalization Growth Portfolio. CCI is a Delaware general partnership with two
partners. CCIP LLP, CCI's general partner, owns over 99% of CCI. Columbus Circle
Investors Management Inc. (CCIM), the other partner, owns the rest of CCI. Both
CCIP LLP and CCIM are owned by five of the managing directors of CCI. As of
March 31, 2000, CCI had approximately $7.2 billion in assets under management.
Oak Associates, Ltd. (Oak), 3875 Embassy Parkway, Suite 250, Akron, Ohio
44333, serves as the other Adviser to the Large Capitalization Growth Portfolio.
It began managing its portion of the Portfolio effective November 22, 1995. The
agreement between Oak and PIFM was approved by the Portfolio's shareholders at a
Special Meeting of Shareholders held on March 12, 1996. Roger Engemann
Management Co. had previously managed the entire Portfolio from its inception
until January 2, 1995, and a portion of the Portfolio from January 2, 1995 until
November 21, 1995.
Oak was founded in April 1985 and has specialized in the large cap market
since inception. It provides investment management services to both individual
and institutional clients and, as of , 2000, had more than $
billion in assets under management. Oak is registered as an investment adviser
under the Investment Advisers Act of 1940. It is a limited liability company
organized under the laws of the State of Ohio. James D. Oelschlager owns a
controlling interest (99%) of Oak.
LARGE CAPITALIZATION VALUE PORTFOLIO
INVESCO Capital Management, Inc. (INVESCO), 1315 Peachtree Street, Suite
500, Atlanta, Georgia 30309, serves as one of two Advisers to the Large
Capitalization Value Portfolio of the Trust. INVESCO has served as an Adviser to
the Portfolio since its inception. INVESCO, a Delaware
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corporation, is an indirect, wholly-owned subsidiary of AMVESCAP PLC, a global
money management firm. As of March 31, 2000, INVESCO had approximately $
million of assets under management for clients located throughout the U.S.,
Europe and Japan.
Hotchkis and Wiley, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a division of Merrill Lynch Asset Management, L.P. It was
established in 1980 and has specialized in the large-cap market since its
inception. Hotchkis and Wiley has served as Adviser for a portion of the
Portfolio's assets since January 2, 1995. As of March 31, 2000, Hotchkis and
Wiley had approximately $11.7 billion in assets under management for corporate,
public, endowment and foundation, and mutual fund clients.
SMALL CAPITALIZATION GROWTH PORTFOLIO
Sawgrass Asset Management, L.L.C. (Sawgrass), 4337 Pablo Oaks Court,
Building 200, Jacksonville, FL 32224, serves as one of two Advisers to the Small
Capitalization Growth Portfolio. Sawgrass was formed in 1998 as a Delaware
limited liability company. AmSouth Bank owns 50% of the shares of Sawgrass, and
employees of Sawgrass own the remaining 50% of the shares of Sawgrass. AmSouth
Bank is a subsidiary of AmSouth Bancorporation. Sawgrass has been an Adviser to
the Portfolio since May 27, 1999. As of , 2000, Sawgrass had
approximately $ million in assets under management for corporate, municipal,
public and state retirement plans and mutual funds.
Fleming Asset Management USA (Fleming USA), 320 Park Avenue, New York, NY
10022 serves as the other Adviser to the Portfolio. Fleming USA is a division of
Robert Fleming, Inc., which is a wholly-owned subsidiary of Robert Fleming
Holdings.
SMALL CAPITALIZATION VALUE PORTFOLIO
Lazard Asset Management (Lazard), 30 Rockefeller Plaza, New York, New York
10112, serves as one of two Advisers to the Small Capitalization Value Portfolio
of the Trust. Lazard has been an Adviser to the Portfolio since January 2, 1995.
Lazard is a division of Lazard Freres & Co. LLC (Lazard Freres), a New York
limited liability company. Lazard provides investment management services to
both individual and institutional clients and, together with its global
affiliates, had more than $ billion of assets under management as of
, 2000. In addition to portfolio management, Lazard Freres provides a
wide variety of investment banking, brokerage and related services.
The Wood, Struthers & Winthrop Division of DLJ Asset Management, Inc.
(DLJAM), 277 Park Avenue, New York, New York 10172, serves as the other Adviser
to the Small Capitalization Value Portfolio. It began managing its portion of
the Portfolio effective April 12, 1995. WSW was founded in 1871 and has
specialized in the small-cap market since 1967. It provides investment
management services to both individual and institutional clients and, as of
March 31, 2000, had more than $6.7 billion in assets under management. DLJAM is
a subsidiary of Donaldson, Lufkin & Jenrette Securities Corporation (DLJSC), 277
Park Avenue, New York, New York 10172. DLJSC is a wholly owned subsidiary of
Donaldson Lufkin & Jenrette Inc (DLJ Inc), 35.3% of which is owned by The
Equitable Life Assurance Society of the United States (LIFE), 787 Seventh
Avenue, New York, New York 10019, a wholly-owned subsidiary of The Equitable
Companies Incorporated (Equitable), 787 Seventh Avenue, New York, New York
10019. Equitable owns directly an additional 42.9% of DLJ Inc. Approximately
60.8% of the outstanding voting common stock as well as certain convertible
preferred stock of Equitable is beneficially owned by AXA, a French insurance
holding company. A group of five French mutual insurance companies, Uni Europe
Assurance Mutuelle, Alpha Assurances I.A.R.D. Mutuelle, Alpha Assurances Vie
Mutuelle, AXA Assurances Vie Mutuelle, and AXA Assurances I.A.R.D. Mutuelle (the
"Mutuelles"), owned directly and indirectly through two French holding
companies, Finaxa and Midi Participations, shares representing over 50% of the
voting shares of AXA. The Mutuelles are owned by approximately 1.5 million
policyholders.
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<PAGE> 156
INTERNATIONAL EQUITY PORTFOLIO
Lazard has served as the Adviser to the International Equity Portfolio
since its inception. Lazard is more fully described immediately above under
"Small Capitalization Value Portfolio."
INTERNATIONAL BOND PORTFOLIO
Delaware International Advisers Ltd. (DIAL), Third Floor, 80 Cheapside,
London, EC2V 6EE, United Kingdom, has served as the Adviser to the International
Bond Portfolio since August 28, 1997. DIAL is affiliated with Delaware
Management Company and is an indirect, wholly-owned subsidiary of Lincoln
National Corporation, a diversified financial services organization. As of March
31, 2000, DIAL had approximately $15.3 billion in assets under management.
INTERMEDIATE-TERM BOND PORTFOLIO AND TOTAL RETURN BOND PORTFOLIO
PIMCO is a subsidiary of PIMCO Advisors L.P. (PIMCO Advisors). The general
partners of PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings
L.P. (PAH). PIMCO Partners, G.P. is a general partnership between PIMCO Holding
LLC, a Delaware limited liability company and indirect wholly-owned subsidiary
of Pacific Life Insurance Company, and PIMCO Partners LLC, a California limited
liability company controlled by the current Managing Directors and two former
Managing Directors of PIMCO. PIMCO Partners, G.P., is the sole general partner
of PAH. PIMCO is registered as an investment advisor with the Commission and as
a commodity trading advisor with the CFTC. As of March 31, 2000, PIMCO had
approximately $193 billion of asset under management.
U.S. GOVERNMENT MONEY MARKET PORTFOLIO AND MORTGAGE BACKED SECURITIES PORTFOLIO
Wellington Management Company, LLP (WMC), 75 State Street, Boston,
Massachusetts 02109, serves as the Adviser to the U.S. Government Money Market
Portfolio and the Mortgage Backed Securities Portfolio of the Trust. WMC is a
Massachusetts limited liability partnership of which the following persons are
managing partners: Laurie A. Gabriel, Duncan M. McFarland and John R. Ryan. WMC
is a professional investment counseling firm which provides investment
management services to investment companies, employee benefit plans, endowment
funds, foundations and other institutions. As of March 31, 2000, WMC had
approximately $248 billion of assets under management.
(b) PRINCIPAL UNDERWRITER AND DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Trust but is not compensated by the
Trust for those services. PIMS is a subsidiary of Prudential.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Trust's portfolio securities
and cash, and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Trust.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, serves as the Transfer and Dividend Disbursing Agent of the
Trust. It is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Trust, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and related
functions. For these services, PMFS receives an annual fee per shareholder
account of $35.00. PMFS is also
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<PAGE> 157
reimbursed for its out-of-pocket expenses, including but not limited to postage,
stationery, printing, allocable communications and other costs. In addition, the
Trust may pay fees for recordkeeping services in respect of certain eligible
defined benefit plan investors.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036 currently serves as the Trust's independent accountants and, in that
capacity, audits the Trust's annual financial statements.
CODES OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics. In
addition, the Manager, Subadvisers and Distributor have each adopted a Code of
Ethics (the Codes). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by a Portfolio.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when a Portfolio is
making such investments. The Codes are on public file with, and are available
from, the Commission.
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.
Although the Trust has not experienced any material problems with the
services provided by the Manager, the Advisers, the Distributor, the Transfer
Agent or the Custodian as a result of the change from 1999 to 2000, there
remains a possibility that computer software systems in use might be impaired or
unavailable 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 completed necessary changes to their computer systems
in connection with the year 2000. The Trust's service providers (or other
securities market participants) may experience future material problems in
connection with the year 2000. The Trust and its Board have instructed the
Trust's principal service providers to monitor and report Year 2000 problems.
Additionally, issuers of securities generally as well as those purchased by
the Portfolios may confront Year 2000 compliance issues at some later time
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.
BROKERAGE ALLOCATION AND OTHER PRACTICES
INCOME PORTFOLIOS
Each Adviser is responsible for decisions to buy and sell securities,
futures contracts and options thereon for the Portfolios, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions, if any. Brokers, dealers or futures
commission merchants may receive brokerage commissions on portfolio
transactions, including options, futures, and options on futures transactions
and the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker, dealer or futures commission merchant,
including to the extent and in the manner permitted by applicable law. The
Income Portfolios do not normally incur any brokerage commission expenses on
portfolio transactions. The securities purchased by the Portfolios are generally
traded on a "net" basis, with dealers acting as principal for their own accounts
without a stated commission, although the price of
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the security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
EQUITY PORTFOLIOS
Broker-dealers may receive negotiated brokerage commissions on transactions
in portfolio securities, including options and the purchase and sale of
underlying securities upon the exercise of options. On foreign securities
exchanges, commissions may be fixed. Orders may be directed to any broker,
dealer or futures commission merchant including, to the extent and in the manner
permitted by applicable law, Prudential Securities, one of the Advisers or an
affiliate thereof (an affiliated broker).
Equity securities traded in the over-the-counter market and bonds,
including convertible bonds, are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments and U.S. government agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Trust will
not deal with an affiliated broker in any transaction in which such affiliated
broker acts as principal. Thus, for example, a Portfolio will not deal with an
affiliated broker/dealer acting as market maker, and it will not execute a
negotiated trade with an affiliated broker/dealer if execution involves an
affiliated broker/dealer acting as principal with respect to any part of the
Portfolio's order.
In placing orders for securities for the Portfolios of the Trust, each
Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that an Adviser will seek to
execute each transaction at a price and commission, if any, which provide the
most favorable total cost or proceeds reasonably attainable under the
circumstances. While an Adviser generally seeks reasonably competitive spreads
or commissions, the Trust will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, an Adviser may
consider research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Trust, an Adviser or an Adviser's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by an
Adviser in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for an
Adviser may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be selected
for the execution of transactions for such other accounts, whose aggregate
assets are far larger than the Trust's, and the services furnished by such
brokers, dealers or futures commission merchants may be used by an Adviser in
providing investment management for the Trust. Commission rates are established
pursuant to negotiations with the broker, dealer or futures commission merchant
based on the quality and quantity of execution services provided by the broker
or futures commission merchant in the light of generally prevailing rates. Each
Adviser's policy is to pay brokers, dealers and futures commission merchants,
other than to an affiliated broker, higher commissions for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in an Adviser's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, each Adviser is authorized to
pay higher commissions on brokerage transactions for the Trust to brokers,
dealers and futures commission merchants, other than to an affiliated broker, in
order to secure research and investment services
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described above, subject to review by the Trustees from time to time as to the
extent and continuation of this practice. The allocation of orders among
brokers, dealers and futures commission merchants and the commission rates paid
are reviewed periodically by the Trustees. While such services are useful and
important in supplementing its own research and facilities, the Advisers believe
that the value of such services is not determinable and does not significantly
reduce expenses.
Subject to the above considerations, an affiliated broker may act as a
securities broker, dealer or futures commission merchant for the Trust. In order
for an affiliate of an Adviser or Prudential Securities to effect any portfolio
transactions for the Trust, the commissions, fees or other remuneration received
by an affiliated broker must be reasonable and fair compared to the commissions,
fees or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold during a
comparable period of time. This standard would allow an affiliated broker to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker in a commensurate arm's-length transaction. Furthermore,
the Trustees, including a majority of the non-interested Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to an affiliated broker are consistent with the
foregoing standard.
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
as amended, an affiliated broker may not retain compensation for effecting
transactions on a national securities exchange for the Trust unless the Trust
has expressly authorized the retention of such compensation. Section 11(a)
provides that an affiliated broker must furnish to the Trust at least annually a
statement setting forth the total amount of all compensation retained by such
affiliated broker from transactions effected for the Trust during the applicable
period. Brokerage and futures transactions with an affiliated broker are also
subject to such fiduciary standards as may be imposed by applicable law.
The table below sets forth certain information concerning the payment of
commissions by the Trust, including the commissions paid to Prudential
Securities or any affiliate of the Trust or the Advisers for the three years
ended December 31, 1999. For the three years ended December 31, 1999, the
International Bond Portfolio and the U.S. Government Money Market Portfolio paid
no brokerage commissions.
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
------------------------------ ------------------------------ ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage commissions
paid by the Portfolio......... $313,639 $282,210 $355,856 $234,396 $149,768 $152,335 $677,480 $327,706 $378,654
Total brokerage commissions
paid to Prudential Securities
or affiliates of the Trust or
the Advisers.................. $1,100 $2,700 -- $48,954 $24,209 $9,334 $40,200 -- --
Percentage of total brokerage
commissions paid to Prudential
Securities or affiliates of
the Trust or the Advisers..... 0.4% 0.9% -- 20.1% 16.2% 6.1% 3.9% -- --
Percentage of the aggregate
dollar amount of portfolio
transactions involving the
payment of commissions through
Prudential Securities or
affiliates of the Trust or the
Advisers...................... 0.4% 0.9% -- 19.1% 11.5% 5.4% 4.9% -- --
</TABLE>
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<TABLE>
<CAPTION>
SMALL CAPITALIZATION INTERNATIONAL
VALUE PORTFOLIO EQUITY PORTFOLIO
------------------------------ ------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total brokerage commissions paid by the
Portfolio............................ $234,056 $206,037 $152,188 $333,001 $449,262 $473,807
Total brokerage commissions paid to
Prudential Securities or affiliates
of the Trust or the Advisers......... - - - - - -
Percentage of total brokerage
commissions paid to Prudential
Securities or affiliates of the Trust
or the Advisers...................... - - - - - -
Percentage of the aggregate dollar
amount of portfolio transactions
involving the payment of commissions
through Prudential Securities or
affiliates of the Trust or the
Advisers............................. - - - - - -
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE BACKED TOTAL RETURN INTERMEDIATE-TERM
SECURITIES PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
-------------------- ------------------------- ---------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage commissions paid by
the Portfolio..................... $ 40 $750 $5,642 $9,809 $10,042 $6,573 $17,285 $14,424 $12,888
Total brokerage commissions paid to
Prudential Securities or
affiliates of the Trust or the
Advisers.......................... - - - - - - - - -
Percentage of total brokerage
commissions paid to Prudential
Securities or affiliates of the
Trust or the Advisers............. - - - - - - - - -
Percentage of the aggregate dollar
amount of portfolio transactions
involving the payment of
commissions through Prudential
Securities or affiliates of the
Trust or the Advisers............. - - - - - - - - -
</TABLE>
Of the total brokerage commissions paid during the year ended December 31,
1999, the Large Capitalization Growth Portfolio, Large Capitalization Value
Portfolio, Small Capitalization Growth Portfolio, Small Capitalization Value
Portfolio and International Equity Portfolio paid $ ( ), $
( %), $ ( %), $ ( %) and $ ( %), respectively,
to firms which provided research, statistical or other services to the Advisers.
The Advisers have not separately identified a portion of such brokerage
commissions as applicable to the provision of such research, statistical or
other services. [TO BE UPDATED]
The Trust is required to disclose the Portfolios' holdings of securities of
the Trust's regular brokers and dealers (as defined under Rule 10b-1 of the
Investment Company Act) and their parents at December 31, 1999. [TO BE UPDATED]
B-49
<PAGE> 161
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Trust, organized as an unincorporated business trust in 1992 under the
laws of Delaware, is a trust fund of the type commonly known as a "business
trust."
The shareholders of the Portfolios are each entitled to a full vote for
each full share of beneficial interest (par value $.001 per share) held (and
fractional votes for fractional shares). Shares of each Portfolio are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Pursuant to the Investment Company Act, shareholders of each
Portfolio have to approve changes in certain investment policies of a Portfolio.
In accordance with the Trust's Declaration of Trust, the Board of Trustees
may authorize the creation of additional series of shares and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine.
Shares of the Trust, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Trust under certain circumstances. Each share is
equal as to earnings, assets and voting privileges. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of a Portfolio is entitled to its portion of all of the Portfolio's assets after
all debts and expenses of the Portfolio have been paid. The Trust's shares do
not have cumulative voting rights for the election of Trustees.
The Trust does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Trust will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Trust's outstanding shares for the purpose of voting on the removal of
one or more Trustees or to transact any other business.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Shares of the Portfolio may be purchased at a price equal to the next
determined net asset value per share.
ISSUANCE OF PORTFOLIO SHARES FOR SECURITIES
Transactions involving the issuance of Portfolio shares for securities
(rather than cash) will be limited to: (i) reorganizations, (ii) statutory
mergers, or (iii) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of a Portfolio, (b) are liquid and not subject
to restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market and (d) are approved by the Trust's Manager.
SPECIMEN PRICE MAKE-UP
Using the net asset value of each Portfolio at December 31, 1999, the
offering prices of the Portfolios' shares are as follows:
<TABLE>
<CAPTION>
LARGE LARGE SMALL SMALL
CAPITALIZATION CAPITALIZATION CAPITALIZATION CAPITALIZATION INTERNATIONAL INTERNATIONAL
GROWTH VALUE GROWTH VALUE EQUITY BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
offering price and
redemption price... $25.68 $13.01 $17.47 $14.97 $17.37 $8.48
====== ====== ====== ====== ====== =====
<CAPTION>
TOTAL MORTGAGE U.S. GOV'T
RETURN INTERMEDIATE BACKED MONEY
BOND TERM BOND SECURITIES MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net asset value,
offering price and
redemption price... $9.86 $9.92 $9.97 $1.00
===== ===== ===== =====
</TABLE>
B-50
<PAGE> 162
RESTRICTIONS ON SALES OF PORTFOLIO SHARES
The payment of redemption proceeds may be postponed or the right of
redemption suspended at times (1) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (2) when trading on such Exchange is
restricted, (3) when an emergency exists as a result of which disposal by a
Portfolio of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Portfolio fairly to determine the value of its
net assets, or (4) during any other period when the Commission, by order, so
permits; provided that applicable rules and regulations of the Commission shall
govern as to whether the conditions prescribed in (2), (3) or (4) exist.
SHAREHOLDER INVESTMENT ACCOUNT
The Trust makes available to its shareholders the following privileges and
plans:
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of each of the Portfolios
at net asset value per share on the payment date, unless the Trustees determine
otherwise. An investor may direct Prudential Securities in writing not less than
five full business days prior to the payment date to have subsequent dividends
and/or distributions paid in cash rather than reinvested. Shareholders investing
through Plan accounts cannot elect to receive dividends and distributions in
cash. Any shareholder who receives dividends or distributions in cash may
subsequently reinvest any such distribution at net asset value by returning the
check or the proceeds to Prudential Securities within 30 days after the payment
date. Such reinvestment will be made at the net asset value per share next
determined after receipt of the check or proceeds by Prudential Securities.
EXCHANGE PRIVILEGE
Shares of a Portfolio may be exchanged without payment of any exchange fee
for shares of another Portfolio at their respective net asset values. There are
no exchange privileges between the Portfolios and other Prudential mutual funds.
An exchange of shares is treated for federal income tax purposes as a
redemption (sale) of shares in exchange by the shareholder, and an exchanging
shareholder may, therefore, realize a taxable gain or loss in connection with
the exchange.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
B-51
<PAGE> 163
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY
INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- --------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years................... $ 105 $ 158 $ 210 $ 263
20 Years................... 170 255 340 424
15 Years................... 289 438 578 722
10 Years................... 547 820 1,093 1,366
5 Years................... 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
</TABLE>
- ---------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Trust.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
INDIVIDUAL RETIREMENT ACCOUNTS
An individual retirement account (IRA) permits the deferral of federal
income tax on income earned in the account until the earnings are withdrawn. The
following chart represents a comparison of the earnings in a personal savings
account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate
of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- -------------------------------------- -------- --------
<S> <C> <C>
10 years.............................. $ 26,165 $ 31,291
15 years.............................. 44,675 58,649
20 years.............................. 68,109 98,846
25 years.............................. 97,780 157,909
30 years.............................. 135,346 244,692
</TABLE>
- ---------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Trust or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders of the Trust through Prudential Securities. The withdrawal plan
provides for monthly, quarterly, semi-annual or annual redemption checks in any
amount up to the value of a shareholder's shares in the Trust.
The shareholder must instruct Prudential Securities of the amount which he
or she wishes to withdraw under the Plan, whether such withdrawal should occur
monthly, quarterly, semi-annually or annually, and which Target Portfolios
should be redeemed in order to satisfy the request. Prudential Securities will
then redeem sufficient full and fractional shares of the applicable Target
Portfolios to provide for the amount of the systematic withdrawal payment. The
Plan may be terminated at any time and the Distributor reserves the right to
initiate a fee of up to $5 per withdrawal, upon 30 days' notice to the
shareholder. Withdrawal payments should not be considered as dividends, yield or
income. If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
B-52
<PAGE> 164
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. Each
shareholder should consult his or her tax adviser with regard to the tax
consequences of the systematic withdrawal plan, particularly if used in
connection with a retirement plan. Retirement plan shareholders should also
consult with their plan sponsor to determine if their retirement plan would
permit the shareholder to participate in the systematic withdrawal plan.
NET ASSET VALUE
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of each Portfolio. In
accordance with procedures adopted by the Trustees, the value of securities for
which the primary market is on an exchange shall be valued at the last sales
prices on that exchange on the day of valuation or, if there was no sale on such
day, the average of readily available closing bid and asked prices on such day.
Should an extraordinary event, which is likely to affect the value of the
security, occur after the close of an exchange on which a portfolio security is
traded, such security will be valued at fair value considering factors
determined in good faith by the Adviser under procedures established by and
under the general supervision of the Trustees. The value of a U.S. government
security for which quotations are available shall be valued at a price provided
by an independent broker/dealer or pricing service. Pricing services consider
such factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations.
Securities that are actively traded in the over-the-counter market
including listed securities for which the primary market is believed by the
Manager in consultation with the appropriate Adviser to be over-the-counter are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker. Securities issued in private placements are valued
at the mean between the bid and asked prices provided by primary market dealers.
Private placement securities for which no bid and asked prices are available and
other securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
investment adviser under procedures described above. Short-term debt securities
are valued at cost, with interest accrued or discount amortized to the date of
maturity, if their original maturity was 60 days or less, unless this is
determined by the Trustees not to represent fair value. Short-term securities
with remaining maturities of 60 days or more, for which market quotations are
readily available, are valued at their current market quotations as provided by
an independent broker/dealer or pricing service. Options on securities that are
listed on an exchange and futures contracts and options thereon traded on a
commodities exchange or board of trade shall be valued at the last sale price at
the close of trading of the applicable exchange or board of trade or, if there
was no sale on the applicable exchange or board of trade, at the average of
quoted bid and asked prices as of the close of such exchange or board of trade.
Over-the-counter options are valued at the mean between bid and asked prices
provided by a dealer. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained by a
recognized bank or dealer. Forward currency exchange contracts are valued at the
current cost of covering or offsetting such contracts.
Each Portfolio other than the U.S. Government Money Market Portfolio will
compute its net asset value at 4:15 P.M., New York time on each day the New York
Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Portfolio shares have been received or days on which
changes in the value of the Portfolio's securities holdings do not affect net
asset value. The U.S. Government Money Market Portfolio will compute its net
asset value at 4:30 P.M., New York time on such days. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
B-53
<PAGE> 165
The U.S. Government Money Market Portfolio uses the amortized cost method
to determine the value of its portfolio securities. The amortized cost method
involves valuing a security at its cost and amortizing any discount or premium
over the period until maturity. The method does not take into account unrealized
capital gains and losses which may result from the effect of fluctuating
interest rates on the market value of the security.
The U.S. Government Money Market Portfolio maintains a dollar-weighted
average portfolio maturity of 90 days or less, purchases instruments having
remaining maturities of thirteen months or less and invests only in securities
determined by the Adviser under the supervision of the Trustees to present
minimal credit risks and to be of "eligible quality" in accordance with
regulations of the Commission. The Trustees have established procedures designed
to stabilize, to the extent reasonably possible, the Portfolio's price per share
as computed for the purpose of sales and redemptions at $1.00. Such procedures
include review of the Portfolio's securities holdings by the Trustees, at such
intervals as it may deem appropriate, to determine whether the Portfolio's net
asset value calculated by using available market quotations deviates from $1.00
per share based on amortized cost. The extent of any deviation will be examined
by the Trustees. If such deviation exceeds 1/2 of 1%, the Trustees will promptly
consider what action, if any, will be initiated. In the event the Trustees
determine that a deviation exists which may result in material dilution or other
unfair results to investors or existing shareholders, the Trustees will take
such corrective action which they regard as necessary and appropriate, including
the sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, the withholding of dividends,
redemptions of shares in kind, or the use of available market quotations to
establish a net asset value per share.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Portfolio has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves each Portfolio (but not its shareholders) from paying federal
income tax on income and capital gains which are distributed to shareholders,
and permits net capital gains of each Portfolio (i.e., the excess of net
long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long shareholders
have held their shares in each Portfolio. Net capital gains of each Portfolio
which are available for distribution to shareholders will be computed by taking
into account any capital loss carryforward of each Portfolio.
For federal income tax purposes, the International Bond Portfolio, Total
Return Bond Portfolio, Intermediate-Term Bond Portfolio and Mortgage Backed
Securities Portfolio had a capital loss carryforward as of December 31, 1999.
Accordingly, no capital gain distributions are expected to be paid to
shareholders of the International Bond Portfolio, Total Return Bond Portfolio
and Mortgage Backed Securities Portfolio until future net gains have been
realized in excess of such carryforward. In addition, certain Portfolios are
electing to treat net currency losses incurred in the two-month
B-54
<PAGE> 166
period ended December 31, 1999 as having been incurred in the following year.
The table below sets forth information on these capital loss carryforwards and
net currency losses.
<TABLE>
<CAPTION>
NET LOSSES
IN TWO
MONTHS ENDED
CAPITAL LOSS EXPIRATION DECEMBER 31,
PORTFOLIO CARRYFORWARD YEAR 1999
- --------- ------------ ---------- ------------
<S> <C> <C> <C>
International Equity.......................... -- -- $ 28,139
International Bond............................ $ 211,700 2007 95,861
Total Return Bond............................. 2,722 2007 352,900
Intermediate-Term Bond........................ 3,241,758 2007 276,982
Mortgage Backed Securities.................... 458,600 2002 --
Mortgage Backed Securities.................... 237,400 2007 35,900
</TABLE>
Qualification of each Portfolio as a regulated investment company requires,
among other things, that (a) each Portfolio derive at least 90% of its annual
gross income (without reduction for losses from the sale or other disposition of
securities or foreign currencies) from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
securities or options thereon or foreign currencies, or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such securities or currencies; (b)
each Portfolio diversify its holdings so that, at the end of each quarter of the
taxable year, (1) at least 50% of the value of each Portfolio's assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer to an amount not greater than 5% of the value of each
Portfolio's assets and 10% of the outstanding voting securities of such issuer,
and (2) not more than 25% of the value of each Portfolio's assets is invested in
the securities of any one issuer (other than the U.S. government securities);
and (c) each Portfolio distribute to its shareholders at least 90% of its net
investment income and net short-term gains (that is, the excess of net
short-term capital gains over net long-term capital losses) in each year.
Gains or losses on sales of securities by each Portfolio will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where each Portfolio acquires a put
or writes a call thereon or otherwise holds an offsetting position with respect
to the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by each Portfolio on securities
lapses or is terminated through a closing transaction, such as a repurchase by
each Portfolio of the option from its holder, each Portfolio will generally
realize short-term capital gain or loss. If securities are sold by each
Portfolio pursuant to the exercise of a call option written by it, each
Portfolio will include the premium received in the sale proceeds of the
securities delivered in determining the amount of gain or loss on the sale.
Certain of each Portfolio's transactions may be subject to wash sale, short
sale, constructive sale, anti-conversion and straddle provisions of the Internal
Revenue Code which may, among other things, require each Portfolio to defer
recognition of losses. In addition, debt securities acquired by each Portfolio
may be subject to original issue discount and market discount rules which,
respectively, may cause each Portfolio to accrue income in advance of the
receipt of cash with respect to interest or cause gains to be treated as
ordinary income.
Special rules apply to most options on stock indexes, future contracts and
options thereon, and foreign currency forward contracts in which each Portfolio
may invest. These investments will generally constitute Section 1256 contracts
and will be required to be "marked to market" for federal income tax purposes at
the end of each Portfolio's taxable year; that is, treated as having been sold
at market value. Except with respect to certain foreign currency forward
contracts, sixty percent of any gain or loss recognized on such deemed sales and
on actual dispositions will be
B-55
<PAGE> 167
treated as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, each Portfolio may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by each Portfolio.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time each Portfolio accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
each Portfolio actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
foreign currency forward contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Internal Revenue Code as "Section 988" gains or
losses, increase or decrease the amount of each Portfolio's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of each Portfolio's net
capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, each Portfolio would not be able to make any
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, thereby reducing each shareholder's basis in his
or her Portfolio shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV (or net asset value) of a share of each
Portfolio on the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of each
Portfolio, the investor should carefully consider the impact of dividends or
capital gains distributions which are expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of each
Portfolio by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period beginning 30 days before the disposition of
shares. Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares.
A shareholder who acquires shares of each Portfolio and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of each
Portfolio.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder.
B-56
<PAGE> 168
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent each Portfolio's income is
derived from qualified dividends received by each Portfolio from domestic
corporations. Dividends attributable to foreign corporations, interest income,
capital and currency gain, gain or loss from Section 1256 contracts (described
above), and income from certain other sources will not constitute qualified
dividends. Individual shareholders are eligible for the dividends-received
deduction.
Each Portfolio is required to distribute 98% of its ordinary income in the
same calendar year in which it is earned. Each Portfolio is also required to
distribute during the calendar year 98% of the capital gain net income it earned
during the twelve months ending on October 31 of such calendar year. In
addition, each Portfolio must distribute during the calendar year all
undistributed ordinary income and undistributed capital gain net income from the
prior year or the twelve-month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, each Portfolio will be subject to a non-deductible 4% excise tax
on the undistributed amount. For purposes of this excise tax, income on which
each Portfolio pays income tax is treated as distributed.
Each Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If each Portfolio acquires and holds stock in a
PFIC beyond the end of the year of its acquisition, each Portfolio will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or on any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if each Portfolio distributes the PFIC
income as a taxable dividend to its shareholders. The balance of the PFIC income
will be included in each Portfolio's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. Each Portfolio may make a "mark-to-market" election with
respect to any marketable stock it holds of a PFIC. If the election is in
effect, at the end of each Portfolio's taxable year, each Portfolio will
recognize the amount of gains, if any, as ordinary income with respect to PFIC
stock. No loss will be recognized on PFIC stock, except to the extend of gains
recognized in prior years. Alternatively, each Portfolio, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, in lieu of the foregoing tax and interest
obligation, each Portfolio will be required to include in income each year its
pro rata share of the qualified electing Portfolio's annual ordinary earnings
and net capital gain, even if they are not distributed to each Portfolio; those
amounts would be subject to the distribution requirements applicable to each
Portfolio described above.
Income received by each Portfolio from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which each Portfolio will be subject, since the amount of each
Portfolio's assets to be invested in various countries will vary. Except in the
case of the International Equity and International Bond Portfolios, each
Portfolio does not expect to meet the requirements of the Internal Revenue Code
for "passing-through" to its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in each
Portfolio.
Dividends and distributions may also be subject to state and local taxes.
B-57
<PAGE> 169
PERFORMANCE INFORMATION
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
CURRENT YIELD AND EFFECTIVE YIELD
The Trust may from time to time advertise the current yield and effective
annual yield of the U.S. Government Money Market Portfolio calculated over a
7-day period. The yield quoted will be the simple annualized yield for an
identified seven calendar day period. The yield calculation will be based on a
hypothetical account having a balance of exactly one share at the beginning of
the seven-day period. The base period return will be the net change in the value
of the hypothetical account during the seven-day period, including dividends
declared on any shares purchased with dividends on the shares but excluding any
capital changes, divided by the value of the account at the beginning of the
base period. This base period return is then multiplied by 365/7 to calculate
the yield on shares of the Portfolio. The yield will vary as interest rates and
other conditions affecting money market instruments change. Yield also depends
on the quality, length of maturity and type of instruments in the portfolio, and
its operating expenses. The Portfolio may also prepare an effective annual yield
computed by compounding the unannualized seven-day period return as follows: by
adding 1 to the unannualized 7-day period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result. The seven-day
yield and effective yield for the U.S. Government Money Market Portfolio as of
December 31, 1999 were 4.50% and 4.60%, respectively.
Effective Yield = [(base period return+1)365/7]-1
OTHER PORTFOLIOS
YIELD
The Trust may from time to time advertise the yield of a Portfolio as
calculated over a 30-day period. This yield will be computed by dividing a
Portfolio's net investment income per share earned during this 30-day period by
the maximum offering price per share on the last day of this period. The average
number of shares used in determining the net investment income per share will be
the average daily number of shares outstanding during the 30-day period that
were eligible to receive dividends. In accordance with regulations of the
Commission, income will be computed by totaling the interest earned on all debt
obligations during the 30-day period and subtracting from that amount the total
of all expenses incurred during the period, which include management fees. The
30-day yield is then annualized on a bond-equivalent basis assuming semi-annual
reinvestment and compounding of net investment income, as described in the
Prospectus. Yield is calculated according to the following formula:
a - b
YIELD = 2[( ------ +1)(6) - 1]
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
The yield for the 30 day period ended December 31, 1999 for each of the
International Bond, Total Return Bond, Intermediate-Term Bond and Mortgage
Backed Securities Portfolios was 4.39%, 5.63%, 6.23%, and 6.95%, respectively.
A Portfolio's yield fluctuates, and an annualized yield quotation is not a
representation by a Portfolio as to what an investment in the Portfolio will
actually yield for any given period. Yields for a Portfolio will vary based on a
number of factors including changes in net asset value, market conditions, the
level of interest rates and the level of income and expenses.
B-58
<PAGE> 170
AVERAGE ANNUAL TOTAL RETURN
The Trust may from time to time advertise the average annual total return
of a Portfolio. Average annual total return is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods at the
end of the 1, 5 or 10 year periods (or fractional portion
thereof).
</TABLE>
The average annual total returns for the one year and five year periods
ended December 31, 1999 and the period since inception (January 5, 1993 for each
Portfolio except the International Bond Portfolio, which commenced operations
May 17, 1994) are set forth in the table below. The average annual total returns
do not reflect the fees associated with the TARGET Program.
<TABLE>
<CAPTION>
ONE YEAR
ENDED
DECEMBER 31, FIVE YEARS ENDED
1999 DECEMBER 31, 1999 SINCE INCEPTION
------------ -------------------------------------- --------------------------------------
AVERAGE ANNUAL AVERAGE ANNUAL
AVERAGE ANNUAL AVERAGE ANNUAL TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
PORTFOLIO TOTAL RETURN TOTAL RETURN (WITHOUT FEE WAIVERS) TOTAL RETURN (WITHOUT FEE WAIVERS)
--------- -------------- -------------- --------------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
Large Capitalization
Growth Portfolio...... 53.05% 30.76% 30.76% 20.44% 20.44%
Large Capitalization
Value Portfolio....... -5.80% 14.85% 14.85% 10.64% 10.64%
Small Capitalization
Growth Portfolio...... 27.27% 17.09% 17.09% 13.87% 13.86%
Small Capitalization
Value Portfolio....... -0.12% 10.64% 10.64% 9.52% 9.51%
International Equity
Portfolio............. 21.46% 14.20% 14.20% 14.01% 14.01%
International Bond
Portfolio............. -6.82% 1.87% 1.85% 1.69% 1.60%
Total Return Bond
Portfolio............. -1.66% 7.02% 7.00% 5.59% 5.52%
Intermediate-Term Bond
Portfolio............. 0.29% 6.62% 6.62% 5.39% 5.38%
Mortgage Backed
Securities
Portfolio............. 0.52% 6.51% 6.49% 5.52% 5.44%
</TABLE>
AGGREGATE TOTAL RETURN
The Trust may from time to time advertise the aggregate total return of a
Portfolio. A Portfolio's aggregate total return figures represent the cumulative
change in the value of an investment in the Portfolio for the specified period
and are computed by the following formula:
ERV-P
-----------
P
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10 year
periods.
</TABLE>
B-59
<PAGE> 171
The aggregate total returns for each Portfolio for the one year and five
year periods ended December 31, 1999 and the period since inception (January 5,
1993 for each Portfolio except the International Bond Portfolio which commenced
operations May 17, 1994) are set forth in the table below. The aggregate total
returns do not reflect the fees associated with the TARGET Program.
<TABLE>
<CAPTION>
ONE YEAR
ENDED
DECEMBER 31, FIVE YEARS ENDED
1999 DECEMBER 31, 1999 SINCE INCEPTION
------------ ------------------------------------ ------------------------------------
AGGREGATE AGGREGATE
AGGREGATE AGGREGATE TOTAL RETURN AGGREGATE TOTAL RETURN
PORTFOLIO TOTAL RETURN TOTAL RETURN (WITHOUT FEE WAIVERS) TOTAL RETURN (WITHOUT FEE WAIVERS)
--------- ------------ ------------ --------------------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio...................... 55.37% 32.74% 32.74% 22.28% 22.28%
Large Capitalization Value
Portfolio...................... -4.37% 16.59% 16.59% 12.32% 12.32%
Small Capitalization Growth
Portfolio...................... 29.20% 18.86% 18.86% 15.61% 15.60%
Small Capitalization Value
Portfolio...................... 1.39% 12.32% 12.32% 11.18% 11.17%
International Equity Portfolio... 23.30% 15.93% 15.93% 15.75% 15.75%
International Bond Portfolio..... -5.88% 2.90% 2.87% 2.71% 2.63%
Total Return Bond Portfolio...... -0.67% 8.10% 8.08% 6.66% 6.58%
Intermediate-Term Bond
Portfolio...................... 1.30% 7.69% 7.69% 6.46% 6.44%
Mortgage Backed Securities
Portfolio...................... 1.54% 7.59% 7.56% 6.58% 6.51%
</TABLE>
ADVERTISING. Advertising materials for the Trust may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by a Portfolio's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Trust also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of these
entities.
From time to time, advertising materials for the Trust may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Trust shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed-income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
B-60
<PAGE> 172
(This Page Intentionally Left Blank)
B-61
<PAGE> 173
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION GROWTH PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--96.5%
Common Stocks--96.5%
BANKS--3.5%
114,000 Bank of America Corp.......... $ 5,721,375
444,900 MBNA Corp..................... 12,123,525
------------
17,844,900
------------
BROADCASTING--1.6%
65,600 AMFM, Inc.*................... 5,133,200
32,700 Univision Communications,
Inc., Class A*.............. 3,341,531
------------
8,474,731
------------
BUSINESS SERVICES--3.1%
284,500 Cendant Corp.*................ 7,557,031
90,300 J.D. Edwards & Co.*........... 2,697,713
55,600 Omnicom Group, Inc............ 5,560,000
------------
15,814,744
------------
COMPUTERS & BUSINESS EQUIPMENT--1.6%
306,000 Compaq Computer Corp.......... 8,281,125
------------
COMPUTER SOFTWARE & SERVICES--10.4%
42,000 Adobe Systems, Inc............ 2,824,500
27,400 Electronic Arts, Inc.*........ 2,301,600
162,000 EMC Corp.*.................... 17,698,500
169,000 Microsoft Corp.*.............. 19,730,750
251,200 Parametric Technology
Corp.*...................... 6,798,100
57,500 Synopsys, Inc.*............... 3,838,125
------------
53,191,575
------------
DRUGS & HEALTHCARE--9.3%
86,200 Amgen, Inc.*.................. 5,177,387
233,200 Columbia/HCA Healthcare
Corp........................ 6,835,675
46,400 Guidant Corp.................. 2,180,800
34,700 Johnson & Johnson, Inc........ 3,231,437
158,000 Medtronic, Inc................ 5,757,125
125,200 Merck & Co., Inc.............. $ 8,396,225
43,900 PE Corp....................... 5,281,719
147,900 Pfizer, Inc................... 4,797,506
140,100 Tenet Healthcare Corp.*....... 3,292,350
37,800 Warner-Lambert Co............. 3,097,238
------------
48,047,462
------------
ELECTRONIC COMPONENTS--13.1%
239,800 Applied Materials, Inc.*...... 30,379,662
520,800 Atmel Corp.*.................. 15,396,150
263,900 Intel Corp.................... 21,722,269
------------
67,498,081
------------
ELECTRONICS--28.2%
83,000 Adaptec, Inc.*................ 4,139,625
57,100 Agilent Technologies,
Inc.*....................... 4,414,544
254,300 CIENA Corp.*.................. 14,622,250
560,650 Cisco Systems, Inc.*.......... 60,059,631
212,000 Linear Technology Corp........ 15,171,250
400,000 Maxim Integrated Products,
Inc.*....................... 18,875,000
54,900 Motorola, Inc................. 8,084,025
440,000 Xilinx Inc.*.................. 20,006,250
------------
145,372,575
------------
FINANCIAL SERVICES--6.0%
46,000 Chase Manhattan Corp.......... 3,573,625
229,975 Citigroup Inc................. 12,777,986
75,000 Morgan Stanley Dean Witter &
Co.......................... 10,706,250
96,100 Wells Fargo Co................ 3,886,044
------------
30,943,905
------------
FOOD & BEVERAGES--2.5%
82,600 Anheuser Busch Companies,
Inc......................... 5,854,275
121,000 PepsiCo, Inc.................. 4,265,250
74,800 SYSCO Corp.................... 2,959,275
------------
13,078,800
------------
FOREST PRODUCTS--1.2%
49,900 Kimberly-Clark Corp........... 3,255,975
116,300 Smurfit-Stone Container
Corp........................ 2,849,350
------------
6,105,325
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-62
<PAGE> 174
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
INSURANCE--3.4%
81,562 American International Group,
Inc......................... $ 8,818,891
45,600 CIGNA Corp.................... 3,673,650
52,200 Providian Financial Corp...... 4,753,463
------------
17,246,004
------------
INTERNET--2.6%
90,600 America Online, Inc........... 6,834,637
15,300 Yahoo!, Inc.*................. 6,620,119
------------
13,454,756
------------
NON-FERROUS METALS--1.0%
63,200 Alcoa, Inc.................... 5,245,600
------------
OIL & GAS--1.1%
132,600 Enron Corp.................... 5,884,125
------------
RETAIL--2.5%
93,300 Home Depot, Inc............... 6,396,881
64,400 Wal-Mart Stores, Inc.......... 4,451,650
48,000 Williams-Sonoma, Inc.......... 2,208,000
------------
13,056,531
------------
TELECOMMUNICATION--4.4%
20,000 Aspect Communications
Corp.*...................... 782,500
127,800 Global TeleSystems Group,
Inc......................... 4,425,075
29,200 Nippon Telegraph & Telephone
Corp. (ADR)................. 2,514,850
57,700 Research In Motion Ltd.*...... 2,665,019
110,000 Tellabs, Inc.*................ 7,060,625
38,000 VoiceStream Wireless Corp..... 5,407,875
------------
22,855,944
------------
UTILITIES--1.0%
65,600 AES Corp.*................... $ 4,903,600
------------
Total common stocks
(cost $220,436,971)........ 497,299,783
------------
SHORT-TERM INVESTMENTS--3.5%
<CAPTION>
PRINCIPAL
AMOUNT
(000) REPURCHASE AGREEMENTS
- --------
<S> <C> <C>
$7,232 State Street Bank & Trust Co.,
2.50%, dated 12/31/99, due
01/3/00 in the amount of
$7,233,507 (cost
$7,232,000,
collateralized by
$5,900,000 U.S. Treasury
Notes, 8.875%, 2/15/19,
value of collateral
including accrued interest
is $7,382,375).............. 7,232,000
11,034 State Street Bank & Trust Co.,
2.50%, dated 12/31/99, due
01/3/00 in the amount of
$11,036,299, (cost
$11,034,000,
collateralized by
$10,735,000 U.S. Treasury
Notes, 8.75%, 8/15/00,
value of collateral
including accrued interest
is $11,258,331)............. 11,034,000
------------
Total short-term investments
(cost $18,266,000).......... 18,266,000
------------
TOTAL INVESTMENTS--100.0%
(cost $238,702,971; Note
4).......................... 515,565,783
Liabilities in excess of
other
assets...................... (95,505)
------------
NET ASSETS--100%.............. $515,470,278
============
</TABLE>
- ---------------
* Non-income producing.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-63
<PAGE> 175
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION VALUE PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--98.7%
COMMON STOCKS--98.7%
AEROSPACE--3.4%
156,700 Lockheed Martin Corp.......... $ 3,427,812
57,500 Northrop Grumman Corp......... 3,108,594
46,000 TRW, Inc...................... 2,389,125
------------
8,925,531
------------
AIRLINES--0.3%
56,000 Southwest Airlines Co......... 906,500
------------
ALUMINUM--1.7%
1,400 Alcoa Inc..................... 116,200
55,700 Reynolds Metals Co............ 4,268,012
------------
4,384,212
------------
APPAREL & TEXTILES--1.1%
25,000 Liz Claiborne, Inc............ 940,625
54,700 Russell Corp.................. 916,225
30,000 V.F. Corp..................... 900,000
------------
2,756,850
------------
AUTO PARTS--1.8%
68,600 Dana Corp..................... 2,053,712
53,462 Delphi Automotive Systems
Corp........................ 842,027
39,000 Genuine Parts Co.............. 967,687
35,000 Meritor Automotive, Inc....... 678,125
29,100 Tenneco Automotive, Inc....... 270,994
------------
4,812,545
------------
AUTOMOBILES--3.5%
113,000 Ford Motor Co................. 6,038,438
44,300 General Motors Corp........... 3,220,056
------------
9,258,494
------------
BANKS--5.5%
46,200 Bank America Corp............. 2,318,662
84,560 Bank One Corp................. 2,711,205
30,300 First Security Corp........... 773,597
96,700 First Union Corp.............. $ 3,172,969
52,000 Fleet Boston Financial
Corp........................ 1,810,250
43,200 KeyCorp....................... 955,800
90,000 National City Corp............ 2,131,875
16,500 UnionBanCal Corp.............. 650,719
------------
14,525,077
------------
BREWERY--0.5%
17,200 Anheuser Busch Companies,
Inc......................... 1,219,050
------------
BUILDING & CONSTRUCTION--0.3%
24,000 Harsco Corp................... 762,000
------------
BUILDING PRODUCTS--0.8%
49,600 Georgia-Pacific Corp.......... 1,221,400
35,000 York International Corp....... 960,313
------------
2,181,713
------------
BUSINESS SERVICES--1.2%
133,500 Xerox Corp.................... 3,028,781
------------
CHEMICALS--2.6%
29,400 Dow Chemical Co............... 3,928,575
32,200 Eastman Chemical Co........... 1,535,537
25,000 Praxair, Inc.................. 1,257,813
------------
6,721,925
------------
COMPUTERS & BUSINESS EQUIPMENT--3.4%
80,000 Compaq Computer Corp.......... 2,165,000
33,000 Hewlett-Packard Co............ 3,759,937
28,000 International Business
Machines Corp............... 3,024,000
------------
8,948,937
------------
CONGLOMERATE--1.4%
19,000 Hanson PLC. (ADR)............. 768,313
11,000 Minnesota Mining &
Manufacturing Co............ 1,076,625
64,500 Scana Corp.................... 1,733,437
------------
3,578,375
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-64
<PAGE> 176
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
CONTRUCTION MATERIALS--1.8%
171,400 CNH Global N.V................ $ 2,281,762
65,000 Sherwin-Williams Co........... 1,365,000
25,000 Vulcan Materials Co........... 998,438
------------
4,645,200
------------
CONSUMER PRODUCTS--2.7%
22,500 American Greetings Corp....... 531,563
30,000 Crown Cork & Seal Co., Inc.... 671,250
43,500 Eastman Kodak Co.............. 2,881,875
44,100 Fortune Brands, Inc........... 1,458,056
145,500 Pactiv Corp.*................. 1,545,937
------------
7,088,681
------------
DOMESTIC OIL--1.3%
48,613 Conoco, Inc. (Class B)........ 1,209,248
14,900 Sunoco, Inc................... 350,150
80,200 USX - Marathon Group.......... 1,979,938
------------
3,539,336
------------
DRUGS & HEALTHCARE--5.3%
30,000 Abbott Laboratories........... 1,089,375
44,000 American Home Products
Corp........................ 1,735,250
13,000 Baxter International, Inc..... 816,562
24,000 Bristol-Myers Squibb Co....... 1,540,500
80,000 Columbia/HCA Healthcare
Corp........................ 2,345,000
20,000 Eli Lilly & Co................ 1,330,000
30,000 Merck & Co., Inc.............. 2,011,875
55,000 Mylan Laboratories............ 1,385,312
40,000 Schering-Plough Corp.......... 1,687,500
------------
13,941,374
------------
ELECTRIC UTILITIES--5.7%
50,000 Central & South West Corp..... 1,000,000
34,400 CMS Energy Corp............... 1,072,850
70,000 DTE Energy Co................. 2,196,250
32,000 Edison International.......... 838,000
27,400 Entergy Corp.................. 705,550
61,000 General Public Utilities 1,826,187
Corp........................
36,000 PECO Energy Co................ 1,251,000
33,835 PP & L Resources, Inc......... $ 773,976
28,800 Public Service Enterprise 1,002,600
Group Inc...................
23,258 Scottish Power Plc. (ADR)..... 651,224
80,000 Southern Co................... 1,880,000
50,000 Teco Energy, Inc.............. 928,125
21,832 Texas Utilities Co............ 776,401
------------
14,902,163
------------
ELECTRICAL EQUIPMENT--1.5%
20,000 Emerson Electric Co........... 1,147,500
30,000 Johnson Controls, Inc......... 1,706,250
40,000 Raytheon Co., ( Class B)...... 1,062,500
------------
3,916,250
------------
ELECTRONICS--1.5%
35,000 Intel Corp.................... 2,880,938
20,000 Rockwell International
Corp........................ 957,500
------------
3,838,438
------------
ENERGY--1.1%
81,900 Illinova Corp................. 2,846,025
------------
FINANCIAL SERVICES--7.3%
53,050 Associates First Capital
Corp........................ 1,455,559
25,000 Chase Manhattan Corp.......... 1,942,187
25,000 Citigroup, Inc................ 1,389,063
89,500 Federal National Mortgage
Association................. 5,588,156
68,265 Household International,
Inc......................... 2,542,871
27,000 MBIA, Inc..................... 1,425,938
18,000 Morgan Stanley Dean Witter
Discover & Co............... 2,569,500
85,600 Washington Mutual, Inc........ 2,225,600
------------
19,138,874
------------
Foods--0.8%
55,000 Sara Lee Corp................. 1,213,438
45,000 SUPERVALU, Inc................ 900,000
------------
2,113,438
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-65
<PAGE> 177
THE TARGET PORTFOLIO TRUST
LARGE CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
FOREST PRODUCTS--3.0%
35,200 Georgia-Pacific Corp.......... $ 1,786,400
50,000 Kimberly-Clark Corp........... 3,262,500
39,600 Weyerhaeuser Co............... 2,843,775
------------
7,892,675
------------
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--1.1%
46,300 Whirlpool Corp................ 3,012,394
------------
INDUSTRIAL MACHINERY--0.3%
16,000 Caterpillar, Inc.............. 753,000
------------
INSURANCE--8.5%
99,400 Allstate Corp................. 2,385,600
81,258 American General Corp......... 6,165,451
44,700 Lincoln National Corp......... 1,788,000
15,000 Loews Corp.................... 910,313
33,000 MGIC Investment Corp.......... 1,986,188
89,175 Old Republic International
Corp........................ 1,215,009
106,900 SAFECO Corp................... 2,659,137
81,900 St. Paul Companies, Inc....... 2,759,006
80,000 Torchmark Corp................ 2,325,000
------------
22,193,704
------------
INTERNATIONAL OIL--5.3%
24,000 Chevron Corp.................. 2,079,000
28,000 Exxon Mobil Corp.............. 2,255,750
116,200 Occidental Petroleum Corp..... 2,512,825
100,800 Phillips Petroleum Co......... 4,737,600
40,000 Repsol S.A. (ADR)............. 930,000
26,300 Texaco, Inc................... 1,428,419
------------
13,943,594
------------
MANUFACTURING--0.3%
10,000 Illinois Tool Works, Inc...... 675,625
------------
MEDICAL DEVICES--0.2%
35,000 Quintiles Transnational,
Corp.*...................... 654,063
------------
MINING--0.9%
33,500 Phelps Dodge Corp............. 2,248,688
------------
OIL FIELD/EQUIPMENT & SERVICES--0.5%
60,000 Cadence Design Systems,
Inc.*....................... $ 1,440,000
------------
PAPER--2.1%
98,114 International Paper Co........ 5,537,309
------------
PETROLEUM SERVICES--0.7%
20,000 Norsk Hydro A S............... 855,000
40,000 Ultramar Diamond Shamrock..... 907,500
------------
1,762,500
------------
POLLUTION CONTROL--0.7%
100,000 Waste Management, Inc......... 1,718,750
------------
PUBLISHING--0.9%
30,000 Gannett Co., Inc.............. 2,446,875
------------
RAILROADS & EQUIPMENT--1.2%
16,300 CSX Corp...................... 511,413
135,000 Norfolk Southern Corp......... 2,767,500
------------
3,278,913
------------
RETAIL TRADE--3.0%
40,000 Albertson's, Inc.............. 1,290,000
35,000 Dillards, Inc., (Class A)..... 706,562
43,700 May Department Stores Co...... 1,409,325
110,000 Penney (J.C.) Co., Inc........ 2,193,125
50,000 Rite Aid Corp................. 559,375
53,700 Sears, Roebuck & Co........... 1,634,494
------------
7,792,881
------------
SOFTWARE--1.7%
45,000 Computer Associates
International, Inc.......... 3,147,187
35,000 Compuware Corp.*.............. 1,303,750
------------
4,450,937
------------
STEEL--2.0%
35,000 Nucor Corp.................... 1,918,437
100,100 USX Corp.-U.S. Steel Group.... 3,303,300
------------
5,221,737
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-66
<PAGE> 178
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS--7.1%
32,300 ALLTEL Corp................... $ 2,670,806
112,600 AT&T Corp..................... 5,714,450
40,000 Bell Atlantic Corp............ 2,462,500
13,500 GTE Corp...................... 952,594
40,500 MCI WorldCom, Inc.*........... 2,149,031
71,172 SBC Communications, Inc....... 3,469,635
15,000 US West, Inc.................. 1,080,000
------------
18,499,016
------------
TIRES & RUBBER--0.4%
65,000 Cooper Tire & Rubber Co....... 1,011,563
------------
TOBACCO--1.9%
214,200 Philip Morris Companies,
Inc......................... 4,966,762
------------
TOYS & AMUSEMENTS--0.2%
50,000 Mattel, Inc................... 656,250
------------
TRUCKING & FREIGHT FORWARDING--0.2%
20,000 Ryder System, Inc............. 488,750
------------
Total common stocks
(cost $229,902,944)......... 258,625,755
------------
SHORT-TERM INVESTMENT--1.2%
3,200 Seven Seas Series Government
Fund 4.84%**, 1/3/00 (cost
$3,200,406)................. 3,200,406
------------
Total Investments--99.9%
(cost $233,103,350; Note 4)... 261,826,161
Other assets in excess of
liabilities--0.1%........... 330,251
------------
NET ASSETS--100%.............. $262,156,412
============
</TABLE>
- ---------------
* Non-income producing.
** Rate represents yield at purchase date.
ADR--American Depository Receipts.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-67
<PAGE> 179
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION GROWTH PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.0%
Common Stocks--98.0%
APPAREL & TEXTILES--1.3%
75,700 Pacific Sunwear of
California, Inc.*.......... $ 2,412,938
------------
AUTO/TRUCK EQUIPMENT--0.6%
48,900 Keystone Automotive
Industries, Inc.*.......... 287,288
30,500 Oshkosh Truck Corp........... 894,031
------------
1,181,319
------------
BUSINESS SERVICES--14.8%
103,700 ACNielsen Corp.*............. 2,553,613
108,950 Acxiom Corp.*................ 2,614,800
68,200 ADVO, Inc.*.................. 1,619,750
20,600 AnswerThink Consulting Group,
Inc.*...................... 705,550
29,350 CDW Computer Centers,
Inc.*...................... 2,307,644
35,800 ChoicePoint, Inc.*........... 1,481,225
7,700 Critical Path, Inc.*......... 726,688
60,950 CSG Systems International,
Inc.*...................... 2,430,381
98,050 Daisytek International
Corp.*..................... 2,285,791
61,400 Hooper Holmes, Inc........... 1,581,050
101,000 Interim Services, Inc.*...... 2,499,750
33,950 Pegasus Systems, Inc.*....... 2,047,609
14,300 ProBusiness Services,
Inc.*...................... 514,800
58,100 Tech Data Corp.*............. 1,575,962
45,200 Zebra Technologies Corp.*.... 2,644,200
------------
27,588,813
------------
CABLE & PAY TELEVISION--0.6%
15,700 Jones Intercable, Inc.*...... 1,088,206
------------
COMMERCIAL SERVICES--7.1%
65,800 Coinmach Laundry Corp.*...... 699,125
71,200 Iron Mountain, Inc........... 2,799,050
144,800 Grubb & Ellis Co.*........... 678,750
84,550 On Command Corp.*............ 1,564,175
32,900 Quintiles Transnational
Corp....................... 614,819
36,400 Ritchie Bros. Auctioneers,
Inc.*...................... 1,010,100
74,880 Trammell Crow Co.*........... $ 870,480
71,400 Vicor Corp.*................. 2,891,700
49,300 Zomax, Inc.*................. 2,230,825
------------
13,359,024
------------
COMPUTERS & BUSINESS EQUIPMENT--3.0%
51,200 Advanced Digital Information
Corp.*..................... 2,489,600
6,600 Black Box Corp.*............. 442,200
65,300 Cybex Computer Products
Corp.*..................... 2,644,650
------------
5,576,450
------------
CONTRUCTION MATERIALS--1.0%
65,800 Insituform Technologies,
Inc.*...................... 1,858,850
------------
EDUCATIONAL SERVICES--0.8%
120,800 Sylvan Learning Systems,
Inc.*...................... 1,570,400
------------
ELECTRONICS--18.9%
66,400 ACT Manufacturing, Inc.*..... 2,490,000
66,000 Audiovox Corp.*.............. 2,004,750
55,350 Burr-Brown Corp.*............ 1,999,519
51,300 Credence Systems Corp.*...... 4,437,450
51,000 Cymer, Inc.*................. 2,346,000
44,100 DII Group, Inc.*............. 3,129,722
36,300 Electro Scientific
Industries, Inc.*.......... 2,649,900
75,500 Electroglas, Inc.*........... 1,915,812
8,450 Electronics for Imaging,
Inc.*...................... 491,156
35,200 Integrated Device Technology,
Inc.*...................... 1,020,800
117,800 International Rectifier
Corp.*..................... 3,062,800
13,350 Jabil Circuit, Inc.*......... 974,550
102,400 KEMET Corp.*................. 4,614,400
69,900 Mettler-Toledo International,
Inc.*...................... 2,669,306
31,800 Pittway Corp................. 1,425,038
------------
35,231,203
------------
FINANCIAL SERVICES--6.1%
222,550 AmeriCredit Corp.*........... 4,117,175
26,300 Brown & Brown, Inc........... 1,007,619
32,950 Investors Financial Services
Corp....................... 1,515,700
5,300 M & T Bank Corp.............. 2,195,525
28,790 T. Rowe Price Associates,
Inc........................ 1,063,430
51,000 Texas Regional Bancshares,
Inc........................ 1,479,000
------------
11,378,449
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-68
<PAGE> 180
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<C> <S> <C>
HOUSEHOLD APPLIANCES & HOME
FURNISHINGS--0.4%
79,000 Falcon Products, Inc......... $ 681,375
------------
HOUSEHOLD PRODUCTS--4.1%
68,700 NBTY, Inc.*.................. 794,344
69,500 Salton, Inc.*................ 2,323,906
85,800 Scotts Company (The)*........ 3,453,450
97,500 Topps Company, Inc........... 1,011,562
------------
7,583,262
------------
INDUSTRIAL MACHINERY--4.8%
69,400 Applied Power, Inc........... 2,550,450
44,200 Asyst Technologies, Inc.*.... 2,897,862
50,300 Helix Technology Corp........ 2,254,069
29,100 Kulicke & Soffa Industries,
Inc.*...................... 1,238,569
------------
8,940,950
------------
LEISURE TIME--2.4%
65,500 American Classic Voyages
Co.*....................... 2,292,500
114,300 Aztar Corp.*................. 1,243,012
55,800 JAKKS Pacific, Inc........... 1,042,763
------------
4,578,275
------------
MEDICAL & DENTAL SUPPLIES--3.4%
98,550 Hanger Orthopedic Group,
Inc.*...................... 985,500
58,300 Henry Schein, Inc.*.......... 776,119
56,450 King Pharmaceuticals,
Inc.*...................... 3,164,728
45,100 PolyMedica Corp.*............ 1,042,937
47,400 STAAR Surgical Co.*.......... 462,150
------------
6,431,434
------------
MISCELLANEOUS--0.7%
65,150 Hollywood.com, Inc.*......... 1,237,850
------------
OIL FIELD/EQUIPMENT--0.3%
30,000 CARBO Ceramics, Inc.......... $ 656,250
------------
OIL FIELD/EXPLORATION AND
PRODUCTION--1.7%
25,400 Devon Energy Corp............ 835,025
53,400 Newfield Exploration Co.*.... 1,428,450
72,800 Vintage Petroleum, Inc....... 878,150
------------
3,141,625
------------
PUBLISHING--3.3%
35,150 Information Holdings,
Inc.*...................... 1,021,547
147,000 Penton Media, Inc............ 3,528,000
100,100 PRIMEDIA Inc.*............... 1,651,650
------------
6,201,197
------------
REAL ESTATE INVESTMENT TRUST--1.6%
56,750 ProLogis Trust............... 1,092,438
87,360 SL Green Reality Corp........ 1,900,080
------------
2,992,518
------------
RETAIL TRADE--6.5%
29,000 Copart, Inc.*................ 1,261,500
21,500 Cost Plus, Inc.*............. 765,938
73,000 Insight Enterprises, Inc.*... 2,965,625
33,000 PC Connection, Inc.*......... 1,138,500
104,300 Regis Corp................... 1,968,662
47,400 Sonic Corp.*................. 1,350,900
90,800 Spiegel, Inc................. 638,438
58,250 Tractor Supply Co.*.......... 932,000
22,500 Zale Corp.*.................. 1,088,437
------------
12,110,000
------------
SOFTWARE--8.2%
34,000 Advent Software, Inc.*....... 2,190,875
74,900 Ardent Software, Inc.*....... 2,921,100
5,700 Genesys Telecommunications
Laboratories, Inc.*........ 307,800
43,050 Integrated Systems, Inc.*.... 1,444,865
53,700 Midway Games, Inc.*.......... 1,285,444
15,300 NVIDIA Corp.*................ 718,144
27,300 Pinnacle Systems, Inc.*...... 1,110,769
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-69
<PAGE> 181
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION GROWTH PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
SOFTWARE (CONT'D.)
9,400 Rational Software Corp.*..... $ 461,775
98,000 Santa Cruz Operation, Inc.
(The)*..................... 2,976,750
80,900 Sybase, Inc.*................ 1,375,300
33,500 Take-Two Interactive
Software, Inc.*............ 433,406
------------
15,226,228
------------
TELECOMMUNICATION--4.4%
45,100 Cabletron Systems, Inc.*..... 1,172,600
32,300 Carrier Access Corp.......... 2,174,194
37,700 Polycom, Inc.*............... 2,401,018
32,500 Xircom, Inc.*................ 2,437,500
------------
8,185,312
------------
TRANSPORTATION--2.0%
67,800 American Freightways Corp.... 1,097,512
33,250 Expeditors International of
Washington, Inc............ 1,456,766
62,200 Swift Transportation Co.,
Inc........................ 1,096,275
------------
3,650,553
------------
Total common stocks
(cost $143,977,765)........ 182,862,481
------------
SHORT-TERM INVESTMENTS--2.0%
3,717,730 Seven Seas Money Market Fund
5.35%**.................... 3,717,730
2,524 Seven Seas Series Government
Fund 4.84%**, 1/3/00....... 2,524
------------
Total short-term investments
(cost $3,720,254).......... 3,720,254
------------
TOTAL INVESTMENTS--100.0%
(cost $147,698,019; Note
4)......................... 186,582,735
Other assets in excess of
liabilities................ 20,468
------------
NET ASSETS--100%............. $186,603,203
============
</TABLE>
- ------------------
* Non-income producing security.
** Rate represents yield at purchase date.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-70
<PAGE> 182
SMALL CAPITALIZATION VALUE PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--98.5%
COMMON STOCKS
AEROSPACE--.9%
24,600 AAR Corp...................... $ 441,262
11,100 Aviation Sales Co.*........... 183,150
17,500 Cordant Technologies, Inc..... 577,500
------------
1,201,912
------------
APPAREL & TEXTILES--0.3%
31,300 Culp, Inc..................... 197,581
20,500 Nautica Enterprises, Inc.*.... 231,907
------------
429,488
------------
AUTO RELATED--1.9%
19,100 Borg-Warner Automotive,
Inc......................... 773,550
31,800 Modine Manufacturing Co....... 795,000
54,512 Myers Industries, Inc......... 858,564
------------
2,427,114
------------
AUTOMOBILES--0.6%
49,700 Tower Automotive, Inc.*....... 767,244
------------
BANKS--6.0%
31,807 AmSouth Bancorporation........ 614,273
19,200 Associated Banc Corp.......... 657,600
17,600 Bank United Corp.............. 479,600
14,800 Chittenden Corp............... 438,450
37,000 Firstmerit Corp............... 851,000
53,779 HUBCO, Inc.................... 1,374,726
51,600 Independent Bank Corp. -
Mass........................ 645,000
31,750 People's Bank*................ 670,719
29,700 Southwest Bancorporation of
Texas, Inc.*................ 588,431
31,400 Staten Island Bancorp,
Inc......................... $ 565,200
48,150 Susquehanna Bancshares,
Inc......................... 764,381
------------
7,649,380
------------
BUILDING & CONSTRUCTION--1.9%%
45,300 Apogee Enterprises, Inc....... 229,331
2,700 Dycom Industries, Inc.*....... 118,969
14,100 Granite Construction, Inc..... 259,969
22,500 Hughes Supply, Inc............ 485,156
18,800 Jacobs Engineering Group,
Inc.*....................... 611,000
17,600 Martin Marietta Materials,
Inc......................... 721,600
------------
2,426,025
------------
BUSINESS SERVICES--5.2%
33,900 ACNielson Corp.*.............. 834,787
20,800 Acxiom Corp.*................. 499,200
17,600 American Management Systems,
Inc.*....................... 552,200
60,800 Bowne & Co., Inc.............. 820,800
14,100 Gartner Group, Inc., Cl.A..... 215,025
24,800 Interim Services, Inc.*....... 613,800
35,800 ITT Educational Services,
Inc......................... 552,662
33,000 Mastech Corp.*................ 816,750
50,450 Tetra Tech, Inc............... 775,669
15,300 The Standard Register Co...... 296,438
20,800 United Stationers, Inc.*...... 594,100
------------
6,571,431
------------
CHEMICALS--4.1%
36,600 Cambrex Corp.................. 1,260,412
28,550 Ferro Corp.................... 628,100
13,400 Fuller (H.B.) Co.............. 749,562
63,400 Hanna (M.A.) Co............... 693,438
24,700 OM Group, Inc................. 850,606
72,287 RPM, Inc...................... 736,424
20,800 Schulman (A.), Inc............ 339,300
------------
5,257,842
------------
COMMUNICATION--0.3%
32,600 Allen Telecom, Inc.*.......... 376,938
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-71
<PAGE> 183
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
COMPUTERS & BUSINESS EQUIPMENT--3.0%
49,200 Inacom Corp.*................. $ 359,775
60,200 MTS Systems Corp.............. 466,550
47,900 Mentor Graphics Corp.*........ 631,681
21,500 Progress Software Corp.*...... 1,220,125
103,200 Quantum Corp.*................ 715,950
22,000 Storage Technology Corp.*..... 405,625
------------
3,799,706
------------
CONSTRUCTION & MINING EQUIPMENT--0.8%
60,200 JLG Industries, Inc........... 959,438
------------
DIVERSIFIED INDUSTRIALS--3.6%
46,100 Applied Power, Inc............ 1,694,175
30,600 Brady (W.H.) Co............... 1,038,487
28,600 Carlisle Co., Inc............. 1,029,600
25,000 Teleflex, Inc................. 782,813
------------
4,545,075
------------
DRUGS & HEALTHCARE--7.6%
36,800 AmeriSource Health Corp.,
Cl.A*....................... 558,900
42,000 Apria Healthcare Group,
Inc.*....................... 753,375
34,100 Arrow International, Inc...... 988,900
14,800 Beckman Coulter, Inc.......... 752,950
21,000 DENTSPLY International,
Inc......................... 496,125
85,600 Invacare Corp................. 1,717,350
27,000 Jones Pharmaceutical, Inc..... 1,172,812
86,200 Meridian Diognostic........... 624,950
25,000 Varian Medical Systems,
Inc.*....................... 745,313
21,100 Vital Signs, Inc.............. 482,663
42,300 West Pharmaceutical Services,
Inc......................... 1,308,656
------------
9,601,994
------------
ELECTRIC UTILITIES--0.9%
34,300 Avista Corp................... 529,506
33,120 Sierra Pacific Resources...... 573,390
------------
1,102,896
------------
ELECTRICAL EQUIPMENT--4.0%
43,700 Anixter International,
Inc.*....................... $ 901,312
16,900 Belden, Inc................... 354,900
10,800 Oak Industries, Inc.*......... 1,146,150
26,400 Polaroid Corp................. 496,650
27,500 Sensormatic Electronics
Corp.*...................... 479,531
26,200 Technitrol, Inc............... 1,165,900
45,700 Woodhead Industries, Inc...... 531,263
------------
5,075,706
------------
ELECTRONICS--10.8%
40,300 Ametek Aerospace Prods,
Inc......................... 768,219
29,800 Bell & Howell Co.*............ 948,013
27,100 C&D Technologies.............. 1,151,750
4,200 Credence Systems Corp.*....... 363,300
16,100 Dallas Semiconductor Corp..... 1,037,444
18,000 Electro Scientific
Industries, Inc.*........... 1,314,000
8,500 Electronics for Imaging,
Inc.*....................... 494,063
23,600 Harman International
Industries, Inc............. 1,324,550
14,800 KEMET Corp.*.................. 666,925
2,900 Lam Research Corp.*........... 323,531
35,850 Methode Eletronics, Inc....... 1,151,681
71,100 Pioneer Standard Electronics,
Inc......................... 1,026,506
20,200 Rogers Corp.*................. 772,650
30,100 Tektronix, Inc................ 1,170,137
53,000 Varian, Inc................... 1,192,500
------------
13,705,269
------------
FOOD - SERVICE/LODGING--0.7%
64,000 Marcus Corp................... 860,000
------------
FOODS--5.2%
28,800 American Italian Pasta Co.,
Cl.A*....................... 885,600
38,600 Aurora Foods, Inc.*........... 359,463
44,800 Flowers Industries, Inc....... 714,000
26,650 Lancaster Colony Corp......... 882,781
12,300 Lance, Inc.................... 123,000
36,800 Performance Food Group Co..... 897,000
38,400 Ralcorp Holdings, Inc.*....... 765,600
72,800 United Natural Foods, Inc..... 873,600
53,200 Universal Foods Corp.......... 1,083,950
------------
6,584,994
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-72
<PAGE> 184
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
GAS & PIPELINE UTILITIES--2.0%
20,600 Equitable Resources, Inc...... $ 687,525
20,600 National Fuel Gas Co.......... 957,900
31,700 Washington Gas Light Co....... 871,750
------------
2,517,175
------------
HOMEBUILDERS--1.0%
17,700 Kaufman & Broad Home Corp..... 428,119
47,500 Toll Brothers, Inc.*.......... 884,687
------------
1,312,806
------------
HOTELS & RESTAURANTS--0.8%
31,200 Lone Star Steakhouse & Saloon,
Inc.*....................... 278,362
10,000 Luby's Cafeterias, Inc........ 113,750
46,300 Prime Hospitality Corp.*...... 408,019
20,600 Ryan's Family Steak Houses,
Inc.*....................... 175,100
------------
975,231
------------
HOUSEHOLD APPLIANCES & HOME
Furnishings--1.9%
24,000 Bassett Furniture Industries,
Inc......................... 384,000
45,000 Chromcraft Revington, Inc.*... 472,500
20,700 Ethan Allen Interiors, Inc.... 663,694
42,700 Furniture Brands
International, Inc.*........ 939,400
------------
2,459,594
------------
INDUSTRIAL MACHINERY--3.3%
4,300 Briggs & Stratton Corp........ 230,588
23,425 Crane Co...................... 465,572
24,900 Graco, Inc.................... 893,287
28,100 Hussmann International,
Inc......................... 423,256
23,209 Mark IV Industries, Inc....... 410,509
14,700 Polaris Industries, Inc....... 532,875
34,400 Regal-Beloit Corp............. 709,500
39,900 Watts Industries, Inc.,
Cl.A........................ 588,525
------------
4,254,112
------------
INSURANCE--5.1%
13,900 Arthur J. Gallagher & Co...... 900,025
11,700 Blanch (E.W.) Holdings,
Inc......................... 716,625
25,000 Brown & Brown, Inc............ 957,812
35,800 Enhance Financial Services
Group, Inc.................. 581,750
26,000 Everest Reinsurance Holdings,
Inc......................... 580,125
17,800 HCC Insurance Holdings,
Inc......................... $ 234,738
36,300 Horace Mann Educators
Corp........................ 712,387
33,200 Protective Life Corp.......... 1,056,175
15,272 Radian Group, Inc............. 729,238
------------
6,468,875
------------
MANUFACTURING--1.8%
28,300 Federal Signal Corp........... 454,569
16,900 Flowserve Corp................ 287,300
17,800 Lydall, Inc.*................. 117,925
18,200 Roper Industries, Inc......... 688,187
17,800 The Dexter Corporation........ 707,550
------------
2,255,531
------------
MISCELLANEOUS--1.7%
31,800 American National Can Group,
Inc......................... 413,400
36,800 AptarGroup, Inc............... 924,600
19,950 CIRCOR International,
Inc.*....................... 205,735
45,100 Whitman Corp.................. 606,031
------------
2,149,766
------------
OFFICE EQUIPMENT--0.4%
23,800 HON Industries, Inc........... 522,113
------------
OIL & GAS--2.4%
20,700 CONSOL Energy, Inc............ 209,588
22,700 Devon Energy Corp............. 746,262
63,400 Helmerich & Payne, Inc........ 1,382,912
74,500 Pennzoil Quaker State
Company..................... 758,969
------------
3,097,731
------------
OIL & GAS - PRODUCTION/PIPELINE--1.3%
27,600 Barrett Resources Corp.*...... 812,475
98,400 Santa Fe Snyder Corp.......... 787,200
------------
1,599,675
------------
OIL-SUPPLIES & CONSTRUCTION--0.4%
12,700 Tidewater, Inc................ 457,200
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-73
<PAGE> 185
THE TARGET PORTFOLIO TRUST
SMALL CAPITALIZATION VALUE PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
PAPER & PAPER PRODUCTS--1.0%
21,300 Chesapeake Corp............... $ 649,650
52,500 Wausau Paper Co............... 613,594
------------
1,263,244
------------
PETROLEUM SERVICES--0.5%
62,000 Varco International, Inc...... 631,625
------------
PRINTING & PUBLISHING--3.7%
11,650 American Business Products,
Inc......................... 136,159
82,750 Banta Corp.................... 1,867,047
12,400 Houghton Mifflin Co........... 523,125
36,400 Lee Enterprises, Inc.......... 1,162,525
40,400 Mail-Well, Inc.*.............. 545,400
10,900 Pulitzer, Inc................. 439,406
------------
4,673,662
------------
PROFESSIONAL SERVICES--2.0%
18,900 CDI Corp.*.................... 455,963
29,100 HSB Group, Inc................ 983,944
18,600 Keane, Inc.*.................. 590,550
28,100 R.H. Donnelley Corp.*......... 530,387
------------
2,560,844
------------
REAL ESTATE INVESTMENT TRUST--3.5%
52,400 Catellus Development Corp.*... 671,375
17,500 Chateau Communities, Inc...... 453,906
9,000 Chelsea GCA Realty, Inc....... 267,750
30,000 FelCor Lodging Trust, Inc..... 525,000
33,700 Glenborough Realty Trust,
Inc......................... 450,738
27,400 JDN Realty Corp............... 441,825
22,200 Kilroy Realty Corp............ 488,400
25,600 Liberty Property Trust........ 620,800
18,100 Mack California Realty
Corp........................ 471,731
------------
4,391,525
------------
RETAIL - APPAREL--1.2%
14,200 Lands End, Inc................ $ 493,450
8,100 Talbots, Inc.................. 361,463
18,000 The Men's Wearhouse, Inc.*.... 528,750
13,900 The Wet Seal, Inc., Cl.A*..... 170,275
------------
1,553,938
------------
RETAIL - GROCERY--1.8%
38,300 Caseys General Stores,
Inc......................... 399,756
25,300 Great Atlantic & Pacific Tea
Co., Inc.................... 705,238
79,400 Ruddick Corp.................. 1,230,700
------------
2,335,694
------------
RETAIL - TRADE--1.7%
53,300 Borders Group, Inc.*.......... 856,131
59,300 CompUSA Inc.*................. 303,913
66,100 Pier 1 Imports, Inc........... 421,387
80,400 Venator Group, Inc.*.......... 562,800
------------
2,144,231
------------
SAVINGS & LOAN--1.5%
22,425 Astoria Financial Corp........ 682,561
46,411 Sovereign Bancorp, Inc........ 345,907
36,800 Webster Financial Corp........ 867,100
------------
1,895,568
------------
TOYS & AMUSEMENTS--0.5%
25,405 Russ Berrie & Co., Inc........ 666,881
------------
TRUCKING & FREIGHT FORWARDINGG--1.2%
24,100 CNF Transportation, Inc....... 831,450
54,000 Werner Enterprises, Inc....... 759,375
------------
1,590,825
------------
Total common stocks
(cost $110,128,333)......... 125,120,298
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-74
<PAGE> 186
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
WARRANT*--0.0%
33,910 Wilshire Technologies, Inc.
expiring Nov. 28, 2002
(cost $0)................... $ 0
------------
Total long-term investments
(cost $110,128,333)......... 125,120,298
------------
SHORT-TERM INVESTMENTS--1.3%
<CAPTION>
PRINCIPAL
AMOUNT
(000) U.S. GOVERNMENT SECURITIES
- --------
United States Treasury Bills,
$ 1,425 5.05%, 1/27/00................ 1,419,865
75 4.95%, 3/23/00................ 74,135
125 5.28%, 3/23/00................ 123,557
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,617,481)........... 1,617,557
------------
Total Investments--99.8%
(cost $111,745,814; Note 4)... 126,737,855
Other assets in excess of
liabilities--0.2%........... 272,144
------------
NET ASSETS--100%.............. $127,009,999
============
</TABLE>
- ---------------
* Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-75
<PAGE> 187
THE TARGET PORTFOLIO TRUST
INTERNATIONAL EQUITY PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--99.0%
COMMON STOCKS
AUSTRALIA--1.9%
405,722 Broken Hill Proprietary Co.,
Ltd......................... $ 5,327,397
------------
DENMARK--1.7%
63,900 Tele Danmark A.S.............. 4,747,811
------------
FINLAND--1.4%
163,200 MeritaNondbaken OYJ........... 961,737
71,380 UPM Kymmene OYJ............... 2,876,184
------------
3,837,921
------------
FRANCE--14.7%
31,930 Alcatel....................... 7,333,545
56,414 Aventis SA*................... 3,273,329
68,877 Aventis SA (New).............. 4,003,412
27,470 Axa SA........................ 3,829,790
52,060 Banque Nationale de Paris..... 4,803,744
15,680 Cie de Saint Gobain........... 2,948,972
36,200 Michelin, Series B............ 1,422,176
16,500 Suez Lyonnaise des Eaux....... 2,644,444
44,185 Total Fina SA, Series B....... 5,897,541
45,601 Vivendi....................... 4,118,176
------------
40,275,129
------------
GERMANY--9.9%
10,999 Allianz A.G................... 3,695,126
40,383 DaimlerChrysler A.G........... 3,140,481
134,800 Deutsche Lufthansa A.G........ 3,136,766
23,032 Deutsche Telekom A.G.......... 1,640,330
61,180 Metro A.G..................... 3,291,023
52,100 Siemens A.G................... 6,628,592
97,600 Thyssen Krupp A.G............. 2,974,099
57,400 Veba A.G...................... 2,789,905
------------
27,296,322
------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------
<S> <C> <C>
ITALY--2.6%
537,900 Eni SpA..................... $ 2,958,520
192,100 Sao Paolo Imi SpA........... 2,610,475
234,100 Telecom Italia SpA.......... 1,426,714
-----------
6,995,709
-----------
JAPAN--25.7%
241,000 Asahi Breweries, Ltd........ 2,637,154
159,000 Canon, Inc.................. 6,318,293
242,000 Fuji Bank, Ltd.............. 2,352,021
270 Japan Tobacco, Inc.......... 2,066,556
123,000 Kao Corp.................... 3,509,298
16,600 Nintendo Co., Ltd........... 2,758,814
291 Nippon Telegraph & Telephone
Corp...................... 4,984,340
715,000 Nissan Motor Co., Ltd.*..... 2,813,253
205 NTT Mobile Communications
Network, Inc.............. 7,885,387
32,900 Orix Corp................... 7,412,724
33,200 Promise Co., Ltd............ 1,689,733
101,000 Sankyo Co., Ltd............. 2,075,952
39,700 Sony Corp................... 11,773,613
533,000 Sumitomo Trust & Banking
Co., Ltd.................. 3,599,589
44,000 TDK Corp.................... 6,076,539
292,000 The Industrial Bank of
Japan, Ltd................ 2,815,112
-----------
70,768,378
-----------
NETHERLANDS--4.2%
67,500 Heineken N.V................ 3,292,371
76,100 ING Groep N.V............... 4,594,959
26,934 Philips Electronics N.V..... 3,662,814
-----------
11,550,144
-----------
PORTUGAL--1.0%
244,700 Portugal Telecom............ 2,684,368
-----------
SINGAPORE--2.4%
360,850 Overseas Chinese Banking
Corp., Ltd................ 3,314,924
383,328 United Overseas Bank, Ltd... 3,383,321
-----------
6,698,245
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-76
<PAGE> 188
<TABLE>
<CAPTION>
- -------------------------------------------------------------
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------
<S> <C> <C>
SPAIN--5.3%
217,400 Endesa S.A.................... $ 4,316,447
407,341 Telefonica S.A................ 10,176,303
------------
14,492,750
------------
SWEDEN--3.0%
142,700 Electrolux AB, Series B....... 3,588,882
205,900 Nordbanken Holding AB......... 1,209,895
189,800 Svenska Handelsbanken AB,
Series A.................... 2,386,720
41,900 Volvo AB, Series B............ 1,083,324
------------
8,268,821
------------
SWITZERLAND--3.8%
33,985 ABB A.G., Series A*........... 4,156,615
290 Roche Holdings A.G............ 3,442,191
4,920 Zurich Allied A.G............. 2,805,602
------------
10,404,408
------------
UNITED KINGDOM--21.4%
162,000 Allied Zurich PLC............. 1,910,254
98,783 Astrazeneca Group PLC......... 4,103,991
392,200 BP Amoco PLC.................. 3,958,998
577,128 British Aerospace PLC......... 3,794,196
346,500 British America Tobacco
Industries PLC.............. 1,958,955
309,664 British Energy PLC............ 1,779,463
282,012 Cadbury Schweppes PLC......... 1,699,142
301,599 Diageo PLC.................... 2,406,634
78,800 GKN PLC....................... 1,290,677
414,600 Granada Group PLC............. 4,185,646
314,100 Great Universal Stores PLC.... 1,826,517
262,800 Halifax Group PLC............. 2,869,626
298,805 HSBC Holdings PLC............. 4,189,843
331,038 Imperial Chemical Industries
PLC......................... 3,497,106
461,500 Invensys PLC.................. 2,439,968
142,600 National Westminster Bank PLC. 3,063,546
159,639 Prudential Corp. PLC.......... 3,115,008
378,400 Reed International PLC........ 2,842,218
375,000 Royal & Sun Alliance Insurance
Group PLC................... 2,810,622
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
US$
VALUE
SHARES DESCRIPTION (NOTE 1)
- -------------------------------------------------------------
<S> <C> <C>
155,300 Smithkline Beecham PLC...... $ 1,969,220
373,200 Tesco PLC................... 1,133,320
284,592 Unilever PLC................ 2,091,642
------------
58,936,592
------------
Total long-term investments
(cost US$193,388,123)..... 272,283,995
------------
PRINCIPAL
AMOUNT
(000) SHORT-TERM INVESTMENTS--1.0%
- ----------
United States Treasury Bills,
$ 795 5.01%, 1/27/00.............. 792,298
1,885 5.05%, 1/27/00.............. 1,878,397
65 4.95%, 3/23/00.............. 64,262
65 5.00%, 3/23/00.............. 64,262
------------
Total short-term investments
(cost US$2,798,856)....... 2,799,219
------------
TOTAL INVESTMENTS--100.0%
(cost US$196,186,979; Note 4) 275,083,214
Liabilities in excess of
other assets.............. (86,631)
------------
NET ASSETS--100%............ $274,996,583
============
</TABLE>
- ------------------
* Non-income producing securities.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-77
<PAGE> 189
THE TARGET PORTFOLIO TRUST
INTERNATIONAL EQUITY PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
The industry classification of portfolio holdings shown as a percentage of net
assets as of December 31, 1999 was as follows:
<TABLE>
<S> <C>
Banking............................................................ 12.7%
Telecommunications................................................. 12.2
Electronics........................................................ 8.9
Insurance.......................................................... 6.6
Energy............................................................. 4.9
Food & Beverage.................................................... 4.8
Oil & Gas Services................................................. 4.7
Diversified Industries............................................. 4.0
Automobiles........................................................ 3.1
Chemicals.......................................................... 2.7
Leasing............................................................ 2.7
Manufacturing...................................................... 2.7
Medical Products & Services........................................ 2.7
Pharmaceuticals.................................................... 2.7
Diversified Manufacturing.......................................... 2.4
Financial Services................................................. 2.3
Computers.......................................................... 2.2
Natural Resources Sector........................................... 1.9
Retail............................................................. 1.9
Engineering & Equipment............................................ 1.5
Tobacco............................................................ 1.5
Aerospace/Defense.................................................. 1.4
Consumer Durable Goods............................................. 1.3
Cosmetics/Toiletries............................................... 1.3
Air Transportation................................................. 1.1
Forest Products.................................................... 1.0
Industrials........................................................ 1.0
Publishing......................................................... 1.0
U.S Government Securities.......................................... 1.0
Electrical Equipment............................................... 0.9
Miscellaneous...................................................... 0.9
-----
100.0%
=====
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-78
<PAGE> 190
INTERNATIONAL BOND PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--98.1%
AUSTRALIA--4.0%
New South Wales Treasury Corp.,
A$ 800 6.50%, 5/1/06............... $ 506,293
Queensland Treasury Corp.,
800 8.00%, 8/14/01.............. 538,330
-----------
1,044,623
-----------
CANADA--7.4%
Canadian Gov't. Bonds,
C$ 100 5.50%, 6/1/09............... 65,597
Deutsche Fin(Neth),
1,500 7.00%, 1/7/04............... 1,054,209
Province of Ontario,
1,150 8.00%, 3/11/03.............. 833,409
-----------
1,953,215
-----------
EUROBONDS--46.8%
Deutschland Rep.,
EUR 2,700 4.00%, 7/4/09............... 2,450,579
Depfa Pfandriefbank,
1,700 5.00%, 2/3/05............... 1,699,651
Dutch Gov't. Bonds,
700 7.50%, 1/15/23.............. 835,949
Finnish Gov't. Bonds,
1,000 9.50%, 3/15/04.............. 1,176,685
French Gov't. Bonds,
1,500 4.00%, 10/25/09............. 1,344,812
French Treasury Note,
400 4.50%, 7/12/02.............. 403,544
German Gov't. Bonds,
307 6.00%, 1/5/06............... 323,399
200 6.00%, 7/4/07............... 210,234
Italian Gov't. Bonds,
1,300 4.50%, 5/1/09............... 1,215,267
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Obrig Do Tes Medio Prazo,
EUR 500 3.625%, 8/19/04............. $ 474,461
750 5.375%, 6/23/08............. 745,313
Spanish Gov't. Bonds,
1,000 5.15%, 7/30/09.............. 978,137
Treuhandanstalt,
500 6.875%, 6/11/03............. 536,666
-----------
12,394,697
-----------
GERMANY--9.9%
Austrian Gov't. Bonds,
DM 1,000 7.25%, 5/3/07............... 568,615
Halifax PLC,
2,000 5.625%, 7/23/07............. 1,023,404
Nordic Invest. Bank,
2,000 4.875%, 3/1/01.............. 1,037,310
-----------
2,629,329
-----------
JAPAN--7.4%
Japan - Gov't. 10-Yr.
Y 130,000 6.20%, 3/20/00.............. 1,287,213
Kingdom of Spain,
60,000 3.10%, 9/20/06.............. 660,076
-----------
1,947,289
-----------
NEW ZEALAND--15.8%
Int'l. Bank Recon. & Dev.,
NZ$ 2,500 7.25%, 5/27/03.............. 1,293,840
750 5.375%, 11/6/03............. 363,464
New Zealand Gov't. Bonds,
2,000 5.50%, 4/15/03.............. 1,001,110
3,000 7.00%, 7/15/09.............. 1,533,798
-----------
4,192,212
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-79
<PAGE> 191
THE TARGET PORTFOLIO TRUST
INTERNATIONAL BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
PRINCIPAL US$
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------
<C> <S> <C>
SWEDEN--3.6%
Kingdom of Sweden,
SEK 5,000 9.00%, 4/20/09.............. $ 723,352
Swedish Gov't. Bonds,
2,000 6.00%, 2/9/05............... 240,428
-----------
963,780
-----------
UNITED STATES--3.2%
U.S. Treasury Notes,
US$ 796 3.375%, 1/15/07 (TIPS)...... 750,151
104 3.625%, 1/15/08 (TIPS)...... 99,130
-----------
849,281
-----------
Total long-term investments
(cost US$27,761,696)........ 25,974,426
-----------
TOTAL INVESTMENTS--98.1%
(cost US$27,761,696; Note 4).. 25,974,426
Other assets in excess of
liabilities--1.9%........... 517,149
-----------
Net Assets--100%.............. $26,491,575
===========
</TABLE>
- ------------------
(TIPS)--Treasury inflationary protection securities.
Portfolio securities are classified according to the
securities currency denomination.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-80
<PAGE> 192
TOTAL RETURN BOND PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--110.1%
CORPORATE BONDS--31.9%
AIRLINES--2.6%
Continental Airlines, Inc.,
Ba2 $ 600 9.50%, 12/15/01......... $ 609,000
United Airlines, Inc.,
Baa1 1,000 10.85%, 2/19/15......... 1,151,520
------------
1,760,520
------------
AUTOMOBILES & PARTS--1.2%
Federal-Mogul Corp.,
Ba1 850 7.75%, 7/1/06........... 788,198
------------
BANKING--7.4%
Asian Development Bank,
Aaa 900 5.82%, 6/16/28.......... 817,012
Capital One Bank,
Baa2 1,200 6.91%, 7/28/03.......... 1,208,328
GS Escrow Corp.,
Ba1 1,300 6.75%, 8/1/01........... 1,253,443
MBNA Bank, Inc.,
Baa1 100 ++ 6.33%, 8/7/01........... 99,820
Baa1 1,100 ++ 6.50%, 12/10/02......... 1,082,292
Baa1 500 ++ 6.88%, 7/15/04.......... 483,285
------------
4,944,180
------------
CABLE--1.0%
Tele-Communications, Inc.,
Aa3 700 ++ 6.72%, 3/12/01.......... 701,048
------------
FINANCIAL SERVICES--14.7%
Ford Credit Auto Owner Trust,
Aaa 1,300 5.77%, 11/15/01......... 1,293,084
Ford Motor Credit Co.,
A1 1,200 5.75%, 2/23/04.......... 1,139,244
General Motors Acceptance Corp.,
AAA ## 700 ++ 6.34%, 4/5/04........... 698,311
A2 1,300 ++ 6.34%, 4/5/04, (MTN).... 1,296,863
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goldman Sachs Group, L.P.,
A1 $ 1,000 ++ 6.40%, 1/25/01.......... $ 1,001,080
Heller Financial, Inc.,
A3 1,100 ++ 6.46%, 4/28/03.......... 1,106,325
A3 800 ++ 6.50%, 7/22/02.......... 785,504
Lehman Brothers Holdings, Inc.,
A2 1,100 ++ 6.42%, 9/3/02........... 1,101,494
A3 200 ++ 6.98%, 4/1/02........... 200,912
Orix Credit Alliance, Inc.,
Baa1 1,300 ++ 6.79%, 4/16/01.......... 1,296,386
------------
9,919,203
------------
HEALTH CARE--0.7%
Columbia/HCA Healthcare Corp.,
Ba1 450 6.88%, 7/15/01.......... 435,668
------------
INDUSTRIALS--1.0%
Westpoint Stevens, Inc.,
Ba2 700 7.88%, 6/15/05.......... 637,000
------------
OIL & GAS EXPLORATION PRODUCTION--0.8%
R & B Falcon Corp.,
Ba3 600 6.50%, 4/15/03.......... 553,500
------------
RECREATION--1.1%
Green Tree Recreational Equipment,
Aaa 775 6.55%, 7/15/28.......... 766,155
------------
UTILITIES--1.4%
Niagara Mohawk Power Corp.,
Baa1 1,000 6.88%, 3/1/01........... 997,970
------------
Total corporate bonds
(cost $21,868,067).... 21,503,442
------------
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--56.8%
Federal Home Loan Mortgage Corp.,
900 5.50%, 12/31/29......... 792,842
7,300 6.00%, 5/15/28-12/1/29.. 6,609,263
849 6.50%, 9/15/18-12/15/21, (I/O) 92,229
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-81
<PAGE> 193
THE TARGET PORTFOLIO TRUST
TOTAL RETURN BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES (CONT'D.)
Federal Home Loan Mortgage
Corp., (cont'd.)
$ 459 6.90%, 1/1/24........... $ 463,117
1,897 7.20%, 11/1/06.......... 1,884,224
2,109 7.50%, 9/1/16 - 12/1/29. 2,089,297
900 8.00%, 9/15/29.......... 881,299
12 9.25%, 1/1/10........... 12,899
Federal National Mortgage Assn.,
2,300 5.50%, 12/31/29......... 2,023,641
895 5.82%, 5/1/36........... 876,909
1,091 ++ 6.59%, 1/1/20........... 1,111,851
Government National Mortgage Assn.,
1,789 6.38%, 2/20/17 - 2/20/26 1,815,713
4,950 6.50%, 12/15/29......... 4,645,278
1,773 6.75%, 7/20/22 - 7/20/27 1,788,584
10,230 7.00%, 12/15/29......... 9,878,395
3,309 7.50%, 2/15/27 - 12/31/29 3,261,848
------------
Total U.S. government agency
mortgage backed securities
(cost $38,616,475).... 38,227,389
------------
FOREIGN CORPORATE BONDS--2.1%
Hellenic Finance, SCA,
Baa1 700 2.00%, 7/15/03........ 705,250
Petroleos Mexicanos,
Ba2 700 ++ 8.80%, 7/15/05, MTN... 686,875
------------
Total foreign corporate bonds
(cost $1,379,169)..... 1,392,125
------------
COLLATERALIZED MORTGAGE
OBLIGATION--7.5%
Allied Capital Commercial
Mortgage Trust,
AAA ## 683 6.31%, 9/25/03......... 672,190
American Housing Trust 1,
Senior Mortgage Pass
Through Certificate,
Series 1-5 Class A,
Aaa 13 8.63%, 8/25/18.......... 13,076
Champion Home Loan
Equity,
Series 1995, Class
A2-3,
Aaa 469 8.04%, 2/25/28.......... 478,996
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Countrywide Collateralized
Mortgage Obligation,
Aaa $ 30 8.02%, 11/25/24......... $ 30,683
GMAC Commercial Mortgage
Security, Inc.,
Aaa 1,205 6.15%, 5/15/35.......... 1,151,414
Aa2 677 6.81%, 4/15/08.......... 639,064
Residential Asset
Securitization Trust,
Aaa 1,166 6.50%, 10/25/14......... 1,124,201
Vendee Mortgage Trust,
Aaa 1,000 7.00%, 9/1/27........... 928,120
------------
Total collateralized
mortgage obligations
(cost $5,165,220)..... 5,037,744
------------
U.S. GOVERNMENT SECURITIES--7.5%
United States Treasury Bonds,
500 11.25%, 2/15/15......... 706,795
United States Treasury Notes,
318 3.38%, 1/15/07.......... 300,060
3,465 ++ 3.63%, 7/15/02 (TIPS)... 3,429,894
615 3.88%, 1/15/09.......... 594,563
------------
Total U.S. government securities
(cost $5,049,725)..... 5,031,312
------------
FOREIGN GOVERNMENT BONDS--4.3%
New Zealand Gov't. Bonds,
Aaa 300 5.50%, 4/15/03.......... 150,861
Aaa 300 10.00%, 3/15/02......... 167,860
Poland Gov't. Bonds,
Baa1 1,750 3.50%, 10/27/24......... 1,078,000
Republic of Argentina,
Ba2 90,000 5.50%, 3/27/01.......... 869,240
United Mexican States,
Ba2 600 ++ 9.88%, 4/7/04........... 616,500
------------
Total foreign government bonds
(cost $2,745,239)..... 2,882,461
------------
Total long-term investments
(cost $74,823,895).... 74,074,473
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-82
<PAGE> 194
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--33.1%
Corporate Bonds--23.5%
BANKING--4.1%
Capital One Bank,
Baa2 $ 700 6.88%, 4/24/00.......... $ 699,405
Korea Development Bank,
Baa2 2,000 9.60%, 12/1/00.......... 2,032,500
------------
2,731,905
------------
CABLE--0.1%
Tele-Communications, Inc.,
A2 100 6.29%, 2/2/00........... 99,965
------------
Electrical Power--1.9%
Kentucky Power Co.,
Baa2 1,300 7.13%, 11/2/00.......... 1,300,000
------------
Financial Services--6.9%
CBA Delaware Finance, Inc.,
P1 200 5.85%, 4/3/00........... 196,021
General Electric Capital Corp.,
A1+## 900 5.93%, 2/22/00.......... 888,968
KFW International Finance, Inc.,
A1 2,300 5.85%, 3/13/00.......... 2,261,878
US West Capital Funding, Inc.,
A2 1,300 5.90%, 3/24/00.......... 1,281,939
------------
4,628,806
------------
INDUSTRIALS--1.9%
Florida Power Corp.,
P1 200 5.95%, 1/31/00.......... 199,008
Williams Cos., Inc.,
Baa3 1,100 ++ 6.49%, 1/30/00.......... 1,100,341
------------
1,299,349
------------
RAILROADS--1.8%
Union Pacific Railroad Corp.,
Baa2 1,200 ++ 6.35%, 5/22/00.......... 1,197,750
------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
TELECOMMUNICATION SERVICES--6.4%
British Telecommunications
Plc,
P1 $ 3,000 5.84%, 3/1/00........... $ 2,956,200
MCI Worldcom, Inc.,
A2 1,300 6.20%, 1/27/00.......... 1,294,216
------------
4,250,416
------------
UTILITIES--0.4%
Texas Utilities Co.,
A2 300 5.83%, 1/21/00.......... 298,989
------------
Total corporate bonds
(cost $15,852,643)...... 15,807,180
------------
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--7.4%
Federal Home Loan Mortgage Corp.,
1,000 5.00%, 1/10/00.......... 998,611
3,000 5.91%, 1/26/00.......... 2,987,688
1,000 6.27%, 5/18/00.......... 1,000,221
------------
Total U.S. government
agency mortgage backed securities
(cost $4,986,131)..... 4,986,520
------------
U.S. GOVERNMENT SECURITIES--0.6%
United States Treasury Bills,
50 + 4.68%, 2/10/00.......... 49,712
40 + 4.71%, 2/17/00.......... 39,735
190 + 4.81%, 2/17/00.......... 188,739
United States Treasury
Notes,
100 + 5.50%, 2/29/00.......... 100,016
------------
Total U.S. government securities
(cost $378,392) 378,202
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-83
<PAGE> 195
THE TARGET PORTFOLIO TRUST
TOTAL RETURN BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENT--1.6%
$ 1,090 State Street Bank & Trust Co.,
2.50%, dated 12/31/99
due 1/3/00 in the
amount of $1,090,227
(cost $1,090,000,
collateralized by
$1,105,000 U.S.
Treasury Notes,
6.50%, 5/31/01;
value of collateral
including accrued
interest is
$1,114,896)......... $ 1,090,000
------------
Total short-term
investments (cost
$22,307,166)........ 22,261,902
------------
Total Investments, Before
Outstanding
Options Written--143.2%
(cost $97,131,061;
Note 4)............. $ 96,336,375
------------
OUTSTANDING CALL OPTIONS
Contracts WRITTEN*
---------
United States Treasury
Bond Futures,
expiring 2/19/00
60 $98.00.............. (3,750)
OUTSTANDING PUT OPTIONS
WRITTEN*
Eurodollar Futures,
expiring 12/18/00
20 $93.50.............. (29,500)
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
VALUE
CONTRACTS DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------------
<S> <C> <C>
United States Treasury
Bond Futures,
expiring 2/19/00
56 $88.00.............. $ (25,375)
United States Treasury
Bond Futures,
expiring 2/19/00
4 $90.00.............. (4,063)
------------
Total outstanding
options written
(premium received
$48,754)............ (62,688)
------------
TOTAL INVESTMENTS, NET OF
OUTSTANDING
OPTIONS WRITTEN--143.1%
(cost $97,082,756).... 96,273,687
Liabilities in excess of
other assets--(43.1%) (29,004,708)
------------
NET ASSETS--100%...... $ 67,268,979
============
</TABLE>
- ---------------
* Non-income producing securities.
+ Pledged as initial margin on financial futures contracts.
++ Rate shown reflects current rate on variable rate instrument.
## Standard & Poor's Rating.
L.P.--Limited Partnership.
(I/O)--Interest Only.
(MTN)--Medium Term Notes.
(TIPS)--Treasury Inflation Protection Securities.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-84
<PAGE> 196
INTERMEDIATE-TERM BOND PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--94.6%
Corporate Bonds--43.7%
AIRLINES--1.5%
United Airlines, Inc.,
Baa1 $ 1,500 10.85%, 2/19/15....... $ 1,727,280
------------
AUTO & TRUCK--2.0%
Daimlerchrysler N.A. Holding,
A1 2,300 6.67%, 9/25/01........ 2,292,916
------------
BANKING--5.1%
Export-Import Bank Korea,
Baa2 300 6.50%, 11/15/06....... 285,822
Korea Development Bank,
Ba2 2,000 7.125%, 9/17/01....... 1,985,000
MBNA America Bank,
Baa1 2,000 ++ 6.50%, 12/10/02....... 1,967,804
Sumitomo Trust &
Banking Co., Ltd.,
Baa2 1,500 ++ 9.40%, 12/29/49....... 1,485,358
------------
5,723,984
------------
FINANCIAL SERVICES--20.4%
AT&T Capital Corp.,
A1 2,200 ++ 6.35%, 4/9/01......... 2,200,750
Bear Stearns Co., Inc.,
A2 3,400 ++ 6.63%, 11/30/04....... 3,396,812
Chase Manhattan Corp.,
A1 500 7.625%, 1/15/03....... 506,865
Ford Motor Credit Co.,
A1 1,100 ++ 6.45%, 7/16/02........ 1,104,642
Fugi JGB Investment, LLC.,
Ba1 300 ++ 9.87%, 12/29/49....... 297,794
General Motors Acceptance Corp.,
A2 2,100 ++ 6.34%, 4/5/04......... 2,094,933
Goldman Sachs Group, L.P.,
A1 1,900 ++ 6.40%, 1/25/01........ 1,902,052
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Heller Financial Inc.,
A3 $ 1,900 ++ 6.46%, 4/28/03......... $ 1,910,925
Household Finance Corp.,
A2 3,300 ++ 6.51%, 8/6/02.......... 3,316,863
Lehman Brothers Holdings, Inc.,
A3 1,500 ++ 6.42%, 9/3/02.......... 1,502,037
A3 700 ++ 6.98%, 4/2/02.......... 703,191
Orix Credit Alliance Inc.,
Baa2 2,100 6.785%, 4/16/01........ 2,094,162
Transamerica Finance Corp.,
A3 2,000 ++ 6.37%, 12/14/01........ 2,001,140
------------
23,032,166
------------
HEALTH CARE SERVICES--1.0%
Columbia/HCA Healthcare Corp.,
Ba2 300 6.91%, 6/15/05......... 274,500
Hospital Corp.,
Ba2 1,000 Zero Coupon, 6/1/01.... 878,450
------------
1,152,950
------------
INDUSTRIALS--6.0%
Cox Communications, Inc.,
Baa2 300 ++ 6.15%, 8/1/03.......... 287,256
Golden State Holdings,
Ba1 1,800 6.75%, 8/1/01.......... 1,735,536
Ba1 400 ++ 7.21%, 8/1/03.......... 381,274
KPNQwest N.V.,
Ba1 1,500 8.125%, 6/1/09......... 1,447,500
Nuevo Grupo Iusacell S.A.,
B1 1,250 14.25%, 12/1/06........ 1,296,875
TCI Communications, Inc.,
A2 400 ++ 6.72%, 3/12/01......... 400,599
Westpoint Stevens Inc.,
Ba3 1,300 7.875%, 6/15/05........ 1,183,000
------------
6,732,040
------------
PETROLEUM SERVICES--1.4%
Occidental Petroleum Corp.,
Baa3 1,600 ++ 6.40%, 4/1/03.......... 1,542,624
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-85
<PAGE> 197
THE TARGET PORTFOLIO TRUST
INTERMEDIATE-TERM BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--0.2%
International Game Technology,
Ba1 $ 200 7.875%, 5/15/04....... $ 193,000
------------
UTILITIES--6.1%
Niagara Mohawk Power Corp.,
Baa2 2,000 6.875%, 3/1/01........ 1,995,940
Texas Utilities Co.,
Baa3 3,000++ 5.94%, 10/15/01....... 2,949,060
Baa3 2,000++ 6.50%, 8/16/02........ 1,978,026
------------
6,923,026
------------
Total corporate bonds (cost
$49,768,533)........ 49,319,986
------------
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--30.4%
Federal Home Loan Mortgage Corp.,
4,400 5.50%, 12/31/29....... 3,876,114
147 6.00%, 4/1/24......... 135,366
815 6.00%, 12/1/26........ 749,317
6,420 6.00%, 12/1/29........ 5,876,290
1,408 6.50%, 9/15/18 - 12/15/21 (I/O) 153,206
3,260 7.50%, 12/1/29........ 3,226,389
63 9.25%, 1/1/10......... 65,142
Federal National Mortgage Assn.,
133 5.812%, 12/1/30....... 130,118
330 6.00%, 12/25/08....... 327,603
1,819 6.50%, 9/1/05......... 1,796,409
561 6.50%, 8/1/24......... 555,160
877 6.796%, 7/1/25........ 897,595
Government National Mortgage Assn.,
703 6.125%, 10/20/24...... 715,107
2,909 6.375%, 5/20/23 - 2/20/26 2,949,549
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage Assn.,
$ 5,300 6.50%, 12/15/29........ $ 4,973,732
5,000 7.00%, 12/15/29........ 4,828,150
1,000 7.50%, 12/31/29........ 985,630
2,026 8.50%, 3/20/25......... 2,087,641
------------
Total U.S. government
agency mortgage backed
securities (cost
$34,609,712)......... 34,328,518
------------
FOREIGN CORPORATE BONDS--1.9%
Hellenic Finance S.C.A.,
A2 EURO1,200 2.00%, 7/15/03......... 1,209,000
Petroleos Mexicanos,
Ba2 $ 1,000 8.80%, 7/15/05, MTN.... 981,250
------------
Total foreign corporate
bonds (cost $2,180,991) 2,190,250
------------
COLLATERALIZED MORTGAGE
OBLIGATIONS--8.9%
Champion Home Loan Equity,
Aaa 704 8.57%, 2/25/28......... 718,494
Countrywide Collateralized
Mortgage Obligation,
Aa1 30 8.02%, 11/25/24........ 30,683
EQCC Home Equity Loan Trust,
Aaa 3,000 5.765%, 3/20/29........ 2,917,031
Ford Credit Auto Owner Trust,
Aaa 2,100 5.77%, 11/15/01........ 2,088,828
Residential Accredit Loans Inc.,
AAA ## 3,000 7.25%, 6/25/27......... 2,913,405
Residential Asset Securities Corp.,
Aaa 414 ++ 6.78%, 10/25/27........ 411,993
Southern Pacific Secured
Assets Corp.,
Aaa 962 ++ 6.64%, 6/25/28......... 955,028
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-86
<PAGE> 198
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total collateralized
mortgage obligations
(cost $10,273,977).... $ 10,035,462
------------
FOREIGN GOVERNMENT BONDS--2.9%
New Zealand Gov't. Bonds,
Aaa NZD 600 5.50%, 4/15/03........ 301,721
Aaa 600 10.00%, 3/15/02....... 335,720
Republic of Argentina,
Ba3 (YEN)150,000 5.50%, 3/27/01........ 1,448,734
United Mexican States,
NR $ 1,200 ++ 9.88%, 4/7/04......... 1,233,000
------------
Total foreign government bonds
(cost $3,059,421)..... 3,319,175
------------
U.S. GOVERNMENT SECURITIES--6.8%
United States Treasury Notes,
531 3.375%, 1/15/07....... 500,100
5,564 3.625%, 7/15/02 (TIPS) 5,508,074
1,353 3.625%, 1/15/08....... 1,288,686
United States Treasury Bonds,
300 11.125%, 8/15/03...... 343,875
------------
Total U.S. government
securities (cost $7,659,971) 7,640,735
------------
Total long-term investments
(cost $107,552,605).... 106,834,126
------------
SHORT-TERM INVESTMENTS--29.7%
CORPORATE BONDS--25.3%
BANKING--1.4%
MNBA America Bank,
Baa1 1,000 ++ 6.37%, 4/13/00........ 999,890
Oesterreichische,
NR 600 5.93%, 1/18/00........ 598,035
------------
1,597,925
------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL SERVICES--8.9%
Banco Latino America,
Baa1 $ 1,800 6.31%, 4/10/00......... $ 1,795,500
Capital One Bank,
Baa2 2,000 8.125%, 3/1/00......... 2,004,160
General Electric Capital Corp.,
A1 2,700 5.93%, 2/22/00......... 2,666,015
KFW International
Finance, Inc.,
A1 900 5.82%, 2/17/00......... 889,803
PaineWebber Group, Inc.,
Baa1 2,000 ++ 6.72%, 11/27/00........ 2,004,360
US West Capital Funding Inc.,
A1 700 5.957%, 3/24/00........ 690,043
------------
10,049,881
------------
INDUSTRIALS--8.3%
Illinois Tool Works Inc.,
A1 3,600 6.01%, 1/31/00......... 3,580,768
TCI Communications, Inc.,
A2 1,800 6.46%, 3/6/00.......... 1,801,584
Union Pacific Corp.,
NR 2,000 5.95%, 5/22/00......... 1,996,250
Williams Companies, Inc.,
NR 2,000 ++ 6.49%, 1/30/00......... 2,000,620
------------
9,379,222
------------
TELECOMMUNICATION SERVICES--1.9%
MCI Worldcom Inc.,
A2 2,200 5.36%, 1/27/00......... 2,189,557
------------
UTILITIES--4.8%
Florida Power Corp.,
A1 5,000 5.95%, 2/9/00.......... 4,960,656
Texas Utilities Co.,
A2 500 5.24%, 1/21/00......... 498,170
------------
5,458,826
------------
Total corporate bonds
(cost $28,713,209)..... 28,675,411
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-87
<PAGE> 199
THE TARGET PORTFOLIO TRUST
INTERMEDIATE-TERM BOND PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE
BACKED SECURITIES--3.4%
Federal Home Loan
Mortgage Corp.,
$ 1,800 5.00%, 1/10/00......... $ 1,797,000
2,000 ++ 6.27%, 5/18/00......... 2,000,442
------------
Total U.S. government
agency mortgage
backed securities
(cost $3,797,136)...... 3,797,442
------------
U.S. Government Securities--0.4%
United States Treasury Bills,
10 + 4.71%, 2/17/00......... 9,932
United States Treasury Notes,
500 + 5.50%, 2/29/00......... 500,080
------------
Total U.S. government
securities
(cost $510,394)........ 510,012
------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT--0.6%
$ 690 State Street Bank & Trust Co.,
2.00%, dated 12/31/99
due 1/3/00 in the
amount of $690,115
(cost $690,000,
collateralized by
$700,000 U.S.
Treasury Notes,
6.500%, 5/31/01;
value of collateral
including accrued
interest is
$706,125).............. $ 690,000
------------
Total short-term investments
(cost $33,710,739)... 33,672,865
------------
TOTAL INVESTMENTS--124.3%
(cost $141,263,344;
Note 4).............. 140,506,991
Liabilities in excess
of other assets--(24.3%) (27,515,979)
------------
NET ASSETS--100%....... $112,991,012
============
</TABLE>
- ---------------
+-- Pledged as initial margin on financial futures contracts.
++--Rate shown reflects current rate on variable rate instrument.
##--Standard & Poor's Rating.
LLC--Limited Liability Company.
L.P.--Limited Partnership.
S.A.--Sociedad Anonima (Spanish Corporation).
(I/O)--Interest Only.
(MTN)--Medium Term Notes.
(TIPS)--Treasury Inflation Protection Securities.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-88
<PAGE> 200
MORTGAGE BACKED SECURITIES PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS--99.2%
COLLATERALIZED MORTGAGE OBLIGATION--28.1%
Chase Commercial Mortgage
Securities Corp.,
$ 1,000 7.37%, 2/19/07.............. $ 991,045
Federal Home Loan Mortgage Corp.,
187 5.50%, 8/15/21, PAC......... 176,386
117 5.80%, 8/15/19, PAC......... 116,685
100 5.95%, 6/15/19, PAC......... 98,562
3,016 6.00%, 5/15/08 - 5/15/23.... 2,833,488
1,560 6.50%, 8/15/06 - 11/15/22, PAC 1,495,882
359 7.00%, 3/15/23, PAC......... 344,974
128 7.25%, 1/15/07, PAC......... 127,890
2,985 7.50%, 6/15/22, PAC I/O..... 281,914
1,606 8.00%, 8/15/04 - 7/15/21.... 1,621,280
611 9.00%, 6/01/09 - 10/15/20... 631,441
Federal National Mortgage Assn.,
1,023 5.00%, 3/25/21, PAC......... 949,236
614 5.666%, 1/25/09............. 613,031
1,722 6.00%, 4/25/08 - 10/25/22... 1,598,844
800 6.25%, 1/25/09, PAC......... 769,248
654 6.50%, 12/25/19 - 12/25/23, PAC 593,037
1,495 7.00%, 9/25/19 - 9/25/20, PAC I/O 302,711
790 7.385%, 3/25/21............. 785,514
775 7.50%, 5/25/07 - 7/25/22.... 760,663
683 8.00%, 8/25/06 - 5/25/24.... 688,983
577 8.50%, 7/25/18 - 6/25/21.... 587,874
First Boston Mortgage Securities,
1,078 Zero Coupon, 4/25/17, P/O..... 576,969
765 6.96%, 6/20/29.............. 761,061
First Union-Lehman Brothers
Commerical Mortgage,
1,000 6.60%, 5/18/07.............. 967,969
Salomon Brothers Mortgage Securities,
239 6.00%, 12/26/11............. 234,380
-----------
Total collateralized
mortgage obligation
(cost $18,920,619).......... 18,909,067
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AGENCY MORTGAGE
PASS-THROUGH OBLIGATIONS--66.7%
Federal Home Loan Mortgage Corp.,
$ 280 6.00%, 5/01/11............... $ 267,370
296 6.50%, 2/01/04............... 292,521
9 7.25%, 7/01/06............... 8,441
88 7.50%, 3/01/08............... 87,656
50 8.25%, 12/01/05 - 5/01/08.... 50,224
194 8.50%, 6/01/03 - 7/01/21..... 198,432
114 8.75%, 12/01/08.............. 117,396
248 9.00%, 1/01/02 - 10/01/05.... 256,338
18 10.00%, 1/01/04.............. 17,875
47 10.50%, 11/01/19............. 50,632
39 11.50%, 3/01/16.............. 42,268
17 12.75%, 11/01/13............. 17,944
24 13.25%, 5/01/13.............. 26,559
5 14.00%, 6/01/11.............. 5,388
Federal National Mortgage Assn.,
998 5.50%, 2/01/29 - 6/01/29..... 885,423
855 6.00%, 5/25/10 - 8/01/11..... 816,055
89 6.18%, 7/01/08............... 82,606
49 6.295%, 6/01/08.............. 46,227
78 6.30%, 1/01/08............... 73,853
73 6.34%, 1/01/08............... 68,804
53 6.39%, 1/01/06............... 50,669
78 6.43%, 1/01/08............... 74,411
495 6.447%, 1/01/08.............. 470,209
315 6.527%, 5/25/30.............. 292,088
645 6.55%, 9/01/07............... 617,616
54 6.812%, 10/01/07............. 52,461
568 6.981%, 6/01/07.............. 557,244
1,938 7.00%, 4/01/29 - 12/01/29.... 1,874,210
313 7.024%, 6/01/07.............. 309,531
610 7.04%, 3/01/07............... 600,777
63 7.28%, 10/01/06.............. 63,131
257 7.50%, 2/01/20............... 256,192
96 7.75%, 10/01/19.............. 95,590
746 8.00%, 3/01/07 - 12/01/22.... 759,817
1,029 8.50%, 1/01/07 - 6/01/10..... 1,051,047
155 9.75%, 8/01/10 - 11/01/16.... 163,076
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-89
<PAGE> 201
THE TARGET PORTFOLIO TRUST
MORTGAGE BACKED SECURITIES PORTFOLIO (CONT'D)
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------
<S> <C> <C>
Government National Mortgage Assn.,
$ 6,377 6.50%, 5/15/23 - 8/15/29.... $ 5,995,165
10,562 7.00%, 7/15/16 - 6/15/29.... 10,223,247
12,981 7.50%, 3/15/07 - 8/15/29.... 12,897,942
930 8.00%, 1/15/08 - 5/15/17.... 949,934
712 8.25%, 6/20/17 - 7/20/17.... 719,280
194 8.50%, 3/15/05 - 4/20/17.... 201,032
2,244 9.00%, 10/20/01 - 1/15/20... 2,366,071
676 9.50%, 9/15/02 - 1/15/21.... 719,409
1 13.00%, 2/15/11............. 551
43 13.50%, 6/15/10 - 5/15/11... 49,307
69 14.00%, 6/15/11 - 4/15/12... 80,527
26 16.00%, 4/15/12 - 5/15/12... 31,095
-----------
Total U.S. government agency
mortgage pass-through obligations
(cost $46,020,688).......... 44,933,641
-----------
U.S. GOVERNMENT SECURITIES--4.4%
United States Treasury Bonds,
600 8.125%, 8/15/19............. 683,718
1,000 8.875%, 2/15/19............. 1,217,190
820 12.00%, 8/15/13............. 1,094,954
-----------
Total U.S. government securities
(cost $3,162,969)........... 2,995,862
-----------
Total long-term investments
(cost $68,104,276).......... 66,838,570
-----------
SHORT-TERM INVESTMENTS--0.7%
U.S. GOVERNMENT SECURITY--0.7%
United States Treasury Bond,
482 2.80%, 1/03/00
(cost $482,000)............. 482,000
-----------
TOTAL INVESTMENTS--99.9%
(cost $68,586,276; Note 4).. 67,320,570
Other assets in excess of
liabilities--0.1%........... 51,037
-----------
NET ASSETS--100%.............. $67,371,607
===========
</TABLE>
- ---------------
I/O--Interest Only Security.
PAC--Planned Amortization Class.
P/O--Principal Only.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-90
<PAGE> 202
U.S. GOVERNMENT MONEY MARKET PORTFOLIO
Portfolio of Investments December 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
FEDERAL FARM CREDIT BANK--5.8%
$ 5,000 4.82%, 3/11/00................ $ 4,999,533
------------
FEDERAL HOME LOAN BANK--62.8%
5,000 4.90%, 1/14/00................ 4,999,989
3,000 4.835%, 1/28/00............... 2,999,858
5,000 4.895%, 2/4/00................ 4,999,860
25,000 5.48%, 2/9/00................. 24,851,583
3,000 4.80%, 4/5/00................. 2,999,618
5,000 5.92%, 10/4/00................ 4,994,851
5,000 5.32%, 10/25/00............... 4,995,184
3,000 5.90%, 12/20/00............... 2,996,373
------------
53,837,316
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--17.4%
5,000 5.97%, 2/4/00................. 4,998,230
5,000 5.25%, 6/15/00................ 4,878,958
5,000 5.93%, 11/13/00............... 4,996,329
------------
14,873,517
------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT--15.4%
$ 13,234 Paribas, 2.80%, dated
12/31/99 due 1/3/00 in the
amount of $13,237,088 (cost
$13,234,000; collateralized
by $13,465,000 U.S.
Treasury Notes, 4.50%,
1/31/01; value of
collateral including
accrued interest -
$13,493,906)................. $13,234,000
-----------
TOTAL INVESTMENTS--101.4%
(amortized cost $86,944,366*).. 86,944,366
Liabilities in excess of
other assets--(1.4%)......... (1,221,961)
-----------
NET ASSETS--100%............... $85,722,405
===========
</TABLE>
- ---------------
* Federal income tax basis of portfolio securities is the same as for financial
reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
B-91
<PAGE> 203
THE TARGET PORTFOLIO TRUST
Statements of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
SMALL
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO VALUE PORTFOLIO
<S> <C> <C> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
Investments, at value* $515,565,783 $261,826,161 $186,582,735 $126,737,855
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Cash 781 6,667 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Foreign currency, at value
(cost $561,124; $28,852; $43,074) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 734,105 470,002 424,795 269,799
- ------------------------------------------------------------------------------------------------------------------------------
Receivable for investments sold -- -- -- 827,167
- ------------------------------------------------------------------------------------------------------------------------------
Dividends and interest receivable 139,634 573,747 64,175 154,157
- ------------------------------------------------------------------------------------------------------------------------------
Due from Manager -- -- -- 10,420
- ------------------------------------------------------------------------------------------------------------------------------
Deferred expenses and other assets 6,616 5,584 3,439 2,926
- ------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts - net
amount receivable from
counterparties -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 516,446,919 262,882,161 187,075,144 128,002,324
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
Foreign currency bank overdraft
(cost $385,789) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Bank overdraft -- -- -- 648,177
- ------------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Payable for Fund shares reacquired 676,375 539,967 334,700 191,480
- ------------------------------------------------------------------------------------------------------------------------------
Accrued expenses and other
liabilities 54,188 46,744 41,420 144,744
- ------------------------------------------------------------------------------------------------------------------------------
Dividends payable -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding options written
(premium received $48,754) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Withholding taxes payable -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Deferred trustees' fees -- 8,663 8,116 7,924
- ------------------------------------------------------------------------------------------------------------------------------
Due to Manager 246,078 130,375 87,705 --
- ------------------------------------------------------------------------------------------------------------------------------
Due to broker-variation margin
payable -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Forward currency contracts - Net
amount payable from counterparties -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 976,641 725,749 471,941 992,325
NET ASSETS $515,470,278 $262,156,412 $186,603,203 $127,009,999
- ------------------------------------------------------------------------------------------------------------------------------
Net assets were comprised of:
Shares of beneficial interest,
at par $ 20,073 $ 20,145 $ 10,679 $ 8,485
- ------------------------------------------------------------------------------------------------------------------------------
Paid-in capital, in excess of
par 235,998,606 226,500,337 131,665,083 110,980,587
- ------------------------------------------------------------------------------------------------------------------------------
236,018,679 226,520,482 131,675,762 110,989,072
Under (over) distribution of net
investment income (loss) -- -- -- 7,255
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated net realized gains
(losses) 2,588,787 6,913,119 16,042,725 1,021,631
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized
appreciation/depreciation 276,862,812 28,722,811 38,884,716 14,992,041
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, December 31, 1999 $515,470,278 $262,156,412 $186,603,203 $127,009,999
- ------------------------------------------------------------------------------------------------------------------------------
Shares of beneficial interest
issued and outstanding 20,073,301 20,144,558 10,678,755 8,485,456
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, offering price
and redemption price per share $ 25.68 $ 13.01 $ 17.47 $ 14.97
- ------------------------------------------------------------------------------------------------------------------------------
*Identified cost of investments $238,702,971 $233,103,350 $147,698,019 $111,745,814
</TABLE>
See Notes to Financial Statements
B-92
<PAGE> 204
<TABLE>
<CAPTION>
INTERNATIONAL U.S. GOVERNMENT
EQUITY INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED MONEY
PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO MARKET PORTFOLIO
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
$ 275,083,214 $ 25,974,426 $ 96,336,375 $ 140,506,991 $ 67,320,570 $ 73,710,366
- -----------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- 13,234,000
- -----------------------------------------------------------------------------------------------------------------------------
213,830 -- 429 223 750 --
- -----------------------------------------------------------------------------------------------------------------------------
-- 572,974 29,319 43,778 -- --
- -----------------------------------------------------------------------------------------------------------------------------
359,462 64,356 184,467 204,598 98,253 3,217,467
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 3,166,500 989,531 -- --
- -----------------------------------------------------------------------------------------------------------------------------
413,380 765,532 674,148 1,122,351 518,886 489,682
- -----------------------------------------------------------------------------------------------------------------------------
-- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
5,348 805 1,324 610 1,752 1,910
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 39,899 1,590 -- --
- -----------------------------------------------------------------------------------------------------------------------------
276,075,234 27,378,093 100,432,461 142,869,672 67,940,211 90,653,425
- -----------------------------------------------------------------------------------------------------------------------------
381,179 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
-- 680,178 -- -- -- 1,627
- -----------------------------------------------------------------------------------------------------------------------------
132,899 -- 32,162,965 28,730,131 -- --
- -----------------------------------------------------------------------------------------------------------------------------
274,086 55,126 745,773 993,287 435,400 4,781,038
- -----------------------------------------------------------------------------------------------------------------------------
110,536 107,845 74,700 24,514 87,277 96,791
- -----------------------------------------------------------------------------------------------------------------------------
-- 20,964 10,313 17,953 12,251 10,391
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 62,688 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
14,759 5,032 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
8,635 5,940 7,596 7,842 7,596 8,307
- -----------------------------------------------------------------------------------------------------------------------------
156,557 11,433 26,143 43,551 26,080 32,866
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 33,125 61,382 -- --
- -----------------------------------------------------------------------------------------------------------------------------
-- -- 40,179 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
1,078,651 886,518 33,163,482 29,878,660 568,604 4,931,020
$ 274,996,583 $ 26,491,575 $ 67,268,979 $ 112,991,012 $ 67,371,607 $ 85,722,405
- -----------------------------------------------------------------------------------------------------------------------------
$ 15,835 $ 3,123 $ 6,824 $ 11,392 $ 6,757 $ 85,722
- -----------------------------------------------------------------------------------------------------------------------------
196,021,061 28,676,992 71,021,561 117,272,549 69,271,991 85,636,683
- -----------------------------------------------------------------------------------------------------------------------------
196,036,896 28,680,115 71,028,385 117,283,941 69,278,748 85,722,405
(2,469,090) (118,673) 107,366 (19,543) 95,753 --
- -----------------------------------------------------------------------------------------------------------------------------
2,538,096 (277,331) (2,877,563) (3,246,256) (737,188) --
- -----------------------------------------------------------------------------------------------------------------------------
78,890,681 (1,792,536) (989,209) (1,027,130) (1,265,706) --
- -----------------------------------------------------------------------------------------------------------------------------
$ 274,996,583 $ 26,491,575 $ 67,268,979 $ 112,991,012 $ 67,371,607 $ 85,722,405
- -----------------------------------------------------------------------------------------------------------------------------
15,834,915 3,123,086 6,824,232 11,392,442 6,757,009 85,722,405
- -----------------------------------------------------------------------------------------------------------------------------
$ 17.37 $ 8.48 $ 9.86 $ 9.92 $ 9.97 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------------
$ 196,186,979 $ 27,761,696 $ 97,131,061 $ 141,263,344 $ 68,586,276 $ 86,944,366
</TABLE>
See Notes to Financial Statements
B-93
<PAGE> 205
THE TARGET PORTFOLIO TRUST
Statements of Operations
For The Year Ended December 31, 1999
<TABLE>
<CAPTION>
SMALL
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO VALUE PORTFOLIO
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Income
Interest $ 398,163 $ 213,843 $ 241,278 $ 193,643
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends 1,585,791 6,729,888 277,142 1,895,518
- ----------------------------------------------------------------------------------------------------------------------------------
Less: Foreign withholding taxes -- (34,939) -- (13)
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 1,983,954 6,908,792 518,420 2,089,148
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses
Management fee 2,315,968 1,679,401 903,559 774,461
- ----------------------------------------------------------------------------------------------------------------------------------
Custodian's fees and expenses 99,000 106,000 100,000 121,000
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer agent's fees and expenses 122,000 120,000 114,000 111,000
- ----------------------------------------------------------------------------------------------------------------------------------
Registration fees 19,000 32,000 22,000 30,000
- ----------------------------------------------------------------------------------------------------------------------------------
Reports to shareholders 30,000 71,000 33,000 20,000
- ----------------------------------------------------------------------------------------------------------------------------------
Audit fees and expenses 13,500 13,500 13,500 13,500
- ----------------------------------------------------------------------------------------------------------------------------------
Legal fees and expenses 10,000 10,000 10,000 10,000
- ----------------------------------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 1,800 1,800 1,800 1,800
- ----------------------------------------------------------------------------------------------------------------------------------
Amortization of organization
expenses -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous 1,782 6,508 1,069 755
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 2,613,050 2,040,209 1,198,928 1,082,516
- ----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (629,096) 4,868,583 (680,508) 1,006,632
- ----------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on:
Investment transactions 39,273,492 34,792,274 38,143,040 1,354,411
- ----------------------------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign currency transactions -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Options written -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Swaps -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN (LOSS) 39,273,492 34,792,274 38,143,040 1,354,411
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized
appreciation/depreciation on:
Investments 142,004,420 (51,549,029) 4,193,728 (1,250,361)
- ----------------------------------------------------------------------------------------------------------------------------------
Financial futures contracts -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Foreign currencies -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Options written -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION 142,004,420 (51,549,029) 4,193,728 (1,250,361)
- ----------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) 181,277,912 (16,756,755) 42,336,768 104,050
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $180,648,816 $(11,888,172) $ 41,656,260 $ 1,110,682
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-94
<PAGE> 206
<TABLE>
<CAPTION>
INTERNATIONAL U.S. GOVERNMENT
EQUITY INTERNATIONAL TOTAL RETURN INTERMEDIATE-TERM MORTGAGE BACKED MONEY
PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO SECURITIES PORTFOLIO MARKET PORTFOLIO
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
$ 458,469 $ 1,355,960 $4,188,480 $ 6,824,420 $4,996,501 $9,970,017
- -----------------------------------------------------------------------------------------------------------------------
5,569,631 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
(648,251) (7,089) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
5,379,849 1,348,871 4,188,480 6,824,420 4,996,501 9,970,017
- -----------------------------------------------------------------------------------------------------------------------
1,723,039 146,497 296,600 487,094 316,095 492,130
- -----------------------------------------------------------------------------------------------------------------------
299,000 115,000 115,000 110,000 130,000 71,000
- -----------------------------------------------------------------------------------------------------------------------
114,000 37,000 50,000 60,000 55,000 46,000
- -----------------------------------------------------------------------------------------------------------------------
51,000 6,000 24,000 19,000 13,000 180,000
- -----------------------------------------------------------------------------------------------------------------------
68,000 31,000 26,000 25,000 20,000 30,000
- -----------------------------------------------------------------------------------------------------------------------
20,000 13,500 13,500 13,500 13,500 5,000
- -----------------------------------------------------------------------------------------------------------------------
10,000 10,000 10,000 10,000 10,000 10,000
- -----------------------------------------------------------------------------------------------------------------------
1,800 1,800 1,800 1,800 1,800 1,800
- -----------------------------------------------------------------------------------------------------------------------
-- 3,949 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
8,222 1,095 3,324 3,316 2,874 2,226
- -----------------------------------------------------------------------------------------------------------------------
2,295,061 365,841 540,224 729,710 562,269 838,156
- -----------------------------------------------------------------------------------------------------------------------
3,084,788 983,030 3,648,256 6,094,710 4,434,232 9,131,861
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
23,216,539 (277,331) (1,590,540) (1,734,014) (255,531) 2,539
- -----------------------------------------------------------------------------------------------------------------------
-- -- (1,237,059) (1,384,753) (1,103) --
- -----------------------------------------------------------------------------------------------------------------------
(420,857) (302,889) (28,829) (106,985) -- --
- -----------------------------------------------------------------------------------------------------------------------
-- -- -- 79,748 -- --
- -----------------------------------------------------------------------------------------------------------------------
-- -- -- 63,771 -- --
- -----------------------------------------------------------------------------------------------------------------------
22,795,682 (580,220) (2,856,428) (3,082,233) (256,634) 2,539
- -----------------------------------------------------------------------------------------------------------------------
29,670,863 (2,113,675) (1,226,685) (1,440,812) (3,075,447) --
- -----------------------------------------------------------------------------------------------------------------------
-- -- (38,208) (171,996) -- --
- -----------------------------------------------------------------------------------------------------------------------
(37,672) (6,806) 3,335 6,738 -- --
- -----------------------------------------------------------------------------------------------------------------------
-- -- (14,212) (309) -- --
- -----------------------------------------------------------------------------------------------------------------------
29,633,191 (2,120,481) (1,275,770) (1,606,379) (3,075,447) --
- -----------------------------------------------------------------------------------------------------------------------
52,428,873 (2,700,701) (4,132,198) (4,688,612) (3,332,081) 2,539
- -----------------------------------------------------------------------------------------------------------------------
$55,513,661 $ (1,717,671) $ (483,942) $ 1,406,098 $1,102,151 $9,134,400
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-95
<PAGE> 207
THE TARGET PORTFOLIO TRUST
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
LARGE CAPITALIZATION LARGE CAPITALIZATION SMALL CAPITALIZATION
GROWTH PORTFOLIO VALUE PORTFOLIO GROWTH PORTFOLIO
----------------------------- ----------------------------- -----------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------- -----------------------------
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment
income (loss) $ (629,096) $ (137,759) $ 4,868,583 $ 4,653,175 $ (680,508) $ (561,626)
- ------------------------------------------------------------------------------------------------------------------------
Net realized gain
(loss) on
investment and
foreign currency
transactions 39,273,492 35,920,680 34,792,274 30,983,706 38,143,040 2,228,053
- ------------------------------------------------------------------------------------------------------------------------
Net change in
unrealized
appreciation/
depreciation of
investments 142,004,420 67,508,676 (51,549,029) (9,079,959) 4,193,728 1,353,560
- ------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets
resulting from
operations 180,648,816 103,291,597 (11,888,172) 26,556,922 41,656,260 3,019,987
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income -- -- (5,225,370) (4,404,065) -- --
- ------------------------------------------------------------------------------------------------------------------------
Dividends in excess
of net investment
income -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Distributions from
net
realized gains (43,879,009) (21,568,633) (32,765,017) (27,679,090) (20,559,728) (6,691,785)
- ------------------------------------------------------------------------------------------------------------------------
Tax return of
capital
distributions -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (43,879,009) (21,568,633) (37,990,387) (32,083,155) (20,559,728) (6,691,785)
- ------------------------------------------------------------------------------------------------------------------------
FUND SHARE
TRANSACTIONS(a)
Net proceeds from
shares sold 114,931,932 61,539,874 77,536,152 61,726,845 54,990,278 47,314,663
- ------------------------------------------------------------------------------------------------------------------------
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions 42,595,350 21,112,171 36,982,534 31,419,758 19,982,699 6,560,196
- ------------------------------------------------------------------------------------------------------------------------
Cost of shares
reacquired (108,629,468) (78,466,932) (85,971,350) (79,225,934) (68,448,742) (57,118,761)
- ------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in net
assets from Fund
share
transactions 48,897,814 4,185,113 28,547,336 13,920,669 6,524,235 (3,243,902)
- ------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) 185,667,621 85,908,077 (21,331,223) 8,394,436 27,620,767 (6,915,700)
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Beginning of year 329,802,657 243,894,580 283,487,635 275,093,199 158,982,436 165,898,136
- ------------------------------------------------------------------------------------------------------------------------
End of year(b) $515,470,278 $329,802,657 $262,156,412 $283,487,635 $186,603,203 $158,982,436
- ------------------------------------------------------------------------------------------------------------------------
(a) Fund share
transactions
are at $1 per
share for the
U.S. Government
Money Market
Portfolio.
(b) Includes
undistributed net
investment income
of $ -- $ -- $ -- $ 331,461 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO
-------------------------------
Year Ended December 31,
-------------------------------
1999 1998
<S> <C> <C>
INCREASE (DECREASE)
IN NET ASSETS
- ------------------------------------------------------
OPERATIONS
Net investment
income (loss) $ 1,006,632 $ 745,060
- ------------------------------------------------------
Net realized gain
(loss) on
investment and
foreign currency
transactions 1,354,411 11,100,287
- ------------------------------------------------------
Net change in
unrealized
appreciation/
depreciation of
investments (1,250,361) (23,613,476)
- ------------------------------------------------------
Net increase
(decrease) in net
assets
resulting from
operations 1,110,682 (11,768,129)
- ------------------------------------------------------
DIVIDENDS AND
DISTRIBUTIONS
Dividends from net
investment income (1,036,917) (616,180)
- ------------------------------------------------------
Dividends in excess
of net investment
income -- --
- ------------------------------------------------------
Distributions from
net
realized gains (845,701) (11,204,352)
- ------------------------------------------------------
Tax return of
capital
distributions -- --
- ------------------------------------------------------
Total distributions (1,882,618) (11,820,532)
- ------------------------------------------------------
FUND SHARE
TRANSACTIONS(a)
Net proceeds from
shares sold 43,989,353 51,340,282
- ------------------------------------------------------
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions 1,831,438 11,566,933
- ------------------------------------------------------
Cost of shares
reacquired (59,596,106) (61,175,473)
- ------------------------------------------------------
Net increase
(decrease) in net
assets from Fund
share
transactions (13,775,315) 1,731,742
- ------------------------------------------------------
Total increase
(decrease) (14,547,251) (21,856,919)
NET ASSETS
- ------------------------------------------------------
Beginning of year 141,557,250 163,414,169
- ------------------------------------------------------
End of year(b) $127,009,999 $ 141,557,250
- ------------------------------------------------------
(a) Fund share
transactions
are at $1 per
share for the
U.S. Government
Money Market
Portfolio.
(b) Includes
undistributed net
investment income
of $ 13,760 $ 44,045
- ------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-96
<PAGE> 208
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY BOND TOTAL RETURN INTERMEDIATE-TERM
PORTFOLIO PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
- ------------------------------ ----------------------------- ----------------------------- ----------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31, Year Ended December 31,
- ------------------------------ ----------------------------- ----------------------------- ----------------------------
1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3,084,788 $ 3,498,986 $ 983,030 $ 1,037,980 $ 3,648,256 $ 3,420,783 $ 6,094,710 $ 5,778,552
- -----------------------------------------------------------------------------------------------------------------------------------
22,795,682 19,004,639 (580,220) 733,885 (2,856,428) 2,090,996 (3,082,233) 1,734,284
- -----------------------------------------------------------------------------------------------------------------------------------
29,633,191 13,769,545 (2,120,481) 768,892 (1,275,770) (641,674) (1,606,379) (424,161)
- -----------------------------------------------------------------------------------------------------------------------------------
55,513,661 36,273,170 (1,717,671) 2,540,757 (483,942) 4,870,105 1,406,098 7,088,675
- -----------------------------------------------------------------------------------------------------------------------------------
(3,084,788) (1,532,425) (728,282) (1,037,980) (3,649,343) (3,376,862) (5,989,108) (5,900,704)
- -----------------------------------------------------------------------------------------------------------------------------------
(2,677,890) -- (15,039) (211,923) -- -- (123,288) --
- -----------------------------------------------------------------------------------------------------------------------------------
(18,824,138) (12,786,060) (533,458) (129,221) -- (2,089,757 ) -- (1,685,532)
- -----------------------------------------------------------------------------------------------------------------------------------
-- -- (357,823) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
(24,586,816) (14,318,485) (1,634,602) (1,379,124) (3,649,343) (5,466,619) (6,112,396) (7,586,236)
- -----------------------------------------------------------------------------------------------------------------------------------
510,600,358 397,245,964 9,337,260 10,468,976 30,284,247 32,010,608 51,530,513 59,709,544
- -----------------------------------------------------------------------------------------------------------------------------------
23,927,794 13,933,450 1,568,393 1,318,338 3,444,914 5,274,697 5,771,282 7,214,518
- -----------------------------------------------------------------------------------------------------------------------------------
(534,749,224) (426,694,187) (12,103,726) (13,095,621) (29,405,059) (20,021,411) (44,887,078) (56,214,686)
- -----------------------------------------------------------------------------------------------------------------------------------
(221,072) (15,514,773) (1,198,073) (1,308,307) 4,324,102 17,263,894 12,414,717 10,709,376
- -----------------------------------------------------------------------------------------------------------------------------------
30,705,773 6,439,912 (4,550,346) (146,674) 190,817 16,667,380 7,708,419 10,211,815
- -----------------------------------------------------------------------------------------------------------------------------------
244,290,810 237,850,898 31,041,921 31,188,595 67,078,162 50,410,782 105,282,593 95,070,778
- -----------------------------------------------------------------------------------------------------------------------------------
$274,996,583 $ 244,290,810 $ 26,491,575 $31,041,921 $ 67,268,979 $67,078,162 $112,991,012 $105,282,593
- -----------------------------------------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ -- $ 107,366 $ 137,282 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MORTGAGE BACKED MONEY
SECURITIES PORTFOLIO MARKET PORTFOLIO
----------------------------- -----------------------------------
Year Ended December 31, Year Ended December 31,
----------------------------- ------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C>
- -----------------------------------------------------------------------
$ 4,434,232 $ 4,525,346 $ 9,131,861 $ 5,162,964
- -----------------------------------------------------------------------
(256,634) 603,101 2,539 (1,050)
- -----------------------------------------------------------------------
(3,075,447) (603,723) -- --
- -----------------------------------------------------------------------
1,102,151 4,524,724 9,134,400 5,161,914
- -----------------------------------------------------------------------
(4,506,298) (4,414,869) (9,134,400) (5,161,914)
- -----------------------------------------------------------------------
-- -- -- --
- -----------------------------------------------------------------------
-- -- -- --
- -----------------------------------------------------------------------
-- -- -- --
- -----------------------------------------------------------------------
(4,506,298) (4,414,869) (9,134,400) (5,161,914)
- -----------------------------------------------------------------------
19,032,932 17,198,222 7,084,700,140 3,570,979,025
- -----------------------------------------------------------------------
3,919,458 3,666,643 5,438,487 4,089,479
- -----------------------------------------------------------------------
(25,046,551) (19,700,312) (7,143,264,709) (3,478,545,549)
- -----------------------------------------------------------------------
(2,094,161) 1,164,553 (53,126,082) 96,522,955
- -----------------------------------------------------------------------
(5,498,308) 1,274,408 (53,126,082) 96,522,955
- -----------------------------------------------------------------------
72,869,915 71,595,507 138,848,487 42,325,532
- -----------------------------------------------------------------------
$ 67,371,607 $72,869,915 $ 85,722,405 $ 138,848,487
- -----------------------------------------------------------------------
$ 95,753 $ 167,819 $ -- $ --
- -----------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-97
<PAGE> 209
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
LARGE CAPITALIZATION
GROWTH PORTFOLIO
-----------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996(b) 1995(b)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 18.29 $ 13.58 $ 12.97 $ 12.13 $ 9.74
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (.03) (.01) --(c) .02 .10
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions 9.79 6.00 2.61 2.33 2.41
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 9.76 5.99 2.61 2.35 2.51
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income -- -- (.01) (.02) (.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- -- -- (.01)
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (2.37) (1.28) (1.99) (1.49) (.01)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.37) (1.28) (2.00) (1.51) (.12)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 25.68 $ 18.29 $ 13.58 $ 12.97 $ 12.13
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(a) 55.37% 44.22% 20.77% 21.09% 25.76%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 515,470 $ 329,803 $ 243,895 $ 220,782 $ 180,077
- ----------------------------------------------------------------------------------------------------------------------------------
Average net assets (000) $ 385,995 $ 277,794 $ 242,233 $ 202,736 $ 162,982
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .68% .68% .73% .82% .78%
- ----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.16)% (.05)% (.01)% .19% .88%
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 50% 54% 82% 65% 154%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
(b) Calculated based upon average shares outstanding during the year.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-98
<PAGE> 210
<TABLE>
<CAPTION>
LARGE CAPITALIZATION SMALL CAPITALIZATION
VALUE PORTFOLIO GROWTH PORTFOLIO
- -------------------------------------------------------------- ---------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- -------------------------------------------------------------- ---------------------------------------------------------
1999 1998 1997(b) 1996(b) 1995(b) 1999 1998 1997 1996(b) 1995(b)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
$ 15.87 $ 16.21 $ 13.97 $ 12.57 $ 10.02 $ 15.35 $ 15.57 $ 14.93 $ 14.15 $ 11.59
- ----------------------------------------------------------------------------------------------------------------------------
.27 .28 .31 .31 .33 (.06) (.05) (.05) (.02) .02
- ----------------------------------------------------------------------------------------------------------------------------
(1.00) 1.34 3.77 2.07 2.89 4.35 .48 3.02 2.63 2.84
- ----------------------------------------------------------------------------------------------------------------------------
(.73) 1.62 4.08 2.38 3.22 4.29 .43 2.97 2.61 2.86
- ----------------------------------------------------------------------------------------------------------------------------
(.29) (.27) (.28) (.31) (.30) -- -- -- -- (.02)
- ----------------------------------------------------------------------------------------------------------------------------
-- -- -- (.03) -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
(1.84) (1.69) (1.56) (.64) (.37) (2.17) (.65) (2.33) (1.83) (.28)
- ----------------------------------------------------------------------------------------------------------------------------
(2.13) (1.96) (1.84) (.98) (.67) (2.17) (.65) (2.33) (1.83) (.30)
- ----------------------------------------------------------------------------------------------------------------------------
$ 13.01 $ 15.87 $ 16.21 $ 13.97 $ 12.57 $ 17.47 $ 15.35 $ 15.57 $ 14.93 $ 14.15
- ----------------------------------------------------------------------------------------------------------------------------
(4.37)% 10.25% 29.80% 19.17% 32.08% 29.20% 2.55% 20.85% 18.88% 24.62%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
$262,156 $283,488 $ 275,093 $227,706 $187,596 $ 186,603 $158,982 $ 165,898 $147,469 $121,533
- ----------------------------------------------------------------------------------------------------------------------------
$279,900 $282,078 $ 253,579 $208,898 $163,124 $ 150,593 $162,654 $ 156,570 $141,496 $107,649
- ----------------------------------------------------------------------------------------------------------------------------
.73% .71% .72% .77% .76% .80% .77% .79% .89% .85%
- ----------------------------------------------------------------------------------------------------------------------------
1.74% 1.65% 1.90% 2.33% 2.83% (.45)% (.35)% (.36)% (.32)% .12%
- ----------------------------------------------------------------------------------------------------------------------------
36% 24% 21% 22% 59% 207% 69% 106% 108% 120%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-99
<PAGE> 211
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
SMALL CAPITALIZATION
VALUE PORTFOLIO
--------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------
1999 1998(c) 1997(c) 1996(c) 1995(c)
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 14.98 $ 17.50 $ 15.22 $ 13.07 $ 11.07
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .11 .08 .08 .11 .14
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions .10 (1.27) 4.37 2.71 2.00
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .21 (1.19) 4.45 2.82 2.14
- -------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income (.12) (.07) (.08) (.11) (.14)
- -------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- (.01) -- --
- -------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gains (.10) (1.26) (2.08) (.56) --
- -------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Tax return of capital distributions -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.22) (1.33) (2.17) (.67) (.14)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 14.97 $ 14.98 $ 17.50 $ 15.22 $ 13.07
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(b) 1.39% (6.62)% 29.98% 21.75% 19.21%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 127,010 $ 141,557 $ 163,414 $ 126,672 $ 97,594
- -------------------------------------------------------------------------------------------------------------------------
Average net assets (000) $ 129,077 $ 153,756 $ 144,160 $ 110,564 $ 88,085
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .87% .79% .81% .92% 1.00%
- -------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .75% .48% .45% .77% 1.14%
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 42% 39% 36% 60% 110%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of expense subsidies.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.
(c) Calculated based upon average shares outstanding during the year.
(d) Less than $.005 per share.
See Notes to Financial Statements
B-100
<PAGE> 212
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
EQUITY PORTFOLIO BOND PORTFOLIO
- ------------------------------------------------------------ -------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- ------------------------------------------------------------ -------------------------------------------------------
1999 1998 1997 1996(c) 1995(c) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
$ 15.54 $ 14.27 $ 14.82 $ 13.64 $ 11.95 $ 9.52 $ 9.17 $ 10.17 $ 10.19 $ 9.57
- -------------------------------------------------------------------------------------------------------------------------
.23 .23 .21 .25 .17 .30 .31 .42 .51 .57(a)
- -------------------------------------------------------------------------------------------------------------------------
3.29 1.98 1.32 1.79 1.67 (.84) .45 (1.00) (.08) .82
- -------------------------------------------------------------------------------------------------------------------------
3.52 2.21 1.53 2.04 1.84 (.54) .76 (.58) .43 1.39
- -------------------------------------------------------------------------------------------------------------------------
(.23) (.10) (.41) (.22) (.11) (.23) (.31) -- (.21) (.57)
- -------------------------------------------------------------------------------------------------------------------------
(.17) -- -- -- -- -- (.06) (.06) -- --
- -------------------------------------------------------------------------------------------------------------------------
(1.29) (.84) (1.67) (.64) (.04) (.16) (.04) --(d) (.24) (.20)
- -------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- (.11) -- (.36) -- --
- -------------------------------------------------------------------------------------------------------------------------
(1.69) (.94) (2.08) (.86) (.15) (.50) (.41) (.42) (.45) (.77)
- -------------------------------------------------------------------------------------------------------------------------
$ 17.37 $ 15.54 $ 14.27 $ 14.82 $ 13.64 $ 8.48 $ 9.52 $ 9.17 $ 10.17 $ 10.19
- -------------------------------------------------------------------------------------------------------------------------
23.30% 15.49% 10.60% 15.25% 15.38% (5.88)% 8.55% (5.73)% 4.45% 14.66%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
$ 274,997 $244,291 $237,851 $240,563 $191,598 $26,492 $31,042 $ 31,189 $41,780 $34,660
- -------------------------------------------------------------------------------------------------------------------------
$ 246,148 $246,335 $245,536 $221,626 $183,414 $29,300 $30,720 $ 35,163 $38,788 $29,510
- -------------------------------------------------------------------------------------------------------------------------
.93% .91% .93% .99% 1.02% 1.25% 1.54% 1.35% 1.34% 1.00%(a)
- -------------------------------------------------------------------------------------------------------------------------
1.25% 1.42% 1.15% 1.77% 1.32% 3.36% 3.38% 4.44% 5.02% 5.56%(a)
- -------------------------------------------------------------------------------------------------------------------------
35% 45% 37% 39% 76% 132% 110% 202% 226% 456%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-101
<PAGE> 213
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
TOTAL RETURN
BOND PORTFOLIO
-------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 10.49 $ 10.56 $ 10.28 $ 10.62 $ 9.48
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .56 .58 .57 .57 .62(a)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains
(losses) on
investment transactions (.63) .27 .35 (.09) 1.18
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS (.07) .85 .92 .48 1.80
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions
Dividends from net investment income (.56) (.58) (.54) (.56) (.58)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
investment income -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gains -- (.34) (.10) (.26) (.08)
- -----------------------------------------------------------------------------------------------------------------------------
Distributions in excess of net
realized gains -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.56) (.92) (.64) (.82) (.66)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 9.86 $ 10.49 $ 10.56 $ 10.28 $ 10.62
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(b) (.67)% 8.28% 9.23% 5.02% 19.63%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 67,269 $ 67,078 $ 50,411 $ 49,218 $ 45,118
- -----------------------------------------------------------------------------------------------------------------------------
Average net assets (000) $ 65,911 $ 61,786 $ 48,123 $ 47,246 $ 37,023
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .82% .81% .91% .94% .85%(a)
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.54% 5.54% 5.54% 5.67% 6.21%(a)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 368% 327% 323% 340% 141%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of expense subsidies.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
See Notes to Financial Statements
B-102
<PAGE> 214
<TABLE>
<CAPTION>
INTERMEDIATE-TERM MORTGAGE BACKED
BOND PORTFOLIO SECURITIES PORTFOLIO
- ---------------------------------------------------------------- -------------------------------------------------------
Year Ended December 31, Year Ended December 31,
- ---------------------------------------------------------------- -------------------------------------------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
$ 10.36 $ 10.42 $ 10.30 $ 10.51 $ 9.56 $ 10.47 $ 10.45 $ 10.21 $ 10.31 $ 9.51
- --------------------------------------------------------------------------------------------------------------------------
.56 .63 .58 .59 .63 .66 .64 .64 .65 .68(a)
- --------------------------------------------------------------------------------------------------------------------------
(.43) .09 .28 (.07) .94 (.50) .01 .23 (.12) .83
- --------------------------------------------------------------------------------------------------------------------------
.13 .72 .86 .52 1.57 .16 .65 .87 .53 1.51
- --------------------------------------------------------------------------------------------------------------------------
(.56) (.61) (.57) (.59) (.60) (.66) (.63) (.63) (.63) (.68)
- --------------------------------------------------------------------------------------------------------------------------
(.01) -- -- -- -- -- -- -- -- (.03)
- --------------------------------------------------------------------------------------------------------------------------
-- (.17) (.17) (.14) (.02) -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
(.57) (.78) (.74) (.73) (.62) (.66) (.63) (.63) (.63) (.71)
- --------------------------------------------------------------------------------------------------------------------------
$ 9.92 $ 10.36 $ 10.42 $ 10.30 $ 10.51 $ 9.97 $ 10.47 $ 10.45 $ 10.21 $ 10.31
- --------------------------------------------------------------------------------------------------------------------------
1.30% 7.09% 8.57% 5.22% 16.87% 1.54% 6.37% 8.82% 5.56% 16.18%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
$ 112,991 $105,283 $95,071 $100,392 $77,125 $67,372 $72,870 $71,596 $73,867 $69,759
- --------------------------------------------------------------------------------------------------------------------------
$ 108,243 $101,219 $95,575 $ 81,723 $68,628 $70,244 $73,737 $71,757 $72,214 $65,149
- --------------------------------------------------------------------------------------------------------------------------
.67% .66% .71% .73% .79% .80% .70% .88% .91% .85%(a)
- --------------------------------------------------------------------------------------------------------------------------
5.63% 5.71% 5.64% 5.69% 6.09% 6.31% 6.14% 6.21% 6.44% 6.79%(a)
- --------------------------------------------------------------------------------------------------------------------------
253% 249% 249% 311% 93% 14% 24% 128% 102% 154%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
B-103
<PAGE> 215
THE TARGET PORTFOLIO TRUST
Financial Highlights
<TABLE>
<CAPTION>
U.S. GOVERNMENT
MONEY
MARKET PORTFOLIO
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .045 .048 .049 .045 .051(a)
- ---------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .045 .048 .049 .045 .051
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income (.045) (.048) (.049) (.045) (.051)
- ---------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.045) (.048) (.049) (.045) (.051)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN(b) 4.67% 4.88% 4.95% 4.53% 5.25%
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ 85,722 $138,848 $ 42,326 $27,397 $18,855
- ---------------------------------------------------------------------------------------------------------------
Average net assets (000) $ 196,853 $106,500 $ 37,675 $19,132 $20,173
- ---------------------------------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .43% .55% .65% .89% .75%(a)
- ---------------------------------------------------------------------------------------------------------------
Net investment income 4.64% 4.85% 4.91% 4.49% 5.18%(a)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net of expense subsidies.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
See Notes to Financial Statements
B-104
<PAGE> 216
THE TARGET PORTFOLIO TRUST
Notes to Financial Statements
The Target Portfolio Trust (the "Fund") is an open-end management
investment company. The Fund was established as a Delaware business trust on
July 29, 1992 and consists of ten separate portfolios (the "Portfolio" or
"Portfolios"): Large Capitalization Growth Portfolio, Large Capitalization Value
Portfolio, Small Capitalization Growth Portfolio, Small Capitalization Value
Portfolio, International Equity Portfolio, International Bond Portfolio, Total
Return Bond Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed
Securities Portfolio and U.S. Government Money Market Portfolio. All the
Portfolios are diversified, as defined under the Investment Company Act of 1940,
except for the International Bond Portfolio. Investment operations commenced on
January 5, 1993 with the exception of the International Bond Portfolio which
commenced on May 17, 1994.
The Portfolios' investment objectives are as follows: Large Capitalization
Growth Portfolio--long-term capital appreciation through investment primarily in
common stocks that, in the investment adviser's opinion, should have earnings
growth faster than that of the S&P 500; Large Capitalization Value
Portfolio--total return of capital appreciation and dividend income through
investment primarily in common stocks that, in the adviser's opinion, are
undervalued; Small Capitalization Growth Portfolio--maximum capital appreciation
through investment primarily in small company common stocks that in the
investment adviser's opinion should have earnings growth faster than that of the
U.S. economy in general; Small Capitalization Value Portfolio--above average
capital appreciation through investment in common small company stocks that, in
the adviser's opinion, are undervalued or overlooked in the marketplace;
International Equity Portfolio--capital appreciation through investment
primarily in stocks of companies domiciled outside the United States;
International Bond Portfolio--high total return through investment primarily in
high quality foreign debt securities; Total Return Bond Portfolio--total return
of current income and capital appreciation through investment primarily in
fixed-income securities of varying maturities with a dollar-weighted average
portfolio maturity of more than four years but not more than fifteen years;
Intermediate-Term Bond Portfolio--current income and reasonable stability of
principal through investment primarily in high quality fixed-income securities
of varying maturities with a dollar-weighted average portfolio maturity of more
than three years but not more than ten years; Mortgage Backed Securities
Portfolio--high current income primarily and capital appreciation secondarily
each consistent with the protection of capital through investment primarily in
mortgage-related securities; U.S. Government Money Market Portfolio--maximum
current income consistent with maintenance of liquidity and preservation of
capital through investment exclusively in short-term securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
The ability of issuers of debt securities (other than those issued or
guaranteed by the U.S. Government) held by the Portfolios to meet their
obligations may be affected by economic or political developments in a specific
industry, region or country.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
SECURITIES VALUATIONS: Securities, including options, futures contracts and
options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade are valued at the last sale
price on such exchange or board of trade, on the date of valuation or, if there
was no sale on such day, at the average of readily available closing bid and
asked prices on such day.
Securities, including options, that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the average of the most
recently quoted bid and asked prices provided by a principal market maker or
dealer.
U.S. Government securities for which market quotations are available are
valued at a price provided by an independent broker/dealer or pricing service.
Quotations of foreign securities in a foreign currency are converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer.
Securities for which market quotations are not available, are valued in
good faith under procedures adopted by the Trustees.
Securities held by the U.S. Government Money Market Portfolio are valued at
amortized cost, which approximates market value. Short-term securities held by
the other portfolios which mature in sixty days or less are valued at amortized
cost which approximates market value. The amortized cost method involves valuing
a security at its cost on the date of purchase and thereafter assuming a
constant amortization to maturity of the difference between the principal amount
due at maturity and cost. Short-term securities held by the other portfolios
which mature in more than sixty days are valued at current market quotations.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines or, if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
All securities (except those of the U.S. Government Money Market Portfolio)
are valued as of 4:15 p.m., New York time. The U.S. Government Money Market
Portfolio calculates net asset value as of 4:30 p.m., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of securities
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
B-105
<PAGE> 217
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Portfolio is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin". Subsequent payments, known as "variation margin",
are made or received by the Portfolio each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Portfolio invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Portfolio intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Portfolio may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets. The International Equity Portfolio, International Bond Portfolio,
Intermediate-Term Bond Portfolio, Mortgage-Backed Securities Portfolio and Total
Return Bond Portfolio are the only portfolios that may invest in financial
futures contracts.
FOREIGN CURRENCY TRANSLATION: The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Portfolios are presented at the foreign
exchange rates and market values at the close of the fiscal period, the
Portfolios do not isolate that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations arising
from changes in the market prices of securities held at the end of the fiscal
period. Similarly, the Portfolios do not isolate the effect of changes in
foreign exchange rates from the fluctuations arising from changes in the market
prices of long-term portfolio securities sold during the fiscal year.
Accordingly, these realized foreign currency gains (losses) are included in the
reported net realized gains (losses) on investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of short-term
securities, holding of foreign currencies, currency gains or losses realized
between the trade and settlement dates of securities transactions, and the
difference between the amounts of dividends, interest and foreign taxes recorded
on the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at period-end exchange rates are reflected as a component
of net unrealized appreciation/depreciation on investments and foreign
currencies.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin
as a result of, among other factors, the level of governmental supervision and
regulation of foreign securities markets and the possibility of political or
economic instability.
FOREIGN CURRENCY FORWARD CONTRACTS: The International Equity Portfolio,
International Bond Portfolio, Intermediate-Term Bond Portfolio and Total Return
Bond Portfolio may enter into foreign currency forward contracts in order to
hedge their exposure to changes in foreign currency exchange rates on their
foreign portfolio holdings. A foreign currency forward contract is a commitment
to purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Portfolio enters into foreign currency forward contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings or on specific receivables and payables denominated in a
foreign currency. The contracts are valued daily at current exchange rates and
any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counter parties to meet the terms of their contracts.
OPTIONS: The International Equity Portfolio, the International Bond
Portfolio, the Intermediate-Term Bond Portfolio, the Total Return Bond Portfolio
and the Mortgage-Backed Securities Portfolio may either purchase or write
options in order to hedge against adverse market movements or fluctuations in
value caused by changes in prevailing interest rates or foreign currency
exchange rates with respect to securities or currencies which the Portfolio
currently owns or intends to purchase. When the Portfolio purchases an option,
it pays a premium and an amount equal to that premium is recorded as an
investment. When the Portfolio writes an option, it receives a premium and an
amount equal to that premium is recorded as a liability. The investment or
liability is adjusted daily to reflect the current market value of the option.
If an option expires unexercised, the Fund realizes a gain or loss to the extent
of the premium received or paid. If an option is exercised, the premium received
or paid is an adjustment to the proceeds from the sale or the cost basis of the
purchase in determining whether the Portfolio has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Portfolio, as writer of an option, has no control over whether the
underlying securities or currencies may be sold (called) or purchased (put). As
a result, the Portfolio bears the market risk of an unfavorable change in the
price of the security or currency underlying the written option. The Portfolio,
as purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts.
SWAPS: The Intermediate-Term Bond Portfolio may enter into a swap in order
to hedge against adverse movements in interest notes. A swap is an agreement
between two parties to exchange a series of cash flows at specified intervals.
Based on a notional amount, each party pays an interest rate or the change in
the value of a security. Dividends and interest on the securities in the swap
are included in the value of the exchange. The swaps are valued daily at current
market value and any unrealized gain or loss is included in net unrealized
appreciation or depreciation on investments. Gain or loss is realized on the
termination date of the swap and is equal to the difference between the
Portfolio's basis in the swap and the proceeds of the closing transaction,
including any fees. During the period that the swap agreement is open, the
Portfolio may be subject to risk from the potential inability of the
counterparty to meet the terms of the agreement.
B-106
<PAGE> 218
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. Net investment income,
net realized gains and net assets were not affected by this change.
<TABLE>
<CAPTION>
PAID-IN ACCUMULATED NET
CAPITAL IN NET GAIN/ INVESTMENT
PORTFOLIO REF. EXCESS OF PAR LOSS INCOME
- --------------------- ------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Large Capitalization
Growth............. c $ -- $ (629,096) $ 629,096
Large Capitalization
Value.............. b -- (25,326) 25,326
Small Capitalization
Growth............. c -- (680,508) 680,508
Small Capitalization
Value.............. f -- 6,505 (6,505)
International
Equity............. a,e -- (5,167,364) 5,167,364
International Bond... a,b 60,015 302,889 (362,904)
Total Return Bond.... a -- 28,829 (28,829)
Intermediate-Term
Bond............... a,b (120,806) 107,192 13,614
</TABLE>
- ---------------
(a) Reclass of net foreign currency gains/losses.
(b) Reclass of dividends in excess of net investment income.
(c) Reclass of net operating losses.
(d) Reclass of distributions/redemption distributions.
(e) Reclass of passive foreign investment companies' gains.
(f) Reclass of real estate investment trust.
DIVIDENDS AND DISTRIBUTIONS: The International Bond Portfolio, Total Return
Bond Portfolio, Intermediate-Term Bond Portfolio and Mortgage Backed Securities
Portfolio declare dividends of their net investment income daily and pay such
dividends monthly. The U.S. Government Money Market Portfolio declares net
investment income and any net capital gain (loss) daily and pays such dividends
monthly. Each other Portfolio declares and pays a dividend of its net investment
income, if any, at least annually. Each Portfolio except for the U.S. Government
Money Market Portfolio declares and pays its net capital gains, if any, at least
annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
TAXES: For federal income tax purposes, each portfolio in the Fund is
treated as a separate tax-paying entity. It is the intent of each portfolio to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its taxable net income
to its shareholders. Therefore, no federal income tax provision is required.
Withholding taxes on foreign interest and dividends have been provided for
in accordance with the Portfolios' understanding of the applicable country's tax
rules and rates.
DEFERRED ORGANIZATIONAL EXPENSES: A total of $279,000 was incurred in
connection with the organization of the Fund. These costs have been deferred and
were amortized ratably over a period of sixty months from the date the Portfolio
commenced investment operations.
NOTE 2. AGREEMENTS
The Fund's manager is Prudential Investments Fund Management LLC ("PIFM")
pursuant to which PIFM manages the investment operations of the Fund,
administers the Fund's affairs and is responsible for the selection, subject to
review and approval of the Trustees, of the advisers. PIFM supervises the
advisers' performance of advisery services and makes recommendations to the
Trustees as to whether the advisers' contracts should be renewed, modified or
terminated. PIFM pays for the costs pursuant to the advisery agreements, the
cost of compensation of officers of the Fund, occupancy and certain clerical and
accounting costs of the Fund. The Fund bears all other costs and expenses.
The advisers noted below each furnished investment advisery services in
connection with the management of the Portfolios. Effective May 28, 1999,
Sawgrass Asset Management, L.L.C. became the subadviser of the Small
Capitalization Growth Portfolio and will serve the portfolio under the same
terms and conditions as under the agreement with Nicholas-Applegate Capital
Management. Effective August 26, 1999, Fleming Asset Management USA became the
subadviser of the Small Capitalization Growth Portfolio and will serve the
portfolio under the same terms and conditions as under the agreement with
Investment Advisers, Inc. Each of the two advisers of the domestic equity
Portfolios--the Large Capitalization Growth Portfolio, Large Capitalization
Value Portfolio, Small Capitalization Growth Portfolio and Small Capitalization
Value Portfolio--manages approximately 50% of the assets of the respective
Portfolio. In general, in order to maintain an approximately equal division of
assets between the two advisers, all daily cash inflows (i.e., subscriptions and
reinvested distributions) and outflows (i.e., redemptions and expenses items)
are divided between the two advisers as PIFM deems it appropriate. In addition,
there will be a periodic rebalancing of each Portfolio's assets to take account
of market fluctuations in order to maintain the approximately equal allocation.
As a consequence, each Portfolio will allocate assets from the better performing
of the two advisers to the other.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
- ------------------------- ------------------------------------------
<S> <C>
Large Capitalization
Growth................. Oak Associates, Ltd., and
Columbus Circle Investors
Large Capitalization
Value.................. INVESCO Capital Management, Inc. and
Hotchkis and Willey
Small Capitalization
Growth................. Sawgrass Asset Management, L.L.C.
and Fleming Asset Management USA
Small Capitalization
Value.................. Wood, Struthers & Winthrop Management
Corp. and Lazard Asset Management
International Equity..... Lazard Asset Management
International Bond....... Delaware International Advisers Ltd.
Total Return Bond and
Intermediate-Term
Bond................... PIMCO
Mortgage Backed
Securities and U.S.
Government Money
Market................. Wellington Management Company, LLP
</TABLE>
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of the average daily net assets of the Portfolios specified below
and PIFM, in turn, pays each adviser a fee for its services.
<TABLE>
<CAPTION>
TOTAL
PORTFOLIO MANAGEMENT FEE ADVISER FEE
- -------------------------------- -------------- -----------
<S> <C> <C>
Large Capitalization Growth..... .60% .30%
Large Capitalization Value...... .60% .30%
Small Capitalization Growth..... .60% .40%
Small Capitalization Value...... .60% .40%
International Equity............ .70% .40%
International Bond.............. .50% .30%
Total Return Bond............... .45% .25%
Intermediate-Term Bond.......... .45% .25%
Mortgage Backed Securities...... .45% .25%
U.S. Government Money Market.... .25% .125%
</TABLE>
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ("PIMS"). PIMS serves the Fund without compensation.
PIFM and PIMS are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
B-107
<PAGE> 219
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. The following amounts represent the
fees PMFS charged for the year ended December 31, 1999 as well as the fees due
PMFS as of December 31, 1999.
<TABLE>
<CAPTION>
AMOUNT INCURRED
FOR THE AMOUNT DUE
YEAR ENDED AS OF
DECEMBER 31, DECEMBER 31,
PORTFOLIO 1999 1999
- -------------------------------- ---------------- ------------
<S> <C> <C>
Large Capitalization Growth..... $121,100 $ 11,300
Large Capitalization Value...... 118,600 10,400
Small Capitalization Growth..... 114,400 10,000
Small Capitalization Value...... 109,900 9,500
International Equity............ 112,500 9,900
International Bond.............. 36,100 3,000
Total Return Bond............... 48,000 4,200
Intermediate-Term Bond.......... 59,000 5,400
Mortgage Backed Securities...... 53,900 4,600
U.S. Government Money Market.... 29,000 2,700
</TABLE>
For the year ended December 31, 1999, Prudential Securities Incorporated
("PSI") earned approximately $1,100, $49,000 and $40,200 in brokerage
commissions on behalf of certain portfolio transactions executed with the Large
Capitalization Growth Portfolio, Large Capitalization Value Portfolio and Small
Capitalization Growth Portfolio, respectively.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities, excluding short-term
investments and written options, for the period ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
PORTFOLIO PURCHASES SALES
- ------------------------------------ ------------ ------------
<S> <C> <C>
Large Capitalization Growth......... $189,728,682 $195,695,379
Large Capitalization Value.......... 99,535,211 104,555,886
Small Capitalization Growth......... 292,760,296 305,723,347
Small Capitalization Value.......... 54,793,721 68,880,486
International Equity................ 82,162,161 100,715,653
International Bond.................. 37,247,786 38,017,829
Total Return Bond................... 292,844,847 282,403,695
Intermediate-Term Bond.............. 302,773,045 278,551,793
Mortgage Backed Securities.......... 20,375,459 9,795,841
</TABLE>
The federal income tax basis and unrealized appreciation/depreciation of
each of the Portfolios' investments, excluding written options as of December
31, 1999, were as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION GROSS UNREALIZED
PORTFOLIO BASIS (DEPRECIATION) APPRECIATION DEPRECIATION
- --------------------- ------------ ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Large Capitalization Growth . $ 238,848,378 $ 276,717,405 $ 277,890,899 $ 1,173,494
Large Capitalization Value .. 233,103,350 28,722,811 56,654,071 27,931,260
Small Capitalization Growth . 147,943,401 38,639,334 44,179,878 5,540,544
Small Capitalization Value .. 111,947,950 14,789,905 23,800,905 9,011,000
International Equity ........ 202,982,450 72,100,764 81,875,961 9,775,197
International Bond .......... 27,824,050 (1,849,624) 182,556 2,032,180
Total Return Bond ........... 97,131,061 (794,686) 342,380 1,137,066
Intermediate-Term Bond ...... 141,270,469 (763,478) 564,042 1,327,520
Mortgage Backed Securities .. 68,591,575 (1,271,005) 714,617 1,985,622
</TABLE>
For federal income tax purposes, International Bond Portfolio, the Total
Return Bond Portfolio, Intermediate-Term Bond Portfolio and Mortgage Backed
Securities Portfolio had a capital loss carryforward as of December 31, 1999.
Accordingly, no capital gain distributions are expected to be paid to
shareholders of the International Bond Portfolio, Total Return Bond Portfolio
and Mortgage Backed Securities Portfolio until future net gains have been
realized in excess of such carryforward. In addition, certain portfolios have
either partially or fully utilized prior year capital losses and/or are electing
to treat net currency losses incurred in the two-month period ended December 31,
1999 as having been incurred in the following year.
<TABLE>
<CAPTION>
UTILIZATION NET LOSSES
OF IN TWO
PRIOR YEAR MONTHS ENDED
CAPITAL LOSS EXPIRATION CAPITAL LOSS DECEMBER 31,
PORTFOLIO CARRYFORWARD YEAR CARRYFORWARD 1999
- ---------------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
International Equity ............... $ -- -- $ -- $ 28,139
International Bond Portfolio ....... 211,700 2007 -- 95,861
Total Return Bond Portfolio ........ 2,722 2007 -- 352,900
Intermediate-Term Bond Portfolio ... 3,241,758 2007 -- 276,982
Mortgage Backed Securities Portfolio 458,600 2002 2,718,500 --
237,400 2007 -- 35,900
</TABLE>
At December 31, 1999, the Total Return Bond and Intermediate-Term Bond
Portfolios bought financial futures contracts. The unrealized
appreciation/depreciation on such contracts as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
TOTAL RETURN BOND PORTFOLIO:
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION DECEMBER 31, TRADE APPRECIATION
CONTRACTS TYPE DATE 1999 DATE (DEPRECIATION)
- ---------- ---------------- ---------- ------------ ---------- --------------
LONG POSITIONS:
<C> <S> <C> <C> <C> <C>
48 5-yr. T-Note Mar. 2000 $ 4,704,750 $4,764,000 $ (59,250)
36 10-yr. T-Note Mar. 2000 3,450,938 3,534,750 (83,812)
19 Eurodollar Sept. 2000 4,432,700 4,456,575 (23,875)
13 Eurodollar Dec. 2000 3,025,587 3,042,475 (16,888)
----------
$ (183,825)
==========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND PORTFOLIO:
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION DECEMBER 31, TRADE APPRECIATION
CONTRACTS TYPE DATE 1999 DATE (DEPRECIATION)
- ---------- -------------------- ---------- ------------ ---------- --------------
LONG POSITIONS:
<C> <S> <C> <C> <C> <C>
94 10-yr. T-Note Mar. 2000 $9,010,781 $9,199,046 $ (188,265)
74 5-yr. T-Note Mar. 2000 7,253,156 7,344,500 (91,344)
----------
$ (279,609)
==========
</TABLE>
B-108
<PAGE> 220
At December 31, 1999, the Total Return Bond Portfolio had outstanding
forward currency contracts to sell foreign currencies, as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
SALE CONTRACTS RECEIVABLE VALUE (DEPRECIATION)
- ------------------------- --------------- ---------- --------------
<S> <C> <C> <C>
Eurodollar,
expiring 1/24/00....... $ 746,445 $ 706,546 $ 39,899
Japanese Yen,
expiring 2/14/00....... 869,546 909,725 (40,179)
----------- ---------- --------
$ 1,615,991 $1,616,271 $ (280)
=========== ========== ========
</TABLE>
At December 31, 1999, the Intermediate-Term Bond Portfolio had outstanding
forward currency contracts to sell foreign currencies, as follows:
<TABLE>
<CAPTION>
VALUE AT
FOREIGN CURRENCY SETTLEMENT DATE CURRENT APPRECIATION
SALE CONTRACTS RECEIVABLE VALUE (DEPRECIATION)
- ------------------------- --------------- ---------- --------------
<S> <C> <C> <C>
Eurodollar,
expiring 1/24/00....... $ 1,279,620 $1,211,222 $ 68,398
Japanese Yen,
expiring 2/14/00....... 1,445,860 1,512,668 (66,808)
----------- ---------- --------
$ 2,725,480 $2,723,890 $ 1,590
=========== ========== ========
</TABLE>
Transactions in options written during the period ended December 31, 1999,
were as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
TOTAL RETURN BOND PORTFOLIO CONTRACTS RECEIVED
- ---------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1998.................................. 15 $ 2,872
Options written......................... 486 236,857
Options terminated in closing purchase
transactions.......................... (76) (61,935 )
Options expired......................... (285) (129,040)
--- --------
Options outstanding at December 31,
1999.................................. 140 $48,754
=== =======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
INTERMEDIATE-TERM BOND PORTFOLIO CONTRACTS RECEIVED
- ---------------------------------------- --------- --------
<S> <C> <C>
Options outstanding at December 31,
1998.................................. 24 $ 4,340
Options written......................... 548 300,147
Options terminated in closing purchase
transactions (125) (101,704)
Options expired......................... (447) (202,783)
---- --------
Options outstanding at December 31,
1999.................................. 0 $ 0
==== ========
</TABLE>
NOTE 5. CAPITAL
The Fund has authorized an unlimited number of shares of beneficial
interest at $.001 par value per share.
Transactions in shares of beneficial interest during the year ended
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED IN
REINVESTMENT INCREASE/
OF DIVIDENDS (DECREASE)
SHARES AND SHARES IN SHARES
PORTFOLIO SOLD DISTRIBUTIONS REACQUIRED OUTSTANDING
- -------------------------------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 5,316,176 1,844,182 (5,115,193) 2,045,165
Large Capitalization Value
Portfolio........................... 4,949,283 2,840,847 (5,511,583) 2,278,547
Small Capitalization Growth
Portfolio........................... 3,515,117 1,238,085 (4,434,609) 318,593
Small Capitalization Value
Portfolio........................... 2,990,699 127,626 (4,083,584) (965,259)
International Equity Portfolio........ 31,285,882 1,444,349 (32,619,836) 110,395
International Bond Portfolio.......... 1,036,333 173,070 (1,347,551) (138,148)
Total Return Bond Portfolio........... 2,983,019 340,231 (2,891,426) 431,824
Intermediate-Term Bond Portfolio...... 5,097,285 571,696 (4,435,925) 1,233,056
Mortgage Backed Securities Portfolio.. 1,860,018 384,091 (2,447,653) (203,544)
</TABLE>
Transactions in shares of beneficial interest during the year ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
SHARES
ISSUED IN
REINVESTMENT INCREASE/
OF DIVIDENDS (DECREASE)
SHARES AND SHARES IN SHARES
PORTFOLIO SOLD DISTRIBUTIONS REACQUIRED OUTSTANDING
- -------------------------------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Large Capitalization Growth
Portfolio........................... 3,830,971 1,197,514 (4,954,992) 73,493
Large Capitalization Value
Portfolio........................... 3,668,396 1,982,225 (4,758,185) 892,436
Small Capitalization Growth
Portfolio........................... 3,052,747 408,882 (3,755,087) (293,458)
Small Capitalization Value
Portfolio........................... 3,013,164 779,594 (3,677,883) 114,875
International Equity Portfolio........ 25,575,077 901,284 (27,414,057) (937,696)
International Bond Portfolio.......... 1,135,046 142,350 (1,417,310) (139,914)
Total Return Bond Portfolio........... 2,988,954 497,282 (1,866,519) 1,619,717
Intermediate-Term Bond Portfolio...... 5,691,190 690,608 (5,350,123) 1,031,625
Mortgage Backed Securities Portfolio.. 1,637,945 349,295 (1,876,495) 110,745
</TABLE>
B-109
<PAGE> 221
THE TARGET PORTFOLIO TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Trustees of
The Target Portfolio Trust
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Large Capitalization Growth
Portfolio, Large Capitalization Value Portfolio, Small Capitalization Growth
Portfolio, Small Capitalization Value Portfolio, International Equity Portfolio,
International Bond Portfolio, Total Return Bond Portfolio, Intermediate-Term
Bond Portfolio, Mortgage Backed Securities Portfolio and U.S. Government Money
Market Portfolio (constituting The Target Portfolio Trust, hereafter referred to
as the "Trust") at December 31, 1999, the results of each of their operations
for the year then ended, the changes in each of their net assets for each of the
two years in the period then ended and each of their financial highlights for
each of the three years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion expressed above. The accompanying financial highlights for
the two periods in the period ended December 31, 1996 were audited by other
independent accountants, whose opinion dated February 21, 1997 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 18, 2000
B-110
<PAGE> 222
APPENDIX I -- HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(VALUE OF $1 INVESTED ON 12/31/25 THROUGH 12/31/99)
[DOLLARS CHART]
Inflation - $9
T-Bills - $15
Bonds - $40
Common Stock - $2,845
Small Stock - $6,640
Source: Ibbotson Associates. Used with permission. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any TARGET Portfolio.
Generally, stock returns are due to capital appreciation and reinvesting
any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices usually are more volatile than bond prices over the long-term.
SMALL STOCK returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. For 1981 through 1999, returns are
those of the Dimensional Fund Advisors (DFA) Small Company Fund, which is a
market-value-weighted index of the ninth and tenth deciles of the New York Stock
Exchange (NYSE), plus stocks listed on the American Stock Exchange and over-the-
counter with the same or less capitalization as the upper bound of the NYSE
decile.
COMMON STOCK returns are based on the S&P 500 Composite Stock Price Index,
a market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
LONG-TERM GOVERNMENT BOND returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years.
TREASURY BILL returns are for a one-month bill. Treasuries are guaranteed
by the government as to the timely payment of principal and interest; equities
are not.
INFLATION is measured by the consumer price index (CPI).
I-1
<PAGE> 223
The following chart shows the performance of a hypothetical investment in
the following stock indexes for the period indicated.
DIFFERENT TYPES OF STOCKS, DIFFERENT RETURNS
VALUE OF $1 INVESTED ON 12/31/69
[BAR CHART]
<TABLE>
<S> <C> <C>
Common Stocks Small Stocks Foreign Stock
47.41 $52.61 $33.41
</TABLE>
COMMON STOCK returns are based on the S&P 500 Composite Stock Price Index,
a market-weighted, unmanaged index of 500 stocks (currently) in a variety of
industries. It is often used as a broad measure of stock market performance.
Source: Lipper Inc.
SMALL STOCK performance for the beginning of the period through 1980 is
based on the returns of stocks making up the 5th quintile of the New York Stock
Exchange (NYSE) and, for 1981-1999, is based on the returns of the DFA Small
Company Fund, which is a market-value-weighted index of the ninth and tenth
deciles of the NYSE, plus stocks listed on the American Stock Exchange and
over-the-counter with the same or less capitalization as the upper bound of the
NYSE decile. Source: Ibbotson Associates.
FOREIGN STOCK returns are represented by the Morgan Stanley Capital
International Europe Australia Far East (EAFE) index, a common measure of
foreign stock performance. It is a market-weighted index of 20 countries.
Source: Lipper Inc.
Geometric Returns are through 1999. Generally, returns of foreign stocks
are more volatile than those of common or small stocks.
This chart is for illustrative purposes only and is not indicative of the
past, present, or future performance of any TARGET Portfolio.
I-2
<PAGE> 224
This chart shows the performance of a hypothetical investment in short-term
U.S. government securities adjusted for inflation for the period from January 1,
1999 through December 31, 1999.
TOO MANY SHORT-TERM SECURITIES
MAY NOT MAKE SENSE
INFLATION AND TAXES CAN ERODE YOUR INVESTMENT
<TABLE>
<S> <C>
Initial investment.......................................... $ 10,000
Interest income: 4.44%...................................... 444
Tax paid on interest (assumes 39.6% tax rate)............... -176
-------------
Net interest income......................................... 268
Adjust for 3.0% inflation................................... -300
-------------
Net investment.............................................. $ 9,968
</TABLE>
THE INVESTOR'S NET RETURN WAS -0.32%!
1999 Salomon Smith Barney Brothers 30-day Treasury bill return used for
short-term interest rate. Federal tax rate of 31% and 1999 inflation rate (CPI)
were used. Short-term rates can fluctuate.
Past performance is no guarantee of future results. This hypothetical
example is provided for informational purposes only. It is not intended to
represent any specific investment and is not indicative of past, present, or
future performance of any TARGET Portfolio.
I-3
<PAGE> 225
Each bar shows the best
and worst annualized return for
the specified holding periods
through 1999. For example, the
best one-year return occurred
in 1933 and the worst 10-year
annualized return occurred from
1929-1938. The first holding
period started on 12/31/25 and
the first 20-year period ended
on 12/31/45.
Common stock returns are
based on the S&P 500 Composite
Stock Price Index, a
market-weighted, unmanaged
index of 500 stocks (currently)
in a variety of industries. It
is often used as a broad
measure of stock market
performance.
This chart is for
illustrative purposes only and
is not indicative of the past,
present, or future performance
of any TARGET Portfolio.
Source: Ibbotson Associates
TIME REDUCES YOUR RISK
BEST AND WORST ANNUALIZED RETURNS OF THE S&P
[S&P BEST AND WORST ANNUALIZED RETURNS BAR CHART]
I-4
<PAGE> 226
APPENDIX II -- GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years -- the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing -- buying securities when prices are low and selling them
when prices are relatively higher -- may not work for many investors because it
is impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
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<PAGE> 228
APPENDIX III
GLOSSARY OF INDEXES
U.S. LARGE CAP STOCKS (S&P 500) -- The S&P 500 is a capital-weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is an unmanaged
index.
U.S. SMALL CAP STOCKS (RUSSELL 2000) -- The Russell 2000 Index is a stock market
index comprised of the 2000 smallest U.S. domiciled publicly traded common
stocks that are included in the Russell 3000 Index. These common stocks
represent 10% of the total market capitalization of the Russell 3000 Index
which, in turn, represents approximately 98% of the publicly traded U.S. equity
market.
INTERNATIONAL STOCKS (MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA,
FAR EAST (EAFE) INDEX) -- The MSCI EAFE Index is an arithmetical average
weighted by market value of the performance of over 1000 non-U.S. companies
representing 20 stock markets in Europe, Australia, New Zealand and the Far
East. The EAFE Index is an unmanaged index.
U.S. BONDS (LEHMAN BROTHERS AGGREGATE BOND INDEX) -- The index is composed of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index, and Asset Backed Securities Index. Total
return comprises price appreciation/depreciation and income as a percentage of
the original investment.
INTERNATIONAL BONDS (WB INDEX) -- The Salomon Smith Barney Non-U.S. World
Government WB Index (WB Index) measures the total return performance of high
quality securities in major sectors of the international bond market. The Index
covers approximately 600 bonds from 17 currencies. Only high quality, straight
issues are included. The WB Index is calculated on both a weighted and an
unweighted basis. Generally, index samples for each market are restricted to
bonds with at least one year of remaining life. The WB Index is an unmanaged
index.
U.S. TREASURY BILLS (SALOMON BROTHERS 90 DAY INDEX) -- This index is constructed
by purchasing equal dollar amounts of three-month Treasury bills at the
beginning of three consecutive months. As each bill matures, all proceeds are
rolled over or reinvested in a new three-month bill. The income used to
calculate the monthly return is derived by subtracting the original amount
invested from the maturity value.
SALOMON SMITH BARNEY MORTGAGE-BASED SECURITIES INDEX (MBS INDEX) -- The MBS
Index is comprised of 30- and 15-year GNMA, FNMA and FHLMC pass-through, and
FNMA and FHLMC balloon mortgages. The MBS Index is an unmanaged index.
INFLATION (CPI) -- The Consumer Price Index for all urban consumers, not
seasonally adjusted, is used to measure the rate of change of consumer prices.
This measures inflation and is constructed by the U.S. Department of Labor,
Bureau of Labor Statistics, Washington D.C.
LARGE CAP GROWTH INDEX (RUSSELL 1000 GROWTH) -- Contains those Russell 1000
securities with a "growth" orientation. Securities in this index tend to exhibit
higher price-to-book and price-to-earnings ratios, lower dividend yields, and
higher forecasted growth rates than those in the Value universe.
LARGE CAP VALUE INDEX (RUSSELL 1000 VALUE) -- Contains those Russell 1000
securities with a "value" orientation. Securities in this index tend to exhibit
lower price-to-book and price-to-earnings ratios, higher dividend yields, and
lower forecasted growth rates than those in the Growth universe.
SMALL CAP GROWTH INDEX (PSI SMALL CAP GROWTH INDEX) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with growth characteristics. Growth stocks have
historical sales growth rates that are greater than 10%, rank in the top half of
the Institutional Brokers Estimate System (I/B/E/S) universe based on forecasted
growth rate, and have low payouts and debt/capital ratios.
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SMALL CAP VALUE INDEX (PSI SMALL CAP VALUE) -- This index is created by
screening the twentieth through forty-fifth percentiles of market value in the
Compustat universe for companies with value characteristics. Value stocks rank
in the bottom 50% of the universe based on a normalized P/E ratio. Companies
must have sustainable dividend rates.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX -- The Lehman Brothers
Government/ Corporate Bond Index (LGCI) is a weighted index comprised of
publicly traded intermediate and long-term government and corporate debt with an
average maturity of 10 years. The LGCI is an unmanaged index.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX -- The Lehman
Brothers Intermediate Government/Corporate Bond Index (Lehman Int. Gov't Corp.
Index) is a weighted index comprised of securities issued or backed by the U.S.
government and its agencies and securities publicly issued by corporations with
one to ten years remaining to maturity, rated investment grade and having $50
million or more outstanding. The Lehman Int. Gov't Corp. Index is an unmanaged
index.
LIPPER INTERNATIONAL EQUITY FUND AVERAGE -- Contains international equity funds
that report to Lipper Analytical Services. The funds are given equal weight in
constructing performance which prevents any one fund from having a greater
impact on the overall calculation. Each fund contained in the average has stated
that their objective matches that of the group. Single country funds are not
included in this group.
LIPPER CORPORATE BOND FUND AVERAGE -- Contains corporate bond funds that report
to Lipper Analytical Services. The funds have an average credit quality rating
of least an "A". The average maturity is greater than 10 years. The funds are
equally weighted to assure that no one fund has more of an impact on the
performance calculation than any other fund.
LIPPER INTERMEDIATE TERM BOND FUND AVERAGE -- Contains intermediate-term bond
funds that report to Lipper Analytical Services. The funds invest mainly in
investment grade debt instruments and have an average credit rating of "A". The
average maturity is between 5 to 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.
LIPPER MORTGAGE FUND AVERAGE -- Contains mortgage funds that report to Lipper
Analytical Services. The funds contain primarily U.S. mortgage obligations. The
average maturity is greater than 10 years. The funds are equally weighted to
assure that no one fund has more of an impact on the performance calculation
than any other fund.
LIPPER GOVERNMENT MONEY MARKET AVERAGE -- Contains Government money market funds
that report to Lipper Analytical Services. The funds invest in short-term U.S.
Government obligations. The funds are equally weighted to assure that no one
fund has more of an impact on the performance calculation than any other fund.
LIPPER WORLD INCOME FUND AVERAGE -- Contains world income funds that report to
Lipper Analytical Services. The funds are able to invest in debt instruments in
any country. The funds are equally weighted to assure that no one fund has more
of an impact on the performance calculation than any other fund.
MORNINGSTAR LARGE CAP GROWTH AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.
MORNINGSTAR LARGE CAP VALUE AVERAGE -- Funds that have a median market
capitalization exceeding $5 billion qualify for large cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.
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MORNINGSTAR SMALL CAP GROWTH AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes growth funds as having a price/earnings ratio
combined with price/book ratio greater than the S&P 500.
MORNINGSTAR SMALL CAP VALUE AVERAGE -- Funds that have a median market
capitalization less than $1 billion qualify for small cap designation.
Morningstar then categorizes value funds as having a price/earnings ratio
combined with price/book ratio less than the S&P 500.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
<TABLE>
<C> <C> <S> <C>
(a) (1) Certificate of Trust.(2)
(2) Amendment to Certificate of Trust.*
(3) Form of Amended and Restated Declaration of Trust.*
(b) Amended and Restated By-Laws.*
(c) Not Applicable.
(d) (1) (i) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC (formerly known as
Prudential Mutual Fund Management).(2)
(ii) Amendment to Management Agreement.(2)
(2) (i) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and INVESCO Capital Management Inc.(3)
(ii) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Sawgrass Asset Management, L.L.C.(6)
(iii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Lazard Asset Management for the
International Equity Portfolio.(2)
(iv) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Wellington Management Company.(2)
(v) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Delaware International Advisers Ltd.(3)
(vi) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Columbus Circle Investors.(2)
(vii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Pacific Investment Management
Company.(2)
(viii) Subadvisory Agreement between Prudential Mutual Fund
Management and Hotchkis and Wiley.(2)
(ix) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Fleming Asset Management USA.(6)
(x) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Lazard Asset Management for the Small
Capitalization Value Portfolio.*
(xi) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Wood, Struthers & Winthrop Management
Corp.*
(xii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Oak Associates, Ltd.(1)
(e)(1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.(4)
(2) Form of Selected Dealer Agreement.(4)
(g) (1) Custodian Contract between the Registrant and State Street
Bank and Trust Company.(2)
(2) Amendment to Custodian Contract/Agreement dated February 22,
1999.(5)
(h)(1) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc.(2)
(2) Amendment to Transfer Agency and Service Agreement.*
(i) Opinion of Morris, Nichols, Arsht & Tunnell.*
(j) Consent of Independent Accountants.*
(p)(1) Code of Ethics of Registrant.*
(2) Code of Ethics of Prudential Investments Fund Management LLC
and Prudential Investment Management Services LLC*
(3) Code of Ethics of INVESCO Capital Management, Inc.*
(4) Code of Ethics of Sawgrass Asset Management, L.L.C.*
</TABLE>
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<TABLE>
<C> <C> <S> <C>
(5) Code of Ethics of Lazard Asset Management*
(6) Code of Ethics of Wellington Management Company*
(7) Code of Ethics of Delaware International Advisors Ltd.*
(8) Code of Ethics of Columbus Circle Investors*
(9) Code of Ethics of Pacific Investment Management Company*
(10) Code of Ethics of Hotchkis and Wiley*
(11) Code of Ethics of Fleming Asset Management USA*
(12) Code of Ethics of Oak Associates, Ltd.*
(13) Code of Ethics of DLJ Asset Management, Inc.*
</TABLE>
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* Filed herewith.
1. Incorporated by reference to the Registrant's Post-Effective Amendment No. 6
to its Registration Statement on Form N-1A filed via EDGAR on March 1, 1996
(File No. 33-50476).
2. Incorporated by reference to the Registrant's Post-Effective Amendment No. 7
to its Registration Statement on Form N-1A filed via EDGAR on March 11, 1997
(File No. 33-50476).
3. Incorporated by reference to the Registrant's Post-Effective Amendment No. 8
to its Registration Statement on Form N-1A filed via EDGAR on March 9, 1998
(File No. 33-50476).
4. Incorporated by reference to the Registrant's Post-Effective Amendment No. 9
to its Registration Statement on Form N-1A filed via EDGAR on March 2, 1999
(File No. 33-50476).
5. Incorporated by reference to the Registrant's Post-Effective Amendment No. 10
to its Registration Statement on Form N-1A filed via EDGAR on May 1, 1999
(File No. 33-50476).
6. Incorporated by reference to the Registrant's Post-Effective Amendment No. 11
to its Registration Statement on Form N-1A filed via EDGAR on March 2, 2000
(File No. 33-50476).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the Investment Company Act) and pursuant to Article VI of the
Fund's By-Laws (Exhibit (b) to the Registration Statement), officers, trustees,
employees and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 3817 of the Delaware Business Trust Act permits
indemnification of trustees who acted in good faith and reasonably believed that
the conduct was in the best interest of the Registrant. As permitted by Section
17(i) of the Investment Company Act, pursuant to Section 8 of the Distribution
Agreement (Exhibit (e)(1) to the Registration Statement), the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, (Securities Act) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Investment Company Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the shares being
registered, the Registrant
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<PAGE> 233
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Investment Company Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1)(i) to the
Registration Statement) and Section 4 of the Subadvisory Agreements (Exhibits
(d)(2) to the Registration Statement) limit the liability of Prudential
Investments Fund Management LLC (PIFM) and each Adviser, respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the
Investment Company Act as long as the interpretation of Section 17(h) and 17(i)
of such Act remains in effect and is consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC
See "How the Trust is Managed -- Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, as most recently amended (File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<S> <C> <C>
David R. Odenath, Jr. ....... Officer in Charge, Officer in Charge, President, Chief
President, Chief Executive Officer and Chief Operating
Executive Officer and Officer, PIFM; Senior Vice President,
Chief Operating The Prudential Insurance Company of
Officer America (Prudential)
Robert F. Gunia.............. Executive Vice President Executive Vice President and Chief
and Chief Administrative Officer, PIFM; Vice
Administrative Officer President, Prudential; President,
Prudential Investment Management
Services LLC (PIMS)
</TABLE>
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<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<S> <C> <C>
William V. Healey............ Executive Vice Executive Vice President, Chief Legal
President, Chief Legal Officer and Secretary, PIFM; Vice
Officer and Secretary President and Associate General Counsel,
Prudential; Senior Vice President, Chief
Legal Officer and Secretary, PIMS
Brian W. Henderson........... Executive Vice President Executive Vice President, PIFM; Senior
Vice President and Chief Operating
Officer, PIMS
Stephen Pelletier............ Executive Vice President Executive Vice President, PIFM
Judy A. Rice................. Executive Vice President Executive Vice President, PIFM
Lynn M. Waidvogel............ Executive Vice President Executive Vice President, PIFM
</TABLE>
(b) Columbus Circle Investors (CCI)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to CCI's directors and executive officers is included in its
Form ADV filed with the Securities and Exchange Commission (File No. 801-31227),
as most recently amended, the text of which is incorporated herein by reference.
(c) INVESCO Capital Management, Inc. (INVESCO)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to INVESCO's directors and executive officers is included in
its Form ADV filed with the Securities and Exchange Commission (File No.
801-33949), as most recently amended, the text of which is incorporated herein
by reference.
(d) Hotchkis and Wiley
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Hotchkis and Wiley is included in the Form ADV of Merrill
Lynch Asset Management, L.P. filed with the Securities and Exchange Commission
(File No. 801-11583), as most recently amended, the text of which is
incorporated herein by reference.
(e) Sawgrass Asset Management, L.L.C. (Sawgrass)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Sawgrass' directors and officers is included in its Form
ADV filed with the Securities and Exchange Commission (File No. 801-55243), as
most recently amended, the text of which is incorporated by reference.
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(f) Fleming Asset Management USA (Fleming USA)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Fleming USA's directors and executive officers is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-26297), as most recently amended, the text of which is incorporated
herein by reference.
(g) Lazard Asset Management
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to the general members of Lazard Freres & Co. LLC is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-6568), as most recently amended, the text of which is incorporated
herein by reference.
(h) Delaware International Advisers Ltd. (DIAL)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to DIAL's directors and executive officers is included in
its Form ADV filed with the Securities and Exchange Commission (File No.
801-37702), as most recently amended, the text of which is incorporated herein
by reference.
(i) Pacific Investment Management Company (PIMCO)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to PIMCO's partners is included in its Form ADV filed with
the Securities and Exchange Commission (File No. 801-7260), as most recently
amended, the text of which is incorporated herein by reference.
(j) Wellington Management Company, LLP (WMC)
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to WMC's general partners is included in its Form ADV filed
with the Securities and Exchange Commission (File No. 801-15908), as most
recently amended, the text of which is incorporated herein by reference.
(k) DLJ Asset Management, Inc.
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to DLJ Asset Management Inc.'s directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-9952), as most recently amended, the text of which is
incorporated herein by reference.
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(l) Oak Associates, Ltd.
See "How the Trust is Managed -- Advisers and Portfolio Managers" in the
Prospectus constituting Part A of this Registration Statement and "Manager and
Advisers" in the Statement of Additional Information constituting Part B of this
Registration Statement.
Information as to Oak Associates, Ltd.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-23632), as most recently amended, the text of which is
incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the Cash Accumulation Trust, COMMAND Government
Fund, COMMAND Money Fund, COMMAND Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Diversified Funds, Prudential Emerging
Growth Fund, Inc., Prudential Equity Fund, Inc. Prudential Equity Income Fund,
Inc., Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Total Return Fund, Inc., Prudential Government Income Fund,
Inc., Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential High Yield Total Return Fund, Inc., Prudential Index Series Fund,
Prudential Institutional Liquidity Portfolio, Inc., Prudential International
Bond Fund, Inc., Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential 20/20 Focus Fund, Prudential Tax-Free Money
Fund, Inc., Prudential Tax-Managed Funds, Prudential World Fund, Inc., The
Prudential Investment Portfolios, Inc., Target Funds and The Target Portfolio
Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts; Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Variable Contract Account 61-2, The Prudential Discovery Select Group Variable
Contract Account, The Pruco Life Flexible Premium Variable Annuity Account, The
Pruco Life of New Jersey Flexible Premium Variable Annuity Account, The
Prudential Individual Variable Contract Account and the Prudential Qualified
Individual Variable Contract Account.
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(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND
NAME(1) WITH UNDERWRITER OFFICES WITH REGISTRANT
------- --------------------- -----------------------
<S> <C> <C>
Margaret Deverell......................... Vice President and Chief None
Financial Officer
Robert F. Gunia........................... President Vice President and
Trustee
Kevin Frawley............................. Senior Vice President and
213 Washington Street Compliance Officer None
Newark, NJ 07102
William V. Healey......................... Senior Vice President, Secretary Assistant Secretary
and Chief Legal Officer
Brian W. Henderson........................ Senior Vice President and None
Officer
John R. Strangfeld, Jr. .................. Advisory Board Member President and Trustee
</TABLE>
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(1) The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act and the Rules thereunder are
maintained at the offices of State Street Bank and Trust Company, One Heritage
Drive, North Quincy, Massachusetts 02171; the Registrant, Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102-4077; and Prudential Mutual Fund
Services LLC, 194 Wood Avenue South, Iselin, New Jersey 08830. Documents
required by Rules 31a-1(b)(4), (5), (6), (7), (9), (10) and (11), 31a-1(d), and
31a-1(f) will be kept at 100 Mulberry Street, Gateway Center Three, Newark, New
Jersey 07102-4077 and the remaining accounts, books and other documents required
by such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the caption "How the Trust is Managed" in the
Prospectus and the caption "Investment Advisory and Other Services" in the
Statement of Additional Information, constituting Parts A and B, respectively,
of this Post-Effective Amendment to the Registration Statement, Registrant is
not a party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-7
<PAGE> 238
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark and State of New Jersey, on the 1st day of May, 2000.
THE TARGET PORTFOLIO TRUST
/s/ JOHN R. STRANGFELD
--------------------------------------
John R. Strangfeld, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EUGENE C. DORSEY Trustee May 1, 2000
- ---------------------------------------------------
Eugene C. Dorsey
/s/ ROBERT F. GUNIA Trustee May 1, 2000
- ---------------------------------------------------
Robert F. Gunia
/s/ ROBERT E. LABLANC Trustee May 1, 2000
- ---------------------------------------------------
Robert E. LaBlanc
/s/ DOUGLAS H. MCCORKINDALE Trustee May 1, 2000
- ---------------------------------------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Trustee May 1, 2000
- ---------------------------------------------------
Thomas T. Mooney
/s/ DAVID R. ODENATH, JR. Trustee May 1, 2000
- ---------------------------------------------------
David R. Odenath, Jr.
/s/ STEPHEN STONEBURN Trustee May 1, 2000
- ---------------------------------------------------
Stephen Stoneburn
/s/ JOHN R. STRANGFELD President May 1, 2000
- --------------------------------------------------- and Trustee
John R. Strangfeld
/s/ GRACE C. TORRES Treasurer and Principal May 1, 2000
- --------------------------------------------------- Financial and Accounting Officer
Grace C. Torres
/s/ CLAY T. WHITEHEAD Trustee May 1, 2000
- ---------------------------------------------------
Clay T. Whitehead
</TABLE>
C-8
<PAGE> 239
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
PAGES
<C> <C> <S> <C> <C>
(a) (1) Certificate of Trust.(2)....................................
(2) Amendment to Certificate of Trust.*.........................
(3) Form of Amended and Restated Declaration of Trust.*.........
(b) Amended and Restated By-Laws.*..............................
(c) Not Applicable..............................................
(d) (1) (i) Management Agreement between the Registrant and Prudential
Investments Fund Management LLC (formerly known as
Prudential Mutual Fund Management).(2)......................
(ii) Amendment to Management Agreement.(2).......................
(2) (i) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and INVESCO Capital Management Inc.(3).....
(ii) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Sawgrass Asset Management, L.L.C.(6).....
(iii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Lazard Asset Management for the
International Equity Portfolio.(2)..........................
(iv) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Wellington Management Company.(2)......
(v) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Delaware International Advisers
Ltd.(3).....................................................
(vi) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Columbus Circle Investors.(2)..........
(vii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Pacific Investment Management
Company.(2).................................................
(viii) Subadvisory Agreement between Prudential Mutual Fund
Management and Hotchkis and Wiley.(2).......................
(ix) Subadvisory Agreement between Prudential Investments Fund
Management LLC and Fleming Asset Management USA.(6).........
(x) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Lazard Asset Management for the Small
Capitalization Value Portfolio.*............................
(xi) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Wood, Struthers & Winthrop Management
Corp.*......................................................
(xii) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and Oak Associates, Ltd.(1)................
(e)(1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.(4)......................
(2) Form of Selected Dealer Agreement.(4).......................
(g) (1) Custodian Contract between the Registrant and State Street
Bank and Trust Company.(2)..................................
(2) Amendment to Custodian Contract/Agreement dated February 22,
1999.(5)....................................................
(h)(1) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc.(2)................
(2) Amendment to Transfer Agency and Service Agreement.*........
(i) Opinion of Morris, Nichols, Arsht & Tunnell.*...............
(j) Consent of Independent Accountants.*........................
</TABLE>
<PAGE> 240
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
PAGES
<C> <C> <S> <C> <C>
(p)(1) Code of Ethics of Registrant.*..............................
(2) Code of Ethics of Prudential Investments Fund Management LLC
and Prudential Investment Management Services LLC*..........
(3) Code of Ethics of INVESCO Capital Management, Inc.*.........
(4) Code of Ethics of Sawgrass Asset Management, L.L.C.*........
(5) Code of Ethics of Lazard Asset Management*..................
(6) Code of Ethics of Wellington Management Company*............
(7) Code of Ethics of Delaware International Advisors Ltd.*.....
(8) Code of Ethics of Columbus Circle Investors*................
(9) Code of Ethics of Pacific Investment Management Company*....
(10) Code of Ethics of Hotchkis and Wiley*.......................
(11) Code of Ethics of Fleming Asset Management USA*.............
(12) Code of Ethics of Oak Associates, Ltd.*.....................
(13) Code of Ethics of DLJ Asset Management, Inc.*...............
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
Exhibit (a)(2)
AMENDMENT NO. 1
TO
CERTIFICATE OF TRUST
OF
THE TARGET PORTFOLIO TRUST
This Amendment No. 1 to the Certificate of Trust (the "Certificate") of
The Target Portfolio Trust (the "Trust") is being executed as of August 25,
1999, for the purpose of amending the terms of the Certificate, as originally
filed in the Office of the Secretary of the State of Delaware on July 29, 1992,
to clarify the inter-series limitation on liability within the Trust.
NOW, THEREFORE, the undersigned do hereby certify as follows:
1. The Certificate is hereby amended by changing current paragraph
No. 4 to read in its entirety as follows:
"SERIES TRUST. Notice is hereby given that pursuant to Section 3804
of the Delaware Business Trust Act, the debts, liabilities,
obligations and expenses incurred, contracted for or otherwise
existing with respect to a particular series of the Trust shall be
enforceable against the assets of such series only and not against
the assets of any other series or of the Trust generally or any other
series thereof, and, unless otherwise provided in the governing
instrument of the Trust, none of the debts, liabilities, obligations
and expenses incurred, contracted for or otherwise existing with
respect to the Trust generally or any other series thereof shall be
enforceable against the assets of such series."
2. This Amendment No. 1 to the Certificate shall become effective
immediately.
3. Except as amended pursuant to the foregoing paragraphs, the
Certificate is hereby ratified and confirmed in all respects.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned, being Trustees of the Trust, have
duly executed this Amendment No. 1 to the Certificate as of the day and year
first above written.
/s/ Eugene C. Dorsey
------------------------------
Eugene C. Dorsey
/s/ Douglas H. McCorkindale
------------------------------
Douglas H. McCorkindale
/s/ Thomas T. Mooney
------------------------------
Thomas T. Mooney
/s/ John R. Strangfeld
------------------------------
John R. Strangfeld
<PAGE> 1
Exhibit (a)(3)
FORM OF AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
---------------------------------------------------------------
of
The Target Portfolio Trust
a Delaware Business Trust
Principal Place of Business:
Gateway Center Three
100 Mulberry Street
Newark, N.J. 07102
<PAGE> 2
TABLE OF CONTENTS
-----------------
AGREEMENT AND DECLARATION OF TRUST
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I Name and Definitions.............................................. 1
1. Name.............................................................. 1
2. Definitions....................................................... 1
(a) By-Laws.................................................... 1
(b) Certificate of Trust....................................... 1
(c) Classes.................................................... 2
(d) Commission and Principal Underwriter....................... 2
(e) Declaration of Trust....................................... 2
(f) Delaware Act............................................... 2
(g) Interested Person.......................................... 2
(h) Investment Manager or Manager.............................. 2
(i) 1940 Act................................................... 2
(j) Person..................................................... 2
(k) Series..................................................... 2
(l) Shareholder................................................ 2
(m) Shares..................................................... 2
(n) Trust...................................................... 2
(o) Trust Property............................................. 3
(p) Trustees................................................... 3
ARTICLE II Purpose of Trust................................................. 3
ARTICLE III Shares.......................................................... 3
1. Division of Beneficial Interest................................... 3
2. Ownership of Shares............................................... 5
3. Transfer of Shares................................................ 5
4. Investments in the Trust.......................................... 5
5. Status of Shares and Limitation of Personal Liability............. 5
6. Establishment and Designation of Series........................... 6
(a) Assets Held with Respect to a Particular Series............ 6
(b) Liabilities Held with Respect to a Particular Series....... 7
(c) Dividends, Distributions, Redemptions, and Repurchases..... 8
(d) Equality................................................... 8
(e) Fractions.................................................. 8
(f) Exchange Privilege......................................... 8
(g) Combination of Series...................................... 9
(h) Elimination of Series...................................... 9
7. Indemnification of Shareholders................................... 9
ARTICLE IV Trustees......................................................... 9
1. Number, Election and Tenure....................................... 9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
2. Effect of Death, Resignation, etc. of a Trustee................... 10
3. Powers............................................................ 11
4. Payment of Expenses by the Trust.................................. 15
5. Payment of Expenses by Shareholders............................... 15
6. Ownership of Assets of the Trust.................................. 16
7. Service Contracts................................................. 16
8. Trustees and Officers as Shareholders............................. 18
ARTICLE V Shareholders' Voting Powers and Meetings.......................... 18
1. Voting Powers, Meetings, Notice and Record Dates.................. 18
2. Quorum and Required Vote.......................................... 19
3. Record Dates...................................................... 20
4. Additional Provisions............................................. 20
ARTICLE VI Net Asset Value, Distributions and Redemptions................... 20
1. Determination of Net Asset Value, Net Income, and Distributions... 20
2. Redemptions and Repurchases....................................... 21
ARTICLE VII Compensation and Limitation of Liability of Trustees............ 22
1. Compensation...................................................... 22
2. Indemnification and Limitation of Liability....................... 22
3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety..... 24
4. Insurance......................................................... 23
ARTICLE VIII Miscellaneous................................................. 24
1. Liability of Third Persons Dealing with Trustees.................. 24
2. Termination of Trust or Series.................................... 24
3. Reorganization.................................................... 25
4. Amendments........................................................ 26
5. Filing of Copies, References, Headings............................ 27
6. Applicable Law.................................................... 27
7. Provisions in Conflict with Law or Regulations.................... 28
8. Business Trust Only............................................... 29
</TABLE>
<PAGE> 4
AGREEMENT AND DECLARATION OF TRUST
OF
The Target Portfolio Trust
THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into as of
the date set forth below by the Trustees named hereunder for the purpose of
forming a Delaware business trust in accordance with the provisions hereinafter
set forth,
NOW, THEREFORE, the Trustees hereby direct that the Certificate of
Trust be filed with Office of the Secretary of State of the State of Delaware
and do hereby declare that the Trustees will hold IN TRUST all cash, securities
and other assets which the Trust now possesses or may hereafter acquire from
time to time in any manner and manage and dispose of the same upon the following
terms and conditions for the benefit of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as The Target
Portfolio Trust and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended from time
to time, which By-Laws are expressly herein incorporated by reference as part of
the "governing instrument" within the meaning of the Delaware Act;
(b) "Certificate of Trust" means the certificate of trust, as amended
or restated from time to time, filed by the Trustees in the Office of the
Secretary of State of the State of Delaware in accordance with the Delaware Act;
1
<PAGE> 5
(c) "Class" means a class of Shares of a Series of the Trust
established in accordance with the provisions of Article III hereof;
(d) "Commission" and "Principal Underwriter" shall have the meanings
given them in the 1940 Act;
(e) "Declaration of Trust" means this Agreement and Declaration of
Trust, as amended or restated from time to time;
(f) "Delaware Act" means the Delaware Business Trust Act, 12 Del. C.
Sections 3801 et seq., as amended from time to time;
(g) "Interested Person" shall have the meaning given it in Section
2(a)(19) of the 1940 Act;
(h) "Manager" means a party furnishing services to the Trust pursuant
to any contract described in Article IV, Section 7(a) hereof;
(i) "1940 Act" means the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(j) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(k) "Series" means each Series of Shares established and designated
under or in accordance with the provisions of Article III;
(l) "Shareholder" means a record owner of outstanding Shares;
(m) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
(n) "Trust" means the Delaware Business Trust established under the
Delaware Act by this Declaration of Trust and the filing of the Certificate of
Trust in the Office of the Secretary of State of the State of Delaware;
2
<PAGE> 6
(o) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is from time to time owned or held by or for the
account of the Trust; and
(p) "Trustees" means the persons who have signed this Declaration of
Trust and all other Persons who may from time to time be duly elected or
appointed to serve as Trustees in accordance with the provisions hereof, in each
case so long as such Person shall continue in office in accordance with the
terms of this Declaration of Trust, and reference herein to a Trustee or the
Trustees shall refer to such Person or Persons in his or her or their capacity
as trustees hereunder.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the
business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities, and to carry on
such other business as the Trustees may from time to time determine pursuant to
their authority under this Declaration of Trust.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall be divided into one or more Series. Each Series may
be divided into two or more Classes. Subject to the further provisions of this
Article III and any applicable requirements of the 1940 Act, the Trustees shall
have full power and authority, in their sole discretion, and without obtaining
any authorization or vote of the Shareholders of any Series or Class thereof,
(i) to divide the beneficial interest in each Series or Class thereof into
Shares, with or without par value as the Trustees shall determine, (ii) to issue
Shares without limitation as to number (including fractional Shares), to such
Persons and for such amount and type of consideration, subject to any
restriction set forth in the By-Laws, including cash or securities, at such time
or times and on such terms as the Trustees
3
<PAGE> 7
may deem appropriate, (iii) to establish and designate and to change in any
manner any Series or Class thereof and to fix such preferences, voting powers,
rights, duties and privileges and business purpose of each Series or Class
thereof as the Trustees may from time to time determine, which preferences,
voting powers, rights, duties and privileges may be senior or subordinate to (or
in the case of business purpose, different from) any existing Series or Class
thereof and may be limited to specified property or obligations of the Trust or
profits and losses associated with specified property or obligations of the
Trust, (iv) to divide or combine the Shares of any Series or Class thereof into
a greater or lesser number without thereby materially changing the proportionate
beneficial interest of the Shares of such Series or Class in the assets held
with respect to that Series, (v) to classify or reclassify any issued Shares of
any Series or Class thereof into shares of one or more Series or Classes thereof
and (vi) to take such other action with respect to the Shares as the Trustees
may deem desirable.
Subject to the distinctions permitted among Classes of the same Series
as established by the Trustees consistent with the requirements of the 1940 Act,
each Share of a Series of the Trust shall represent an equal beneficial interest
in the net assets of such Series, and each holder of Shares of a Series shall be
entitled to receive such holder's pro rata share of distributions of income and
capital gains, if any, made with respect to such Series. Upon redemption of the
Shares of any Series, the applicable Shareholder shall be paid solely out of the
funds and property of such Series of the Trust.
All references to Shares in this Declaration of Trust shall be deemed
to be Shares of any or all Series or Classes thereof, as the context may
require. All provisions herein relating to the Trust shall apply equally to each
Series of the Trust and each Class thereof, except as the context otherwise
requires.
All Shares issued hereunder, including, without limitation, Shares
issued in connection with a dividend in Shares or a split or reverse split of
Shares, shall be fully paid and non-assessable. Except as otherwise provided by
the Trustees, Shareholders shall have no preemptive or other right to subscribe
to any
4
<PAGE> 8
additional Shares or other securities issued by the Trust.
Section 2. Ownership of Shares. The Ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series (or
Class). No certificates certifying the ownership of Shares shall be issued
except as the Trustees may otherwise determine from time to time. The Trustees
may make such rules as they consider appropriate for the issuance of Share
certificates, the transfer of Shares of each Series (or Class) and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series (or Class) and as to the number of Shares of each
Series (or Class) held from time to time by each Shareholder.
Section 3. Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the books of the Trust only by the
record holder thereof or by his duly authorized agent upon delivery to the
Trustees or the Trust's transfer agent of a duly executed instrument of
transfer, together with a Share certificate if one is outstanding, and such
evidence of the genuineness of each such execution and authorization and of such
other matters as may be required by the Trustees. Upon such delivery, and
subject to any further requirements specified by the Trustees or contained in
the By-Laws, the transfer shall be recorded on the books of the Trust. Until a
transfer is so recorded, the Shareholder of record of Shares shall be deemed to
be the holder of such Shares for all purposes hereunder and neither the Trustees
nor the Trust, nor any transfer agent or registrar or any officer, employee or
agent of the Trust, shall be affected by any notice of a proposed transfer.
Section 4. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize.
Section 5. Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in
5
<PAGE> 9
this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof. The
death, incapacity, dissolution, termination or bankruptcy of a Shareholder
during the existence of the Trust shall not operate to terminate the Trust, nor
entitle the representative of any such Shareholder to an accounting or to take
any action in court or elsewhere against the Trust or the Trustees, but entitles
such representative only to the rights of such Shareholder under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust Property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor, except as specifically provided herein, to
call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
Section 6. Establishment and Designation of Series. The establishment
and designation of any Series (or Class) of Shares shall be effective upon the
adoption by a majority of the then Trustees of a resolution that sets forth such
establishment and designation and the relative rights and preferences of such
Series (or Class), whether directly in such resolution or by reference to
another document including, without limitation, any registration statement of
Trust, or as otherwise provided in such resolution.
Shares of each Series (or Class) established pursuant to this Article
III, unless otherwise provided in the resolution establishing such Series, shall
have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be,
6
<PAGE> 10
shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors of such Series, and shall be so recorded upon
the books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
held with respect to" that Series. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as assets held with respect to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series in such manner and on such
basis as the Trustees, in their sole discretion, deem fair and equitable, and
any General Assets so allocated to a particular Series shall be held with
respect to that Series. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series for all purposes. Separate and
distinct records shall be maintained for each Series and the assets held with
respect to each Series shall be held and accounted for separately from the
assets held with respect to all other Series and the General Assets of the Trust
not allocated to such Series.
(b) Liabilities Held with Respect to a Particular Series. The assets of
the Trust held with respect to each particular Series shall be charged against
the liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general liabilities
of the Trust which are not readily identifiable as being held with respect to
any particular Series shall be allocated and charged by the Trustees to and
among any one or more of the Series in such manner and on such basis as the
Trustees in their sole discretion deem fair and equitable. All liabilities,
expenses, costs, charges, and reserves so charged to a Series are herein
referred to as "liabilities held with respect to" that Series. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes. All
liabilities held with respect to a particular Series shall be enforceable
against the assets held with respect to such Series only and not against the
assets of the Trust generally or against the assets held with respect to any
other Series and, except as otherwise provided in this Declaration of Trust,
none of the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to the Trust generally or any other
Series thereof shall be enforceable against the assets of such Series.
7
<PAGE> 11
Notice of this contractual limitation on the liability of each Series shall be
set forth in the Certificate of Trust or in an amendment thereto prior to the
issuance of any Shares of a Series.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution, including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or Class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or Class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor shall any Shareholder of any particular
Series otherwise have any right or claim against the assets held with respect to
any other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Equality. All the Shares of each particular Series shall represent
an equal proportionate interest in the assets held with respect to that Series
(subject to the liabilities held with respect to that Series and such rights and
preferences as may have been established and designated with respect to Classes
of Shares within such Series), and each Share of any particular Series shall be
equal to each other Share of that Series.
(e) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole Share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
(f) Exchange Privilege. The Trustees shall have the authority to
provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of
8
<PAGE> 12
Shares in accordance with such requirements and procedures as may be established
by the Trustees.
(g) Combination of Series. The Trustees shall have the authority,
without the approval of the Shareholders of any Series unless otherwise required
by applicable law, to combine the assets and liabilities held with respect to
any two or more Series into assets and liabilities held with respect to a single
Series.
(h) Elimination of Series. At any time that there are no Shares
outstanding of any particular Series (or Class) previously established and
designated, the Trustees may by resolution of a majority of the Trustees abolish
that Series (or Class) and rescind the establishment and designation thereof.
Section 7. Indemnification of Shareholders. If any Shareholder or
former Shareholder shall be exposed to liability by reason of a claim or demand
relating to such Person being or having been a Shareholder, and not because of
such Person's acts or omissions, the Shareholder or former Shareholder (or such
Person's heirs, executors, administrators, or other legal representatives or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the Trust against all loss and expense arising from such claim or
demand, but only out of the assets held with respect to the particular Series of
Shares of which such Person is or was a Shareholder and from or in relation to
which such liability arose.
ARTICLE IV
Trustees
Section 1. Number, Election and Tenure. The number of Trustees shall
initially be two, who shall be Frank W. Giordano and S. Jane Rose. Hereafter,
the number of Trustees shall at all times be at least two and no more than
fifteen as determined, from time to time, by the Trustees pursuant to Section 3
of this Article IV. Each Trustee shall serve during the continued lifetime of
the Trust until he or she dies, resigns, is declared bankrupt or incompetent by
a court of appropriate jurisdiction, or is removed, or, if sooner, until the
next meeting of Shareholders called
9
<PAGE> 13
for the purpose of electing Trustees and until the election and qualification of
his or her successor. In the event that less than the majority of the Trustees
holding office have been elected by the Shareholder, the Trustees then in office
shall call a Shareholders' meeting for the election of Trustees. Any Trustee may
resign at any time by written instrument signed by him and delivered to any
officer of the Trust or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages on account of such removal. The Shareholders may elect Trustees
at any meeting of Shareholders called by the Trustees for that purpose. Any
Trustee may be removed at any meeting of Shareholders by a vote of two-thirds of
the outstanding Shares of the Trust.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination to serve, resignation, retirement, removal, or incapacity of one or
more Trustees, or all of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Declaration of Trust.
Whenever there shall be fewer than the designated number of Trustees, until
additional Trustees are elected or appointed as provided herein to bring the
total number of Trustees equal to the designated number, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to replace those no longer serving,
the Trust's Manager(s) are empowered to appoint new Trustees subject to the
provisions of Section 16(a) of the 1940 Act.
Section 3. Powers. Subject to the provisions of this Declaration of
Trust, the business of the Trust
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shall be managed by the Trustees, and the Trustees shall have all powers
necessary or convenient to carry out that responsibility including the power to
engage in securities transactions of all kinds on behalf of the Trust. Without
limiting the foregoing, the Trustees may: adopt By-Laws not inconsistent with
this Declaration of Trust providing for the regulation and management of the
affairs of the Trust and may amend and repeal them to the extent that such
By-Laws do not reserve that right to the Shareholders; enlarge or reduce their
number; remove any Trustee with or without cause at any time by written
instrument signed by at least two-thirds of the number of Trustees prior to such
removal, specifying the date when such removal shall become effective, and fill
vacancies caused by enlargement of their number or by the death, resignation or
removal of a Trustee; elect and remove, with or without cause, such officers and
appoint and terminate such agents as they consider appropriate; appoint from
their own number and establish and terminate one or more committees consisting
of two or more Trustees which may exercise the powers and authority of the Board
of Trustees to the extent that the Trustees determine; employ one or more
custodians of the assets of the Trust and may authorize such custodians to
employ subcustodians and to deposit all or any part of such assets in a system
or systems for the central handling of securities or with a Federal Reserve
Bank, retain a transfer agent or a shareholder servicing agent, or both; provide
for the issuance and distribution of Shares by the Trust directly or through one
or more Principal Underwriters or otherwise; redeem, repurchase and transfer
Shares pursuant to applicable law; set record dates for the determination of
Shareholders with respect to various matters; declare and pay dividends and
distributions to Shareholders of each Series from the assets of such Series; and
in general delegate such authority as they consider desirable to any officer of
the Trust, to any committee of the Trustees and to any agent or employee of the
Trust or to any such custodian, transfer or Shareholder servicing agent, or
Principal Underwriter. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. Unless otherwise specified herein or in the
By-Laws or required by law, any action by the Trustees shall be deemed effective
if approved or taken by a majority of the Trustees present
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at a meeting of Trustees at which a quorum of Trustees is present, within or
without the State of Delaware.
Without limiting the foregoing, the Trustees shall have the power and
authority to cause the Trust (or to act on behalf of the Trust):
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, to change the investments of the assets of the Trust; and to
exercise any and all rights, powers, and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options (including, options on futures contracts) with respect
to or otherwise deal in any property rights relating to any or all of the assets
of the Trust or any Series;
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(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such Person or Persons as the
Trustees shall deem proper, granting to such Person or Persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including, but not
limited to, claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
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(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes and in connection therewith issue notes or other
evidence of indebtedness; and to mortgage and pledge the Trust Property or any
part thereof to secure any or all of such indebtedness;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust Property or any part thereof to secure any of or all of such obligations;
(l) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability;
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans and trusts, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any or
all of the Trustees, officers, employees and agents of the Trust;
(n) To operate as and carry out the business of an investment
company, and exercise all the powers necessary or appropriate to the conduct of
such operations;
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(o) To enter into contracts of any kind and description;
(p) To employ one or more banks, trust companies or companies
that are members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Declaration or Trust or in the By-Laws;
(q) To interpret the investment policies, practices or
limitations of any Series or Class; and
(r) Subject to the 1940 Act, to engage in any other lawful act
or activity in which a business trust organized under the Delaware Act may
engage.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of the principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including, but not limited to, the Trustees compensation and such expenses and
charges for the services of the Trust's officers, employees, investment adviser
or manager, Principal Underwriter, auditors, counsel, custodian, transfer agent,
shareholder servicing agent, and such other agents or independent contractors
and such other expenses and charges as the Trustees may deem necessary or proper
to incur, which expenses, fees, charges, taxes and liabilities shall be
allocated in accordance with Article III, Section 6 hereof.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series, to pay directly, in advance or
arrears, for charges of the Trust's
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custodian or transfer, Shareholder servicing or similar agent, an amount fixed
from time to time by the Trustees, by setting off such charges due from such
Shareholder from declared but unpaid dividends owed such Shareholder and/or by
reducing the number of Shares in the account of such Shareholder by that number
of full and/or fractional Shares which represents the outstanding amount of such
charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets
of the Trust shall at all times be considered as vested in the Trust, except
that the Trustees shall have power to cause legal title to any Trust Property to
be held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee, he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be
set forth under federal and/or state law and in the By-Laws, including, without
limitation, the requirements of Section 15 of the 1940 Act, the Trustees may, at
any time and from time to time, contract for exclusive or nonexclusive advisory,
management and/or administrative services for the Trust or for any Series (or
Class thereof) with any corporation, trust, association or other organization;
and any such contract may contain such other terms as the Trustees may
determine, including, without limitation, authority for the Manager or
administrator to delegate certain or all of its duties under such contracts to
qualified investment advisers and administrations and to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust
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shall be held uninvested and to make changes in the Trust's investments, or such
other activities as may specifically be delegated to such party.
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series (or Classes) or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth under federal and/or state law and in the
By-Laws, including, without limitation, the requirements of Section 15 of the
1940 Act; and any such contract may contain such other terms as the Trustees may
determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
Shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth under federal and/or state law and in the By-Laws or stipulated by
resolution of the Trustees.
(d) Subject to applicable law, the Trustees are further
empowered, at any time and from time to time, to contract with any entity to
provide such other services to the Trust or one or more of the Series, as the
Trustees determine to be in the best interests of the Trust and the applicable
Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, Manager, adviser, Principal Underwriter,
distributor, or affiliate or agent of or for any corporation,
trust, association, or other organization, or for any parent
or affiliate of any organization with which an advisory,
management or administration contract, or principal
underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may
have been or
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may hereafter be made, or that any such organization, or any
parent or affiliate thereof, is a Shareholder or has an
interest in the Trust, or that
(ii) any corporation, trust, association or other
organization with which an advisory, management or
administration contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made also has an advisory, management or administration
contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
Section 8. Trustees and Officers as Shareholders. Any Trustee, officer
or agent of the Trust may acquire, own and dispose of Shares to the same extent
as if he were not a Trustee, officer or agent; and the Trustees may issue and
sell and cause to be issued and sold Shares to, and redeem such Shares from, any
such Person or any firm or company in which such Person is interested, subject
only to the general limitations contained herein or in the By-Laws relating to
the sale and redemption of such Shares.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers, Meetings, Notice and Record Dates. The
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such
additional matters relating to the Trust as may be required by applicable law,
this
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Declaration of Trust, the By-laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. Notwithstanding any other
provision of this Declaration of Trust, on any matter submitted to a vote of the
Shareholders, all Shares of the Trust then entitled to vote shall be voted in
aggregate, except (i) when required by the 1940 Act, Shares shall be voted by
individual Series; (ii) when the matter involves the termination of a Series or
any other action that the Trustees have determined will affect only the
interests of one or more Series, then only Shareholders of such Series shall be
entitled to vote thereon; and (iii) when the matter involves any action that the
Trustees have determined will affect only the interests of one or more Classes,
then only the Shareholders of such Class or Classes shall be entitled to vote
thereon. There shall be no cumulative voting in the election of Trustees. Shares
may be voted in person or by proxy. A proxy may be given in writing. The By-Laws
may provide that proxies may also, or may instead, be given by any electronic or
telecommunications device or in any other manner. Notwithstanding anything else
contained herein or in the By-Laws, in the event a proposal by anyone other than
the officers or Trustees of the Trust is submitted to a vote of the Shareholders
of one or more Series or Classes thereof or of the Trust, or in the event of any
proxy contest or proxy solicitation or proposal in opposition to any proposal by
the officers or Trustees of the Trust, Shares may be voted only in person or by
written proxy at a meeting. Until Shares are issued, the Trustees may exercise
all rights of Shareholders and may take any action required by law, this
Declaration of Trust or the By-Laws to be taken by the Shareholders. Meeting of
the Shareholders shall be called and notice thereof and record dates therefor
shall be given and set as provided in the By-Laws.
Section 2. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
thirty-three and one-third percent (33-1/3%) of the Shares entitled to vote
shall constitute a quorum at a Shareholders' meeting. When any one or more
Series (or Classes) is to vote as a single Class separate from any
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other Shares, thirty-three and one-third percent (33-1/3%) of the Shares of each
such Series (or Classes) entitled to vote shall constitute a quorum at a
Shareholders' meeting of that Series (or Class). Except when a larger vote is
required by any provision of this Declaration of Trust or the By-Laws or by
applicable law, when a quorum is present at any meeting, a majority of the
Shares voted shall decide any questions and a plurality of the Shares voted
shall elect a Trustee, provided that where any provision of law or of this
Declaration of Trust requires that the holders of any Series shall vote as a
Series (or that holders of a Class shall vote as a Class), then a majority of
the Shares of that Series (or Class) voted on the matter (or a plurality with
respect to the election of a Trustee) shall decide that matter insofar as that
Series (or Class) is concerned.
Section 3. Record Dates. For the purpose of determining the
Shareholders of any Series (or Class) who are entitled to receive payment of any
dividend or of any other distribution, the Trustees may from time to time fix a
date, which shall be before the date for the payment of such dividend or such
other payment, as the record date for determining the Shareholders of such
Series (or Class) having the right to receive such dividend or distribution.
Without fixing a record date, the Trustees may for distribution purposes close
the register or transfer books for one or more Series (or Classes) at any time
prior to the payment of a distribution. Nothing in this Section shall be
construed as precluding the Trustees from setting different record dates for
different Series (or Classes).
Section 4. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to applicable law and Article III, Section 6 hereof, the
Trustees, in their absolute discretion, may prescribe and shall set forth in the
By-Laws or in a duly adopted vote of the Trustees such bases and time for
determining the per
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Share or net asset value of the Shares of any Series or net income attributable
to the Shares of any Series, or the declaration and payment of dividends and
distributions on the Shares of any Series, as they may deem necessary or
desirable.
Section 2. Redemptions and Repurchases.
(a) The Trust shall purchase such Shares as are offered by any
Shareholder for redemption, upon the presentation of a proper instrument of
transfer together with a request directed to the Trust or a Person designated by
the Trust that the Trust purchase such Shares or in accordance with such other
procedures for redemption as the Trustees may from time to time authorize; and
the Trust will pay therefor the net asset value thereof as determined by the
Trustees (or on their behalf), in accordance with applicable law. Unless
extraordinary circumstances exist, payment for said Shares shall be made by the
Trust to the Shareholder within seven (7) days after the date on which the
request is made in proper form. The obligation set forth in this Section 2 is
subject to the provision that in the event that any time the New York Stock
Exchange (the "Exchange") is closed for other than weekends or holidays, or if
permitted by the rules and regulations or an order of the Commission during
periods when trading on the Exchange is restricted or during any emergency which
makes it impracticable for the Trust to dispose of the investments of the
applicable Series or to determine fairly the value of the net assets held with
respect to such Series or during any other period permitted by order of the
Commission for the protection of investors, such obligations may be suspended or
postponed by the Trustees. In the case of a suspension of the right of
redemption as provided herein, a Shareholder may either withdraw the request for
redemption or receive payment based on the net asset value per share next
determined after the termination of such suspension.
(b) The redemption price may in any case or cases be paid
wholly or partly in kind if the Trustees determine that such payment is
advisable in the interest of the remaining Shareholders of the Series for which
the Shares are being redeemed. Subject to the foregoing, the fair value,
selection and quantity of securities or other property so paid or delivered as
all or part of the redemption price may be determined
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by or under authority of the Trustees. In no case shall the Trust be liable for
any delay of any corporation or other Person in transferring securities selected
for delivery as all or part of any payment in kind.
(c) If the Trustees shall, at any time and in good faith,
determine that direct or indirect ownership of Shares of any Series has or may
become concentrated in any Person to an extent that would disqualify any Series
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (or any successor statute thereto), then the Trustees shall have the
power (but not the obligation) by such means as they deem equitable (i) to call
for the redemption by any such Person of a number, or principal amount, of
Shares sufficient to maintain or bring the direct or indirect ownership of
Shares into conformity with the requirements for such qualification and (ii) to
refuse to transfer or issue Shares to any Person whose acquisition of the Shares
in question would result in such disqualification. Any such redemption shall be
effected at the redemption price and in the manner provided in this Article VI.
(d) The holders of Shares shall upon demand disclose to the
Trustees in writing such information with respect to direct and indirect
ownership of Shares as the Trustees deem necessary to comply with the provisions
of the Internal Revenue Code of 1986, as amended (or any successor statute
thereto), or to comply with the requirements of any other taxing authority.
ARTICLE VII
Compensation and Limitation of
Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. A Trustee, when
acting in such capacity,
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shall not be personally liable to any Person, other than the Trust or a
Shareholder to the extent provided in this Article VII, for any act, omission or
obligation of the Trust, of such Trustee or of any other Trustee. The Trustees
shall not be responsible or liable in any event for any neglect or wrongdoing of
any officer, agent, employee, Manager or Principal Underwriter of the Trust. The
Trust shall indemnify each Person who is, or has been, a Trustee, officer,
employee or agent of the Trust and any Person who is serving or has served at
the Trust's request as a director, officer, trustee, employee or agent of
another organization in which the Trust has any interest as a shareholder,
creditor or otherwise to the extent and in the manner provided in the By-Laws.
All persons extending credit to, contracting with or having any claim
against the Trust or the Trustees shall look only to the assets of the
appropriate Series, or, if the Trustees have yet to establish Series, of the
Trust for payment under such credit, contract or claim; and neither the Trustees
nor the Shareholders, nor any of the Trust's officers, employees or agents,
whether past, present or future, shall be personally liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees by any of them in connection with the Trust shall
conclusively be deemed to have been executed or done only in or with respect to
his or their capacity as Trustee or Trustees, and such Trustee or Trustees shall
not be personally liable thereon. At the Trustees' discretion, any note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officer or officers may give notice that the Certificate of Trust is
on file in the Office of the Secretary of State of the State of Delaware and
that a limitation on liability of Series exists and such note, bond, contract,
instrument, certificate or undertaking may, if the Trustees so determine, recite
that the same was executed or made on behalf of the Trust by a Trustee or
Trustees in such capacity and not individually or by an officer or officers in
such capacity and not individually and that the obligations of such instrument
are not binding upon any of them or the Shareholders individually but are
binding only on the assets and property of the Trust or a Series thereof, and
may contain such further recital
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as such Person or Persons may deem appropriate. The omission of any such notice
or recital shall in no way operate to bind any Trustees, officers or
Shareholders individually.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to
the fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee, officer, employee or agent of the Trust in connection with
any claim, action, suit or proceeding in which he or she becomes involved by
virtue of his or her capacity or former capacity with the Trust.
ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 2. Termination of Trust or Series.
(a) Unless terminated as provided herein, the Trust shall
continue without limitation of time.
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The Trust may be terminated at any time by vote of a majority of the Shares of
each Series entitled to vote, voting separately by Series, or by the Trustees by
written notice to the Shareholders. Any Series of Shares or Class thereof may be
terminated at any time by vote of a majority of the Shares of such Series or
Class entitled to vote or by the Trustees by written notice to the Shareholders
of such Series or Class.
(b) Upon the requisite Shareholder vote or action by the
Trustees to terminate the Trust or any one or more Series of Shares or any Class
thereof, after paying or otherwise providing for all charges, taxes, expenses
and liabilities, whether due or accrued or anticipated, of the Trust or of the
particular Series or any Class thereof as may be determined by the Trustees, the
Trust shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets of the Trust or of the affected Series
or Class to distributable form in cash or Shares (if any Series remain) or other
securities, or any combination thereof, and distribute the proceeds to the
Shareholders of the Series or Classes involved, ratably according to the number
of Shares of such Series or Class held by the several Shareholders of such
Series or Class on the date of distribution. Thereupon, the Trust or any
affected Series or Class shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties relating thereto or
arising therefrom, and the right, title and interest of all parties with respect
to the Trust or such Series or Class shall be canceled and discharged.
(c) Upon termination of the Trust, following completion of
winding up of its business, the Trustees shall cause a certificate of
cancellation of the Trust's Certificate of Trust to be filed in accordance with
the Delaware Act, which certificate of cancellation may be signed by any one
Trustee.
Section 3. Reorganization.
(a) Notwithstanding anything else herein, the Trustees may,
without Shareholder approval unless such approval is required by applicable law,
(i) cause the Trust to merge or consolidate with or into one or more trusts (or
series thereof to the extent permitted by law), partnerships, associations,
corporations or other business entities (including trusts, partnerships,
associations, corporations or other
25
<PAGE> 29
business entities created by the Trustees to accomplish such merger or
consolidation) so long as the surviving or resulting entity is an open-end
management investment company under the 1940 Act, or is a series thereof, that
will succeed to or assume the Trust's registration under the 1940 Act and that
is formed, organized or existing under the laws of the United States or of a
state, commonwealth, possession or colony of the United States, (ii) cause the
Shares to be exchanged under or pursuant to any state or federal statute to the
extent permitted by law or (iii) cause the Trust to incorporate under the laws
of Delaware. Any agreement of merger or consolidation or exchange or certificate
of merger may be signed by a majority of the Trustees and facsimile signatures
conveyed by electronic or telecommunication means shall be valid.
(b) Pursuant to and in accordance with the provisions of
Section 3815(f) of the Delaware Act, and notwithstanding anything to the
contrary contained in this Declaration of Trust, an agreement of merger or
consolidation approved by the Trustees in accordance with this Section 3 may
effect any amendment to the governing instrument of the Trust or effect the
adoption of a new trust instrument of the Trust if the Trust is the surviving or
resulting trust in the merger or consolidation.
(c) The Trustees may create one or more business trusts to
which all or any part of the assets, liabilities, profits or losses of the Trust
or any Series or Class thereof may be transferred and may provide for the
conversion of Shares in the Trust or any Series or Class thereof into beneficial
interests in any such newly created trust or trusts or any series or classes
thereof.
Section 4. Amendments. Except as specifically provided in this Section,
the Trustees may, without Shareholder vote, restate, amend or otherwise
supplement this Declaration of Trust. Shareholders shall have the right to vote
(i) on any amendment that would affect their right to vote granted in Article V,
Section 1 hereof, (ii) on any amendment to this Section 4 of Article VIII, (iii)
on any amendment that may be required by applicable law or by the Trust's
registration statement filed with the Commission and (iv) on any amendment
submitted to them by the Trustees. Any amendment required or permitted to be
submitted to the Shareholders that, as the Trustees
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<PAGE> 30
determine, shall affect the Shareholders of one or more Series shall be
authorized by a vote of the Shareholders of each Series affected and no vote of
Shareholders of a Series not affected shall be required. Notwithstanding
anything else herein, no amendment hereof shall limit the rights to insurance
provided by Article VII, Section 4 with respect to any acts or omissions of
Persons covered thereby prior to such amendment nor shall any such amendment
limit the rights to indemnification referenced in Article VII, Section 2 hereof
as provided in the ByLaws with respect to any actions or omissions of Persons
covered thereby prior to such amendment. The Trustees may, without Shareholder
vote, restate, amend, or otherwise supplement the Certificate of Trust as they
deem necessary or desirable.
Section 5. Filing of Copies, References, Headings. The original or a
copy of this instrument and of each restatement and/or amendment hereto shall be
kept at the office of the Trust where it may be inspected by any Shareholder.
Anyone dealing with the Trust may rely on a certificate by an officer of the
Trust as to whether or not any such restatements and/or amendments have been
made and as to any matters in connection with the Trust hereunder; and, with the
same effect as if it were the original, may rely on a copy certified by an
officer of the Trust to be a copy of this instrument or of any such restatements
and/or amendments. In this instrument and in any such restatements and/or
amendments, references to this instrument, and all expressions such as "herein",
"hereof" and "hereunder", shall be deemed to refer to this instrument as amended
or affected by any such restatements and/or amendments. Headings are placed
herein for convenience of reference only and shall not be taken as a part hereof
or control or affect the meaning, construction or effect of this instrument.
Whenever the singular number is used herein, the same shall include the plural;
and the neuter, masculine and feminine genders shall include each other, as
applicable. This instrument may be executed in any number of counterparts each
of which shall be deemed an original.
Section 6. Applicable Law.
(a) The Trust is created under, and this Declaration of Trust
is to be governed by, and construed and enforced in accordance with, the laws of
27
<PAGE> 31
the State of Delaware. The Trust shall be of the type commonly called a business
trust, and without limiting the provisions hereof, the Trust specifically
reserves the right to exercise any of the powers or privileges afforded to
business trusts or actions that may be engaged in by business trusts under the
Delaware Act, and the absence of a specific reference herein to any such power,
privilege or action shall not imply that the Trust may not exercise such power
or privilege or take such actions.
(b) Notwithstanding the first sentence of Section 6(a) of this
Article VIII, there shall not be applicable to the Trust, the Trustees or this
Declaration of Trust (x) the provisions of Section 3540 of Title 12 of the
Delaware Code or (y) any provisions of the laws (statutory or common) of the
State of Delaware (other than the Delaware Act) pertaining to trusts that relate
to or regulate: (i) the filing with any court or governmental body or agency of
trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents or employees of a
trust, (iii) the necessity for obtaining a court or other governmental approval
concerning the acquisition, holding or disposition of real or personal property,
(iv) fees or other sums applicable to trustees, officers, agents or employees of
a trust, (v) the allocation of receipts and expenditures to income or principal,
(vi) restrictions or limitations on the permissible nature, amount or
concentration of trust investments or requirements relating to the titling,
storage or other manner of holding of trust assets, or (vii) the establishment
of fiduciary or other standards or responsibilities or limitations on the acts
or powers of trustees that are inconsistent with the limitations or liabilities
or authorities and powers of the Trustees set forth or referenced in this
Declaration of Trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable,
and if the Trustees shall determine, with the advice of counsel, that any of
such provisions is in conflict with the 1940 Act, the regulated investment
company provisions of the Internal Revenue Code of 1986, as amended (or any
successor statute thereto), and the regulations thereunder, the
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<PAGE> 32
Delaware Act or with other applicable laws and regulations, the conflicting
provision shall be deemed never to have constituted a part of the Declaration of
Trust; provided, however, that such determination shall not affect any of the
remaining provisions of the Declaration of Trust or render invalid or improper
any action taken or omitted prior to such determination.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Act. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to the Delaware Act. Nothing in this Declaration of
Trust shall be construed to make the Shareholders, either by themselves or with
the Trustees, partners or members of a joint stock association.
[The remainder of this page has been
left blank intentionally.]
29
<PAGE> 33
IN WITNESS WHEREOF, the Trustees named below do hereby make and enter
into this Declaration of Trust as of the day of .
/s/
---------------------
Name:
Address:
/s/
---------------------
Name:
Address:
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS:
Gateway Center Three
100 Mulberry Street
Newark, N.J. 07102
<PAGE> 1
Exhibit (b)
AMENDED AND RESTATED BY-LAWS
OF
THE TARGET PORTFOLIO TRUST
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
ARTICLE I - DEFINITIONS 1
ARTICLE II - OFFICES 1
Section 1. Principal Office 1
Section 2. Other Offices 1
ARTICLE III - SHAREHOLDERS 2
Section 1. Meetings 2
Section 2. Notice of Meetings 2
Section 3. Record of Date for Meetings and Other Purposes 2
Section 4. Proxies 3
Section 5. Inspection of Records 4
Section 6. Action without Meeting 4
ARTICLE IV - TRUSTEES 4
Section 1. Meetings of the Trustees 4
Section 2. Quorum and Manner of Acting 6
ARTICLE V - COMMITTEES 6
Section 1. Executive and Other Committees 6
Section 2. Meetings, Quorum and Manner of Acting 7
ARTICLE VI - OFFICERS 8
Section 1. General Provisions 8
Section 2. Term of Office and Qualifications 8
Section 3. Removal 8
Section 4. Powers and Duties of the President 9
Section 5. Powers and Duties of Vice President 9
Section 6. Powers and Duties of the Treasurer 10
Section 7. Powers and Duties of the Secretary 10
Section 8. Powers and Duties of Assistant Treasurers 11
Section 9. Powers and Duties of Assistant Secretaries 11
Section 10. Compensation of Officers and Trustees and
Members of Advisory Board 11
ARTICLE VII - FISCAL YEAR 11
ARTICLE VIII - SEAL 12
ARTICLE IX - WAIVERS OF NOTICE 12
ARTICLE X - CUSTODY OF SECURITIES 12
Section 1. Employment of a Custodian 12
Section 2. Action upon Termination of Custodian Agreement 13
-i-
<PAGE> 3
TABLE OF CONTENTS (continued)
Section 3. Provisions of Custodian Contract 13
Section 4. Central Certificate System 14
ARTICLE XI - INDEMNIFICATION 15
ARTICLE XII - AMENDMENTS 19
-ii-
<PAGE> 4
BY-LAWS
OF
THE TARGET PORTFOLIO TRUST
ARTICLE I
AGREEMENT AND DECLARATION OF TRUST
SECTION 1. AGREEMENT AND DECLARATION OF TRUST. These By-Laws shall be
subject to the Agreement and Declaration of Trust, as from time to time amended,
supplemented or restated (Declaration of Trust) of the Target Portfolio Trust.
SECTION 2. DEFINITIONS. The terms used herein have the respective
meanings given them in the Declaration of Trust.
ARTICLE II
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located in the City of New York, State of New York, or such other location as
the Trustees may, from time to time determine.
SECTION 2. OTHER OFFICES. The Trust may establish and maintain such other
offices and places of business as the Trustees may from time to time determine.
<PAGE> 5
ARTICLE III
SHAREHOLDERS
SECTION 1. MEETINGS. Meetings of the Shareholders shall be held to the
extent provided in the Declaration of Trust at such place within the United
States of America as the Trustees shall designate. To the extent required by the
1940 Act, meetings of the Shareholders for the purpose of voting on the removal
of any Trustee shall be called promptly by the Trustees upon the written request
of Shareholders holding at least ten percent (10%) of the outstanding Shares
entitled to vote. The holders of one-third of the outstanding Shares of the
Trust or series of the Trust present in person or by proxy and entitled to vote
shall constitute a quorum with respect to Shares of the Trust or such series at
any meeting of the Shareholders.
SECTION 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purpose of the meeting, shall be given
by the Trustees by mail to each Shareholder at his or her address as recorded on
the register of the Trust mailed at least (10) days and not more than ninety
(90) days before the meeting. Only the business stated in the notice of the
meeting shall be considered at such meeting. Any adjourned meeting may be held
as adjourned without further notice. No notice need be given to any Shareholder
who shall have failed to inform the Trust of his or her current address or if a
written waiver of notice, executed before or after the meeting by the
Shareholder or his or her attorney thereunto authorized, is filed with the
records of the
2
<PAGE> 6
meeting.
Section 3. Record Date for Meetings and Other Purposes. For the purpose of
determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
ninety (90) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determinations of the
persons to be treated as Shareholders of record for such purposes, except for
dividend payments which shall be governed by the Declaration of Trust.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole Share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration of Trust to vote, and each fractional Share
shall be entitled to a proportionate fractional vote. When any Share is held
jointly by several persons, any one of them may
3
<PAGE> 7
vote at any meeting in person or by proxy in respect of such Share, but if more
than one of them shall be present at such meeting in person or by proxy, and
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or the legal
control of any other person as regards the charge or management of such Share,
he or she may vote by his or her guardian or such other person appointed or
having such control, and such vote may be given in person or by proxy.
Section 5. Inspection of Records. The records of the Trust shall be open to
inspection by Shareholders to the same extent as is permitted shareholders of a
Delaware corporation.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust or the applicable series of the Trust entitled to vote on the matter (or
such larger proportion thereof as shall be required by law, the Declaration of
Trust or these By-Laws for approval of such matter) consent to the action in
writing and the written consents are filed with the records of the meetings of
Shareholders. Such consents shall be treated for all purposes as a vote taken at
a meeting of Shareholders.
4
<PAGE> 8
ARTICLE IV
Trustees
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, or by any
one of the Trustees, at the time being in office. Notice of the time and place
of each meeting other than regular or stated meetings shall be given by the
Secretary or an Assistant Secretary or by the officer or Trustee calling the
meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wired to each Trustee at his or
her business address, or personally delivered to him or her at least one day
before the meeting. Such notice may, however, be waived by any Trustee. Notice
of a meeting need not be given to any Trustee if a written waiver of notice,
executed by him or her, is filed with the records of the meeting, or to any
Trustee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him or her. A notice or waiver of notice
need not specify the purpose of any meeting. The Trustees may meet by means of
a telephone conference circuit or similar communications equipment by means of
which all persons participating in the meeting are connected, which meeting
shall be deemed to have been held at a place designated by the Trustees at the
meeting. Participation in a telephone conference meeting shall
5
<PAGE> 9
constitute presence in person at such meeting. Any action required or permitted
to be taken at any meeting of the Trustees may be taken by the Trustees without
a meeting if a majority of the Trustees consent to the action in writing and
the written consents are filed with the records of the Trustees' meetings. Such
consents shall be treated for all purposes as a vote taken at a meeting of the
Trustees. Notwithstanding the foregoing, all actions of the Trustees shall be
taken in compliance with the provisions of the Investment Company Act of 1940,
as amended.
Section 2. Quorum and Manner of Acting. One-third of the Trustees then in
office shall constitute a quorum for the transaction of business, provided that
a quorum shall in no case be less than two Trustees. If at any meeting of the
Trustees there shall be less than a quorum present, a majority of those present
may adjourn the meeting from time to time until a quorum shall be obtained.
Notice of an adjourned meeting need not be given. The act of the majority of
the Trustees present at any meeting at which there is a quorum shall be the act
of the Trustees, except as may be otherwise specifically provided by statute or
by the Declaration of Trust or by these By-Laws.
ARTICLE V
Committees
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3)
6
<PAGE> 10
Trustees to hold office at the pleasure of the Trustees, which shall have the
power to conduct the current and ordinary business of the Trust while the
Trustees are not in session, including the purchase and sale of securities and
the designation of securities to be delivered upon redemption of Shares of the
Trust, and such other powers of the Trustees as the Trustees may, from time to
time, delegate to them except those powers which by law, the Declaration of
Trust or these By-Laws they are prohibited from delegating. The Trustees may
also elect from their own number or otherwise other Committees from time to
time, the number composing such Committees, the powers conferred upon the same
(subject to the same limitations as with respect to the Executive Committee)
and the term of membership on such Committees to be determined by the
Trustees. The Trustees may designate a chairman of any such Committee. In the
absence of such designation the Committee may elect its own Chairman.
Section 2. Meetings, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any Committees, (2) specify the manner of
calling and notice required for special meetings of any Committee, (3) specify
the number of members of a Committee required to constitute a quorum and the
number of members of a Committee required to exercise specified powers
delegated to such Committee, (4) authorize the making of decisions to exercise
specified powers by written assent of the requisite number of members of a
Committee without a meeting, and (5) authorize the members of a Committee to
meet by means of a telephone conference
7
<PAGE> 11
circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI
Officers
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise provided
by law, the Declaration of Trust or these By-Laws, the President, the Treasurer
and the Secretary shall each hold office until his or her successor shall have
been duly elected and qualified, and all other officers shall hold office at
the pleasure of the Trustees. The Secretary and Treasurer may be the same
person. A Vice President and the Treasurer or a Vice President and the Secretary
may be the same person, but the offices of Vice President, Secretary and
Treasurer shall not be held by the same person. The President shall hold no
other office. Except as above provided, any two offices may be held by the same
person.
8
<PAGE> 12
Any officer may be but none need be a Trustee or Shareholder.
SECTION 3. REMOVAL. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer without cause, by a vote of a majority of the
Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.
SECTION 4. POWERS AND DUTIES OF THE PRESIDENT. The President shall be the
principal executive officer of the Trust. He or she may call meetings of the
Trustees and of any Committee thereof when he or she deems it necessary and
shall preside at all meetings of the Shareholders. Subject to the control of the
Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, the President shall at all
times exercise a general supervision and direction over the affairs of the
Trust. The President shall have the power to employ attorneys and counsel for
the Trust and to employ such subordinate officers, agents, clerks and employees
as he or she may find necessary to transact the business of the Trust. He or she
shall also have the power to grant, issue, execute or sign such powers of
attorney, proxies or other documents as may be deemed advisable or necessary in
furtherance of the interests of the Trust. The President shall have such other
powers and duties as from time to time may be conferred upon or assigned to him
or her by the Trustees.
SECTION 5. POWERS AND DUTIES OF VICE PRESIDENT. In the absence or
disability of the President, the Vice President or, if
9
<PAGE> 13
there be more than one Vice President, any Vice President designated by the
Trustees shall perform all the duties and may exercise any of the powers of the
President, subject to the control of the Trustees. Each Vice President shall
perform such other duties as may be assigned to him or her from time to time by
the Trustees and the President.
SECTION 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be the
principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his or her hands to such
Custodian as the Trustees may employ pursuant to Article X of these By-Laws. He
or she shall render a statement of condition of the finances of the Trust to the
Trustees as often as they shall require the same and he or she shall in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him or her by the Trustees. The
Treasurer shall give a bond for the faithful discharge of his or her duties, if
required so to do by the Trustees, in such sum and with such surety or sureties
as the Trustees shall require.
SECTION 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall keep the
minutes of all meetings of the Trustees and of the Shareholders in proper books
provided for that purpose; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in
10
<PAGE> 14
accordance with the provisions of these By-Laws and as required by law; and
subject to these By-Laws, he or she shall in general perform all duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him or her by the Trustees.
SECTION 8. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Treasurer. Each Assistant Treasurer shall give a bond for the faithful
discharge of his or her duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
SECTION 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence of
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
SECTION 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable provisions of the Declaration of
Trust, the compensation of the officers and Trustees and members of the
Advisory Board shall be fixed from time to time by the Trustees or, in the case
of officers, by any Committee or officer upon whom such power may be conferred
by the Trustees. No officer shall be prevented from receiving such compensation
as such officer by reason of the fact that he or she is also a Trustee.
11
<PAGE> 15
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of January in
each year and shall end on the last day of December in each year, provided,
however, that the Trustees may from time to time change the fiscal year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration of Trust or these By-Laws, a waiver thereof in writing, signed by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. A notice shall be deemed to
have been telegraphed, cabled or wired for the purposes of these By-Laws when
it has been delivered to a representative of any telegraph, cable or wire
company with instructions that it be telegraphed, cabled or wired.
12
<PAGE> 16
ARTICLE X
CUSTODY OF SECURITIES
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having not
less than $20,000,000 aggregate capital, surplus and undivided profits and shall
be appointed from time to time by the Trustees, who shall fix its remuneration.
SECTION 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the Trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by a
Majority Shareholder Vote, the Custodian shall deliver and pay over all Trust
Property held by it as specified in such vote.
SECTION 3. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed: The Trustees shall cause to be delivered to the
Custodian all securities included in the Trust Property or to which the Trust
may become
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<PAGE> 17
entitled, and shall order the same to be delivered by the Custodian only in
completion of a sale, exchange, transfer, pledge, loan of portfolio securities
to another person, or other disposition thereof, all as the Trustees may
generally or from time to time require or approve or to a successor Custodian;
and the Trustees shall cause all funds included in the Trust Property or to
which it may become entitled to be paid to the Custodian, and shall order the
same disbursed only for investment against delivery of the securities acquired
(including securities acquired under a repurchase agreement), or the return of
cash held as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of the Trust,
including distributions to Shareholders, or to a successor Custodian.
Notwithstanding anything to the contrary in these By-Laws, upon receipt of
proper instructions, which may be standing instructions, the Custodian may
deliver funds in the following cases. In connection with repurchase agreements,
the Custodian shall transmit prior to receipt on behalf of the Fund of any
securities or other property, funds from the Fund's custodian account to a
special custodian approved by the Trustees of the Fund, which funds shall be
used to pay for securities to be purchased by the Fund subject to the Fund's
obligation to sell and the seller's obligation to repurchase such securities. In
such case, the securities shall be held in the custody of the special custodian.
In connection with the Trust's purchase of sale of financial futures contracts,
the Custodian shall transmit, prior to receipt on behalf of the Fund
14
<PAGE> 18
of any securities or other property, funds from the Trust's custodian account in
order to furnish to and maintain funds with brokers as margin to guarantee the
performance of the Trust's futures obligations in accordance with the
applicable requirements of commodities exchanges and brokers.
SECTION 4. CENTRAL CERTIFICATE SYSTEM. Subject to applicable rules,
regulations, and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
ARTICLE XI
INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS
SECTION 1. AGENTS, PROCEEDINGS, EXPENSES. For the purpose of this Article,
"agent" means any Person who is or was a Trustee, officer, employee or other
agent of the Trust or is or was serving
15
<PAGE> 19
at the request of the Trust as a trustee, director, officer, employee or agent
of another organization in which the Trust has any interest as a shareholder,
creditor or otherwise; "proceeding" means any threatened, pending or completed
claim, action, suit or proceeding, whether civil, criminal, administrative or
investigative (including appeals); and "expenses" includes, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and all other liabilities whatsoever.
SECTION 2. INDEMNIFICATION. Subject to the exceptions and limitations
contained in Section 3 below, the Trust shall indemnify present and former
Trustees, officers, employees and agents of the Trust (each a "Covered
Person") against judgments, fines, settlements and expenses to the fullest
extent authorized, and in the manner permitted, by applicable federal and state
law. The Trust shall advance the expenses of Covered Persons who are parties to
any proceeding to the fullest extent authorized, and in the manner permitted,
by applicable federal and state law. Pursuant and subject to this Article XI,
Section 2, the Trust shall indemnify each Covered Person against, or advance
the expenses of any Covered Person for, the amount of any deductible provided
in any liability insurance policy maintained by the Trust.
SECTION 3. LIMITATIONS, SETTLEMENTS. No indemnification shall be provided
hereunder to an agent:
(a) who shall have been adjudicated by the court or other body before
which the proceeding was brought to be liable to the Trust or its Shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office
(collectively, "disabling conduct"); or
16
<PAGE> 20
(b) with respect to any proceeding disposed of (whether by
settlement, pursuant to a consent decree or otherwise) without an adjudication
by the court or other body before which the proceeding was brought that such
agent was liable to the Trust or its Shareholders by reason of disabling
conduct, unless there has been a determination that such agent did not engage
in disabling conduct;
(i) by the court or other body before which the
proceeding was brought;
(ii) by at least a majority of those Trustees who are
neither Interested Persons of the Trust nor are parties to the
proceeding based upon a review of readily available facts (as
opposed to a full trial-type inquiry); or
(iii) by written opinion of independent legal counsel
based upon a review of readily available facts (as opposed to a
full trial-type inquiry);
provided, however, that indemnification shall be provided
hereunder to an agent with respect to any proceeding in the event
of (i) a final decision on the merits by the court or other body
before which the proceeding was brought that the agent was not
liable by reason of
17
<PAGE> 21
disabling conduct, or (2) the dismissal of the proceeding by the
court or other body before which it was brought for insufficiency
of evidence of any disabling conduct with which such agent has
been charged.
Section 4. INSURANCE, RIGHTS NOT EXCLUSIVE. The
rights of indemnification herein provided may be insured against
by policies maintained by the Trust on behalf of any agent, shall
be severable, shall not be exclusive of or affect any other
rights to which any agent may now or hereafter be entitled and
shall inure to the benefit of the heirs, executors and
administrators of any agent.
Section 5. ADVANCE OF EXPENSES. Expenses incurred
by an agent in connection with the preparation and presentation
of a defense to any proceeding may be paid by the Trust from time
to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such agent that such amount will
be paid over by him or her to the Trust if it is ultimately
determined that he or she is not entitled to indemnification
under this Article VI; provided, however, that (a) such agent
shall have provided appropriate security for such undertaking,
(b) the Trust is insured against losses arising out of any such
advance payments or (c) either a majority of the Trustees who are
neither
18
<PAGE> 22
Interested Persons of the Trust nor parties to the proceeding, or independent
legal counsel in a written opinion, shall have determined, based upon a review
of readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such agent will be found
entitled to indemnification under this Article VI.
Section 6. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE XII
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted
19
<PAGE> 23
or repealed by the Trustees if such amendment, adoption or repeal requires,
pursuant to law, the Declaration of Trust or these By-Laws, a vote of the
Shareholders.
End of By-Laws.
20
<PAGE> 1
EXHIBIT (d)(2)(x)
THE TARGET PORTFOLIO TRUST
AMENDED AND RESTATED SUBADVISORY AGREEMENT
Agreement made as of the 2nd day of January, 1995, and amended and
restated as of the 1st day of September, 1999, between Prudential Investments
Fund Management LLC (PIFM or the Manager), a New York limited liability
company, and Lazard Asset Management (the Adviser), a division of Lazard
Freres & Co. LLC, a New York limited liability company.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts
as Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Small Capitalization Value Portfolio of the
Trust (the Portfolio) in connection with the management of the Trust.
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services.
<PAGE> 2
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the
Trustees of the Trust, the Adviser shall manage such portion of the investment
operations of the Portfolio as the Manager shall direct and shall manage the
composition of such portfolio, including the purchase, retention and
disposition thereof, in accordance with the Portfolio's investment objectives,
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of
the Portfolio's investments as the Manager shall direct and shall determine
from time to time what investments and securities will be purchased, retained,
sold or loaned by the Portfolio, and what portion of the assets it manages will
be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Adviser shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus of the Trust and the Portfolio and with the
instructions and directions of the Manager and of the Trustees of the Trust and
will conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated and Lazard Freres & Co. LLC) to carry out the policy with respect
to brokerage as set forth in the Trust's Registration Statement and Prospectus
or as the Trustees may
2
<PAGE> 3
direct from time to time. In providing the Portfolio with investment
supervision, it is recognized that the Adviser will give primary consideration
to securing the most favorable price and efficient execution. Within the
framework of this policy, the Adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a
party to any such transaction or other transactions to which the Adviser's
other clients may be a party. It is understood that Prudential Securities
Incorporated and Lazard Freres & Co. LLC may each be used as principal broker
for securities transactions but that no formula has been adopted for allocation
of the Portfolio's investment transaction business. It is also understood that
it is desirable for the Trust that the Adviser have access to supplemental
investment and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage transactions
at a higher cost to the Trust than may result when allocating brokerage to
other brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the Adviser is authorized to place orders for the
purchase and sale of securities and futures contracts for the Portfolio with
such brokers or futures commission merchants, subject to review by the Trustees
from time to time with respect to the extent and continuation of this practice.
It is understood that the services provided by such brokers or futures
commission merchants may be useful to the Adviser in connection with the
Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as
other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most
3
<PAGE> 4
favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others; provided, however, that the Adviser agrees that
neither it, nor any person controlled by it, nor any successor shall serve or
accept retention as investment adviser, investment manager or similar service
provider during the term of this Agreement and for a period of one year after
the termination of this Agreement with or for the benefit of any investment
company registered under the 1940 Act (a) that has as its primary investment
objective capital appreciation by investing in equity securities of companies
domiciled within the United States with total market capitalization of less than
$1 billion, (b) the shares of which are sold primarily through an asset
allocation program which is substantially the same as the Prudential Securities
Target Program, as described in the registration statement filed with the
4
<PAGE> 5
Securities and Exchange Commission, and (c) which is sponsored by a "major
retail broker/dealer" as may be agreed from time to time in writing by the
Manager and the Adviser.
(b) Services to be furnished by the Adviser under this Agreement
may be furnished through the medium of any of its directors, officers or
employees.
(c) The Adviser shall keep the Portfolio's books and records
required to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof
and shall timely furnish to the Manager all information relating to the
Adviser's services hereunder needed by the Manager to keep the other books and
records of the Trust required by Rule 31a-1 under the 1940 Act. The Adviser
agrees that all records which it maintains for the Portfolio are the property
of the Trust and the Adviser will surrender promptly to the Trust any of such
records upon the Trust's request. The Adviser further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph 1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures
to ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all
records prepared in connection with (i) the performance of this Agreement and
(ii) the maintenance of compliance procedures pursuant to paragraph 1(d) hereof
as the Manager may reasonably request.
2. The Manager shall continue to have responsibility for all
services to be provided to the Portfolio pursuant to the Management Agreement
and shall oversee and review the Adviser's performance of its duties under this
Agreement.
5
<PAGE> 6
3. The Manager shall compensate the Adviser for the services
provided and the expenses assumed pursuant to this Subadvisory Agreement, a fee
at an annual rate of .40 of 1% of the average daily net assets of the portion
of the Portfolio managed by the Adviser. This fee will be computed daily and
paid monthly.
4. The Adviser shall not be liable for any error of judgment or
for any loss suffered by the Portfolio, the Trust or the Manager in connection
with the matters to which this Agreement relates, except a loss resulting from
the willful misfeasance, bad faith or gross negligence of the Adviser in the
performance of its duties or from its reckless disregard of its obligations and
duties under this Agreement. Nothing in this Agreement shall be deemed to waive
any rights the Manager or the Trust may have against the Adviser under federal
or state securities laws.
5. This Agreement shall continue in effect for a period of more
than two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act; provided, however, that this Agreement may be terminated by the
Trust at any time, without the payment of any penalty, by the Trustees or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Portfolio, or by the Manager or the Adviser at any time, without
the payment of any penalty, on not more than 60 days' nor less than 30 days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right
of any of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management
or other aspects of any business, whether of a similar or a
6
<PAGE> 7
dissimilar nature, nor limit or restrict the Adviser's right to engage in any
other business or to render services of any kind to any other corporation,
firm, individual or association, except as described in Paragraph 1(a)(vi)
above.
7. During the term of this Agreement, the Manager agrees to
furnish the Adviser at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature or other material prepared for
distribution to shareholders of the Trust or the public, which refer to the
Adviser in any way, prior to use thereof and not to use material if the Adviser
reasonably objects in writing five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of the termination of this
Agreement, the manager will continue to furnish the Adviser copies of such
materials which refer to the Adviser. Sales literature may be furnished to the
Adviser hereunder by first class or overnight mail, facsimile transmission
equipment or hand delivery.
8. The Manager has delivered to the Adviser copies of each of
the following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust, as filed with the Secretary of
State of Delaware (such Declaration of Trust, as in effect on the date hereof
and as amended from time to time, are herein called the Declaration of Trust);
(b) By-Laws of the Trust (such By-Laws, as in effect on the
date hereof and as amended from time to time, are herein called the By-Laws);
(c) Certified resolutions of the Trustees of the Trust
authorizing the appointment of the Manager and the Adviser and approving the
form of this Agreement;
7
<PAGE> 8
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the Registration Statement),
as filed with the Securities and Exchange Commission (the Commission) relating
to the Portfolio and shares of beneficial interest of the Portfolio and all
amendments thereto;
(e) Notification of Registration of the Trust under the
1940 Act on Form N-8A as filed with the Commission and all amendments thereto;
and
(f) Prospectus of the Portfolio (such Prospectus and
Statement of Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the Prospectus).
9. This Agreement may be amended by mutual consent, but the
consent of the Trust must be obtained in conformity with the requirements of
the 1940 Act.
10. This Agreement shall be governed by the laws of the State of
New York.
11. The Adviser agrees to notify the Manager of any change in the
membership of the Adviser within a reasonable time following such change. The
Manager agrees that the Adviser may refrain from providing any advice or
services concerning securities of companies of which any officers, directors,
partners or employees of the Adviser or any of the Adviser's affiliates are
officers or directors, or of companies for which the Adviser or any of the
Adviser's affiliates act as financial adviser, investment manager or in any
capacity that the adviser deems confidential, unless the Adviser determines in
its sole discretion that it may appropriately do so. The Manager appreciates
that, for good commercial and legal reasons, material nonpublic information
which becomes available to affiliates of the Adviser through these
relationships cannot be passed on to the Manager.
8
<PAGE> 9
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year set forth
above.
PRUDENTIAL INVESTMENTS FUND
MANAGEMENT LLC.
By: /s/ ROBERT F. GUNIA
------------------------------------
Robert F. Gunia
Executive Vice President
LAZARD ASSET MANAGEMENT
By: /s/ CHARLES CARROLL
------------------------------------
Charles Carroll
9
<PAGE> 1
EXHIBIT (d)(2)(xi)
THE TARGET PORTFOLIO TRUST
AMENDED AND RESTATED SUBADVISORY AGREEMENT
Agreement made as of the 12th day of April, 1995, and amended and
restated as of the 1st day of September, 1999, between Prudential Investments
Fund Management, LLC (PIFM or the Manager), a New York limited liability
company, and Wood, Struthers & Winthrop Management Corp. (the Adviser), a
subsidiary of Donaldson, Lufkin & Jenrette Securities Corporation.
WHEREAS, PIFM has entered into a management agreement (the Management
Agreement) with The Target Portfolio Trust (the Trust), a Delaware business
trust and a diversified open-end management investment company registered under
the Investment Company Act of 1940 (the 1940 Act), pursuant to which PIFM acts
as Manager of the Trust.
WHEREAS, shares of the Trust are divided into separate series or
portfolios (each a portfolio), each of which is established pursuant to a
resolution of the Trustees of the Trust and the Trustees may from time to time
terminate such portfolios or establish and terminate additional portfolios.
WHEREAS, PIFM has the responsibility of evaluating, recommending,
supervising and compensating investment advisers to each portfolio of the Trust
and shall enter into subadvisory agreements with one or more subadvisers with
respect to the management of the Small Capitalization Value Portfolio of the
Trust (the Portfolio) in connection with the management of the Trust.
<PAGE> 2
WHEREAS, the Manager desires to retain the Adviser to provide
investment advisory services to the Portfolio and to manage such portion of the
Portfolio as the Manager shall from time to time direct and the Adviser is
willing to render such investment advisory services. NOW, THEREFORE, the
Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees
of the Trust, the Adviser shall manage such portion of the investment
operations of the Portfolio as the Manager shall direct and shall manage the
composition of such portfolio, including the purchase, retention and
disposition thereof, in accordance with the Portfolio's investment objectives,
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus") and
subject to the following understandings:
(i) The Adviser shall provide supervision of such portion of the
Portfolio's investments as the Manager shall direct and determine from time to
time what investments and securities will be purchased, retained, sold or
loaned by the Portfolio, and what portion of the assets it manages will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Adviser shall act in conformity with the Declaration of Trust,
By-Laws and Prospectus of the Trust and the Portfolio and with the instructions
and directions of the Manager and of the Trustees of the Trust and will conform
to and comply with the requirements of the 1940 Act, the Internal Revenue Code
of 1986 and all other applicable federal and state laws and regulations.
(iii) The Adviser shall determine the securities and futures
contracts to be purchased or sold by such portion of the Portfolio and will
place orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential
2
<PAGE> 3
Securities Incorporated) to carry out the policy with respect to brokerage as
set forth in the Trust's Registration Statement and Prospectus or as the
Trustees may direct from time to time. In providing the Portfolio with
investment supervision, it is recognized that the Adviser will give primary
consideration to securing the most favorable price and efficient execution.
Within the framework of this policy, the Adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a
party to any such transaction or other transactions to which the Adviser's
other clients may be a party. It is understood that Prudential Securities
Incorporated may be used as principal broker for securities transactions but
that no formula has been adopted for allocation of the Portfolio's investment
transaction business. It is also understood that it is desirable for the Trust
that the Adviser have access to supplemental investment and market research and
security and economic analysis provided by brokers or futures commission
merchants who may execute brokerage transactions at a higher cost to the Trust
than may result when allocating brokerage to other brokers on the basis of
seeking the most favorable price and efficient execution. Therefore, the
Adviser is authorized to place orders for the purchase and sale of securities
and futures contracts for the Portfolio with such brokers or futures commission
merchants, subject to review by the Trustees from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such brokers or futures commission merchants may be useful
to the Adviser in connection with the Adviser's services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or futures contract to be in the best interest of the Portfolio as well as
other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be sold or purchased in order
to obtain the most
3
<PAGE> 4
favorable price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by the
Adviser in the manner the Adviser considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to such other
clients.
(iv) The Adviser shall maintain all books and records with
respect to the portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-l under the 1940 Act and
shall render to the Trustees such periodic and special reports as the Board may
reasonably request.
(v) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning the
portion of the Portfolio's assets it manages and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the
Adviser hereunder are not exclusive, and the Adviser shall be free to render
similar services to others; provided, however, that the Adviser agrees that
neither it, nor any person controlled by it, nor any successor shall serve or
accept retention as investment adviser, investment manager or similar service
provider during the term of this Agreement and for the period of one year after
the termination of this Agreement with or for the benefit of any investment
company registered under the 1940 Act that seeks as a primary market for its
shares asset allocation programs sponsored by U.S. broker-dealers similar in
nature or market to the Prudential Securities Target Program.
(b) Services to be furnished by the Adviser under this Agreement
may be furnished through the medium of any of its directors, officers or
employees.
(c) The Adviser shall keep the Portfolio's books and records
required to be maintained by the Adviser pursuant to paragraph 1(a)(iv) hereof
and shall timely furnish to the Manager all
4
<PAGE> 5
information relating to the Adviser's services hereunder needed by the Manager
to keep the other books and records of the Trust required by Rule 31a-1 under
the 1940 Act. The Adviser agrees that all records which it maintains for the
Portfolio are the property of the Trust and the Adviser will surrender promptly
to the Trust any of such records upon the Trust's request. The Adviser further
agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act
any such records as are required to be maintained by it pursuant to paragraph
1(a) hereof.
(d) The Adviser agrees to maintain adequate compliance procedures to
ensure its compliance with the 1940 Act, the Investment Advisers Act of 1940
(Advisers Act) and other applicable state and federal regulations.
(e) The Adviser shall furnish to the Manager copies of all records
prepared in connection with (i) the performance of this Agreement and (ii) the
maintenance of compliance procedures pursuant to paragraph 1(d) hereof as the
Manager may reasonably request.
2. The Manager shall continue to have responsibility for all
services to be provided to the Portfolio pursuant to the Management Agreement
and shall oversee and review the Adviser's performance of its duties under this
Agreement.
3. The Manager shall compensate the Adviser for the services
provided and the expenses assumed pursuant to this Subadvisory Agreement, a fee
at an annual rate of .40 of 1% of the average daily net assets of the portion
of the Portfolio managed by the Adviser. This fee will be computed daily and
paid monthly.
4. The Adviser shall not be liable for any error of judgment or for
any loss suffered by the Portfolio, the Trust or the Manager in connection with
the matters to which this Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the
5
<PAGE> 6
Adviser's part in the performance of its duties or from its reckless disregard
of its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Trustees or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, or by the Manager or the Adviser at any time, without the
payment of any penalty, on not more than 60 days' nor less than 30 days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any
of the Adviser's directors, officers or employees to engage in any other
business or to devote his or her time and attention in part to the management
or other aspects of any business, whether of a similar or a dissimilar nature,
nor limit or restrict the Adviser's right to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association, except as described in Paragraph 1(a)(vi) above.
7. During the term of this Agreement, the Manager agrees to furnish
the Adviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other material prepared for distribution
to shareholders of the Trust or the public, which refer to the Adviser in any
way, prior to use thereof and not to use material if the Adviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof.
6
<PAGE> 7
Sales literature may be furnished to the Adviser hereunder by first class or
overnight mail, facsimile transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year set forth
above.
PRUDENTIAL INVESTMENTS FUND
MANAGEMENT LLC
By: /s/ ROBERT F. GUNIA
----------------------------------------
Robert F. Gunia
Executive Vice President
WOOD, STRUTHERS & WINTHROP
MANAGEMENT CORP.
By: /s/ CHARLES E. HUGHES
----------------------------------------
Charles E. Hughes
Senior Vice President
7
<PAGE> 1
EXHIBIT (h)(2)
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and between
The Target Portfolio Trust (the "Trust") and Prudential Mutual Fund Services
LLC (successor to Prudential Mutual Fund Services, Inc.)("PMFS") is entered
into as of August 24, 1999.
WHEREAS, the Trust and PMFS have entered into a Transfer Agency and
Service Agreement (the "Agreement") pursuant to which PMFS serves as transfer
agent, dividend disbursing agent and shareholder servicing agent for the Trust;
and
WHEREAS, the Trust and PMFS desire to amend the Agreement to
confirm the Trust's agreement to pay transfer agency account fees and expenses
for beneficial owners holding shares through omnibus accounts maintained by The
Prudential Insurance Company of America, its subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement, and other good and valuable consideration, Article 8 of the
Agreement is amended by adding the following Section:
8.04 PMFS may enter into agreements with Prudential or any
subsidiary or affiliate of Prudential whereby PMFS will maintain an
omnibus account and the Trust will reimburse PMFS for amounts paid by
PMFS to Prudential, or such subsidiary or affiliate, in an amount not
in excess of the annual maintenance fee for each active beneficial
shareholder account as if each beneficial shareholder account were
maintained by PMFS on the Trust's records, subject to the fee schedule
attached hereto as Schedule A. Prudential, its subsidiary or
affiliate, as the case may be, shall maintain records relating to each
beneficial shareholder account that underlies the omnibus account
maintained by PMFS.
<PAGE> 2
IN WITNESS WHEROF, the parties hereto have caused this Amendment to be
executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
THE TARGET PORFOLIO TRUST ATTEST:
By: /s/ JOHN R. STRANGFELD By: /s/ DAVID F. CONNOR
---------------------------- -------------------------------
President Secretary
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTEST:
By: /s/ BRIAN HENDERSON By: /s/ WILLIAM V. HEALEY
---------------------------- -------------------------------
President Secretary
<PAGE> 1
Exhibit (i)
Morris, Nichols, Arsht & Tunnell
1201 N. Market Street
P.O. Box 1347
Wilmington, DE 19899-1347
(302) 658-9200
Telecopy No. (302) 658-3989
May 1, 2000
The Target Portfolio Trust
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
Re: The Target Portfolio Trust
Ladies and Gentlemen:
We have acted as special Delaware counsel to The Target
Portfolio Trust, a Delaware business trust (the "Trust"), in connection with
certain matters relating to the formation of the Trust and the proposed issuance
of Shares of the Trust pursuant to and as described in Post-Effective Amendment
No. 12 to Registration Statement No. 33-50476 under the Securities Act of 1933
(including the Prospectus and Statement of Additional Information forming a part
thereof) on Form N-1A of the Trust to be filed with the Securities and Exchange
Commission on or about the date hereof (the "Registration Statement").
Capitalized terms used herein and not otherwise herein defined are used as
defined in the Agreement and Declaration of Trust of the Trust dated July 29,
1992, as amended by the First Amendment to Agreement and Declaration of Trust of
the Trust dated as of October 13, 1992 and Amendment No. 2 to Agreement and
Declaration of Trust of the Trust dated as of August 25, 1999 (as so amended,
the "Governing Instrument").
In rendering this opinion, we have examined and relied upon
copies of the following documents, each in the form provided to us: the
Certificate of Trust of the Trust as filed in the Office of the Secretary of
State of the State of Delaware (the "State Office") on July 30, 1992 (the
"Certificate"); Amendment No. 1 to Certificate of Trust of the Trust as filed in
the State Office on April 10, 2000; the Governing Instrument; the By-laws of the
Trust, as amended by Amendment No. 1 to Bylaws (as amended, the "Bylaws"); the
Trust's Notification of Registration Filed Pursuant to Section 8(a) of the
Investment Company Act of 1940 on Form N-8A; the Registration Statement; a
Secretary's Certificate of the Trust dated as of April 28, 2000;
<PAGE> 2
The Target Portfolio Trust
May 1, 2000
Page 2
certain resolutions of the Trustees of the Trust including resolutions dated
July 30, 1992, October 14, 1992, January 11, 1994, May 12, 1998 and May 25, 1999
(such resolutions, together with the Governing Instrument and the Bylaws of the
Trust are referred to as the "Operative Documents"); and a certification of good
standing of the Trust obtained as of a recent date from the State Office. In
such examinations, we have assumed the genuineness of all signatures, the
conformity to original documents of all documents submitted to us as copies or
drafts of documents to be executed and the legal capacity of natural persons to
complete the execution of documents. We have further assumed for the purpose of
this opinion: (i) the due adoption, authorization, execution and delivery by, or
on behalf of, each of the parties thereto of the above-referenced resolutions,
instruments, certificates and other documents, and of all documents contemplated
by the Operative Documents to be executed by investors acquiring Shares; (ii)
the payment of consideration for Shares, and the application of such
consideration, as provided in the Operative Documents, and compliance with the
other terms, conditions and restrictions set forth in the Operative Documents in
connection with the issuance of Shares (including, without limitation, the
taking of all appropriate action by the Trustees to designate Series of Shares
and the rights and preferences attributable thereto as contemplated by the
Governing Instrument); (iii) that appropriate notation of the names and
addresses of, the number of Shares held by, and the consideration paid by,
Shareholders will be maintained in the appropriate registers and other books and
records of the Trust in connection with the issuance, redemption or transfer of
Shares; (iv) that no event has occurred subsequent to the filing of the
Certificate that would cause a termination or reorganization of the Trust under
Section 2 or Section 3 of Article VIII of the Governing Instrument; (v) that the
activities of the Trust have been and will be conducted in accordance with the
terms of the Governing Instrument and the Delaware Business Trust Act, 12 Del.
C. Sections 3801 et seq. (the "Delaware Act"); and (vi) that each of the
documents examined by us is in full force and effect and has not been amended,
supplemented or otherwise modified, except as herein referenced. No opinion is
expressed herein with respect to the requirements of, or compliance with,
federal or state securities or blue sky laws. Further, we have not participated
in the preparation of the Registration Statement or any other offering
documentation relating to the Trust, the Shares or the related Series, and we
assume no responsibility for their contents. As to any facts material to our
opinion, other than those assumed, we have relied without independent
investigation on the above-referenced documents and on the accuracy, as of the
date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all
respects to matters of Delaware law, it is our opinion that:
1. The Trust is a duly formed and validly existing business
trust in good standing under the laws of the State of Delaware.
<PAGE> 3
The Target Portfolio Trust
May 1, 2000
Page 3
2. The issuance of the Shares has been duly authorized on
behalf of the Trust, and the Shares, when issued to Shareholders in accordance
with the terms, conditions, requirements and procedures set forth in the
Operative Documents, will constitute legally issued, fully paid and
non-assessable Shares of beneficial interest in the Trust.
3. Under the Delaware Act and the terms of the Governing
Instrument, each Shareholder of the Trust, in such capacity, will be entitled to
the same limitation of personal liability as that extended to stockholders of
private corporations for profit organized under the General Corporation Law of
the State of Delaware; provided, however, that we express no opinion with
respect to the liability of any Shareholder who is, was or may become a named
Trustee of the Trust. Neither the existence nor exercise of the voting rights
granted to Shareholders under the Governing Instrument will, of itself, cause a
Shareholder to be deemed a trustee of the Trust under the Delaware Act.
Notwithstanding the foregoing or the opinion expressed in paragraph 2 above, we
note that, pursuant to Section 5 of Article IV of the Governing Instrument, the
Trustees have the power to cause Shareholders, or Shareholders of a particular
Series, to have the obligation to pay certain custodian, transfer, servicing or
similar agent charges by setting off the same against declared but unpaid
dividends or by reducing Share ownership (or by both means).
We consent to the filing of a copy of this opinion with the
Securities and Exchange Commission with the Registration Statement. In giving
this consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder. Except as provided in this paragraph, the opinions set
forth above are expressed solely for the benefit of the addressee hereof in
connection with the matters contemplated hereby and may not be relied upon for
any other purpose by any other person or entity without our prior written
consent.
Sincerely,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
<PAGE> 1
EXHIBIT (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated February 18, 2000, relating to the financial statements and
financial highlights of The Target Portfolio Trust, consisting of: Large
Capitalization Growth Portfolio, Large Capitalization Value Portfolio, Small
Capitalization Growth Portfolio, Small Capitalization Value Portfolio,
International Equity Portfolio, International Bond Portfolio, Total Return Bond
Portfolio, Intermediate-Term Bond Portfolio, Mortgage Backed Securities
Portfolio, U.S. Government Money Market Portfolio, which appears in such
Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services" and "Financial Highlights" in
such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
April 28, 2000
<PAGE> 1
THE TARGET PORTFOLIO TRUST
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees of the
Fund, in accordance with Rule 17j-1(c) under the Investment Company Act of 1940
(the Act) and in accordance with the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF
SHAREHOLDERS FIRST.
Investment company personnel should scrupulously
avoid serving their own personal interests ahead of
shareholders' interests in any decision relating to their
personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS
BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS
TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY
ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to
achieve technical compliance with the Code but should strive
to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL
SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation
that might compromise, or call into question, their exercise
of fully independent judgment in the interest of shareholders,
including, but not limited to the receipt of unusual
investment opportunities, perquisites, or gifts of more than a
de minimis value from persons doing or seeking business with
the Fund.
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Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to a purchase or sale of a security held or
to be acquired (as such term is defined in Section 2.) by an investment company,
if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the
Act and Rule 17j-1 to give effect to the following general prohibitions as set
forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or
Principal Underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal underwriter
for a registered investment company in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to
be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to
defraud such registered investment company;
(2) To make to such registered investment
company any untrue statement of a material fact or omit to
state to such registered investment company a material fact
necessary in order to make the statements made, in light of
the circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any such registered investment company; or
(4) To engage in any manipulative practice with
respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer,
general
2
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partner or Advisory Person (including any Investment Personnel, as that
term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter; provided, however,
that "Access Person" shall not include any director/trustee, officer,
general partner or Advisory Person of an Adviser/Subadviser who shall
be subject to the provisions of the code of ethics adopted by such
Adviser/Subadviser.
(b) "Adviser/Subadviser" means the Adviser or Subadviser
of the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund,
Manager or Adviser/Subadviser (or of any company in a control
relationship to the Fund, Manager or Adviser/Subadviser) who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of a security by the Fund, or whose functions relate to the making of
any recommendations with respect to such purchases or sales; and (ii)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the
same manner as it would be under Securities Exchange Act Rule
16a-1(a)(2) in determining which security holdings of a person are
subject to the reporting and short-swing profit provisions of Section
16 of the Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership will apply to all securities which an Access
Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment
companies for which Prudential Investments Fund Management LLC serves
as Manager; provided, however, that with respect to Access Persons of
the Subadviser (including any unit or subdivision thereof), "Complex"
means the group of registered investment companies in the Complex
advised by the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by
the Manager, the Adviser/Subadviser, or Principal Underwriter
(including his or her designee) as having responsibility for compliance
with the requirements of the Code.
(g) "Control" will have the same meaning as that set
forth in
3
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Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/
Trustee of the Fund who is not an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be
deemed to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of the
Code.
(i) "Initial Public Offering" means an offering of
securities registered under the Securities Act of 1933, the issuer of
which, immediately before the registration, was not subject to the
reporting requirements of sections 13 or 15(d) of the Securities
Exchange Act of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers
and other Advisory Persons who provide investment information and/or
advice to the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund
Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has
the direct responsibility and authority to make investment decisions
for the Fund.
(m) "Private placement" means a limited offering that is
exempt from registration under the Securities Act of 1933 pursuant to
section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule
506 under such Securities Act.
(n) "Security" will have the meaning set forth in Section
2(a)(36) of the Act, except that it will not include shares of
registered open-end investment companies, direct obligations of the
Government of the United States, short-term debt securities which are
"government securities" within the meaning of Section 2(a)(16) of the
Act, bankers' acceptances, bank
4
<PAGE> 5
certificates of deposit, commercial paper and such other money market
instruments as are designated by the Compliance Officer. For purposes
of the Code, an "equivalent Security" is one that has a substantial
economic relationship to another Security. This would include, among
other things, (1) a Security that is exchangeable for or convertible
into another Security, (2) with respect to an equity Security, a
Security having the same issuer (including a private issue by the same
issuer) and any derivative, option or warrant relating to that Security
and (3) with respect to a fixed-income Security, a Security having the
same issuer, maturity, coupon and rating.
(o) "Security held or to be acquired" means any Security
or any equivalent Security which, within the most recent 15 days: (1)
is or has been held by the Fund; or (2) is being considered by the Fund
or its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of
5
<PAGE> 6
government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private
placement without prior approval.
(i) Prior approval must be obtained in accordance with
the preclearance procedure described in Section 6 below. Such approval
will take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall maintain a record of such prior approval and reason for same, for
at least 5 years after the end of the fiscal year in which the approval
is granted.
(ii) Investment Personnel who have been authorized to
acquire Securities in a private placement must disclose that investment
to the chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent
consideration of an investment by the Fund in the issuer. In such
circumstances, the Fund's decision to purchase Securities of the issuer
will be subject to an independent review by appropriate personnel with
no personal interest in the issuer.
6
<PAGE> 7
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons
are prohibited from executing a Securities transaction on a day during
which any investment company in the Complex has a pending "buy" or
"sell" order in the same or an equivalent Security and until such time
as that order is executed or withdrawn; provided, however, that this
prohibition shall not apply to Disinterested Directors/Trustees except
if they have actual knowledge of trading by any fund in the Complex
and, in any event, only with respect to those funds on whose boards
they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and
sale of Securities for the Fund and are not engaged in the day-to-day
operations of the Fund; provided that Securities investments effected
by such Access Persons during the proscribed period are not effected
with knowledge of the purchase or sale of the same or equivalent
Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to
purchase or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or
selling a Security within seven calendar days before or after the Fund
trades in the same or an equivalent Security. Nevertheless, a personal
trade by any Investment
7
<PAGE> 8
Personnel shall not prevent a Fund in the same Complex from trading in
the same or an equivalent security. However, such a transaction shall
be subject to independent review by the Compliance Officer.
(iii) If trades are effected during the periods proscribed in
(i) or (ii) above, except as provided in (iv) below with respect to (i)
above, any profits realized on such trades will be promptly required to
be disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6
below and without prior knowledge of trading by any fund in the Complex
in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are
prohibited from profiting from a purchase and sale, or sale and purchase, of the
same or an equivalent Security within any 60 calendar day period. If trades are
effected during the proscribed period, any profits realized on such trades will
be immediately required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
in the
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<PAGE> 9
Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put
option on a security owned by any Fund in the Complex. Access Persons may
purchase options on securities not held by any Fund in the Complex, or purchase
call options or write put options on securities owned by any Fund in the
Complex, subject to preclearance and the same restrictions applicable to other
Securities. Access Persons may write covered call options or buy covered put
options on a Security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any
account over which the Access Person has no direct or indirect
influence or control or in any account of the Access Person which is
managed on a discretionary basis by a person other than such Access
Person and with respect to which such Access Person does not in fact
influence or control such transactions.
(b) Purchases or sales of Securities (or their
equivalents) which
9
<PAGE> 10
are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are
non-volitional on the part of either the Access Person or any fund in
the Complex.
(d) Purchases of Securities which are part of an
automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of its Securities, to
the extent such rights were acquired from such issuer, and sales of
such rights so acquired.
(f) Any equity Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
500 shares or less in the aggregate, if (i) the Access Person has no
prior knowledge of activity in such security by any fund in the Complex
and (ii) the issuer is listed on The New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a
broad-based index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the
prior approval of the Compliance Officer (such person having no
personal interest in such purchases or sales), based on a determination
that no abuse is involved and that such purchases and sales are not
likely to have any economic impact on any fund in the Complex or on its
ability to purchase or sell Securities of the same class or other
Securities of the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
- ------------------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
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<PAGE> 11
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed no later than 5:00
p.m. local time on the business day following the date preclearance is granted.
If any order is not timely executed, a request for preclearance must be
resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary
of the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to
11
<PAGE> 12
transactions effected in any account over which such Director/Trustee does not
have any direct or indirect influence or control or in any account of the
Disinterested Director/Trustee which is managed on a discretionary basis by a
person other than such Director/Trustee and with respect to which such
Director/Trustee does not in fact influence or control such transactions. The
Secretary of the Fund or the Compliance Officer shall maintain such reports and
such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall
not be construed as an admission by the person making such report that he or she
has any direct or indirect Beneficial Ownership in the Security to which the
report relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
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<PAGE> 13
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
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<PAGE> 14
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such
14
<PAGE> 15
Investment Personnel serves as a director through the use of "Chinese Wall" or
other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to
the requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing
and any
15
<PAGE> 16
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and
sanctions imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
16
<PAGE> 17
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
17
<PAGE> 18
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own
benefit, whether in bearer form or registered in his or her own name or
otherwise, but also ownership of securities held for his or her benefit by other
(regardless of whether or how they are registered) such as custodians, brokers,
executors, administrators, or trustees (including trusts in which he or she has
only a remainder interest), and securities held for his or her account by
pledges, securities owned by a partnership in which he or she should regard as a
personal holding corporation. Correspondingly, this term would exclude
securities held by an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE> 19
Exhibit B
INDEX OPTIONS ON A BROAD-BASED INDEX
TICKER SYMBOL DESCRIPTION
- --------------------------------------------------------------------------------
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit (P)(2)
PRUDENTIAL INVESTMENT CORPORATION
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the
Duly Appointed Officer-In-Charge of the Prudential Mutual Fund (hereinafter,
referred to as the "Fund"), the Manager, the Adviser/Subadviser, and the
Principal Underwriter in accordance with Rule 17j-1(c) under the Investment
Company Act of 1940 (the Act) and in accordance with the following general
principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF
SHAREHOLDERS FIRST.
Investment company personnel should scrupulously
avoid serving their own personal interests ahead of
shareholders' interests in any decision relating to their
personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS
BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS
TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY
ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to
achieve technical compliance with the Code but should strive
to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL
SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation
that might compromise, or call into question, their exercise
of fully
<PAGE> 2
independent judgment in the interest of shareholders,
including, but not limited to the receipt of unusual
investment opportunities, perquisites, or gifts of more than a
de minimis value from persons doing or seeking business with
the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to a purchase or sale of a security held or
to be acquired (as such term is defined in Section 2.) by an investment company,
if effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the
Act and Rule 17j-1 to give effect to the following general prohibitions as set
forth in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or
Principal Underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal underwriter
for a registered investment company in connection with the purchase or
sale, directly or indirectly, by such person of a security held or to
be acquired, by such registered investment company:
(1) To employ any device, scheme or artifice to
defraud such registered investment company;
(2) To make to such registered investment company any
untrue statement of a material fact or omit to state to such
registered investment company a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any such registered investment company; or
<PAGE> 3
(4) To engage in any manipulative practice with
respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer,
general partner or Advisory Person (including any Investment Personnel,
as that term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of
the Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund,
Manager or Adviser/Subadviser (or of any company in a control
relationship to the Fund, Manager or Adviser/Subadviser) who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of a security by the Fund, or whose functions relate to the making of
any recommendations with respect to such purchases or sales; and (ii)
any natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard to
the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same
manner as it would be under Securities Exchange Act Rule 16a-1(a)(2) in
determining which security holdings of a person are subject to the
reporting and short-swing profit provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership will apply to all securities which an Access
Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment
companies for which Prudential Investments Fund Management LLC serves
as Manager; provided, however, that with respect to Access Persons of
the Subadviser (including any unit or subdivision thereof), "Complex"
means the group of registered investment companies in the Complex
advised by the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the
Manager, the Adviser/Subadviser, or Principal Underwriter (including
his or her designee) as having responsibility for compliance with the
requirements of the Code.
<PAGE> 4
(g) "Control" will have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/Trustee
of the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be
deemed to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of the
Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act of
1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and
other Advisory Persons who provide investment information and/or advice
to the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders ; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund
Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the
direct responsibility and authority to make investment decisions for
the Fund.
(m) "Private placement" means a limited offering that is
exempt from registration under the Securities Act of 1933 pursuant to
section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or rule
506 under such Securities Act.
(n) "Security" will have the meaning set forth in Section
2(a)(36) of the Act, except that it will not include shares of
registered open-end investment companies, direct obligations of the
government of the United States, short-term debt securities which are
<PAGE> 5
"government securities" within the meaning of Section 2(a)(16) of the
Act, bankers' acceptances, bank certificates of deposit, commercial
paper and such other money market instruments as are designated by the
Compliance Officer. For purposes of the Code, an "equivalent Security"
is one that has a substantial economic relationship to another
Security. This would include, among other things, (1) a Security that
is exchangeable for or convertible into another Security, (2) with
respect to an equity Security, a Security having the same issuer
(including a private issue by the same issuer) and any derivative,
option or warrant relating to that Security and (3) with respect to a
fixed-income Security, a Security having the same issuer, maturity,
coupon and rating.
(o) "Security held or to be acquired" means any Security or
any equivalent Security which, within the most recent 15 days: (1) is
or has been held by the Fund; or (2) is being considered by the Fund or
its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer shall
provide each Access Person with a copy of the Code. The prohibitions described
below will only apply to a transaction in a Security in which the designated
Access Person has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership. The Compliance Officer will maintain a list of
all Access Persons who are currently, and within the past five years, subject to
the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering. For purposes of this restriction, "Initial Public Offerings" shall not
include offerings of government and municipal securities.
<PAGE> 6
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private
placement without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall maintain a record of such prior approval and reason for same, for
at least 5 years after the end of the fiscal year in which the approval
is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent
consideration of an investment by the Fund in the issuer. In such
circumstances, the Fund's decision to purchase Securities of the issuer
will be subject to an independent review by appropriate personnel with
no personal interest in the issuer.
<PAGE> 7
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during
which any investment company in the Complex has a pending "buy" or
"sell" order in the same or an equivalent Security and until such time
as that order is executed or withdrawn; provided, however, that this
prohibition shall not apply to Disinterested Directors/Trustees except
if they have actual knowledge of trading by any fund in the Complex
and, in any event, only with respect to those funds on whose boards
they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and
sale of Securities for the Fund and are not engaged in the day-to-day
operations of the Fund; provided that Securities investments effected
by such Access Persons during the proscribed period are not effected
with knowledge of the purchase or sale of the same or equivalent
Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to
purchase or sell a Security has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or selling
a Security within seven calendar days before or after the Fund trades
in the same or an equivalent Security. Nevertheless, a personal trade
by any
<PAGE> 8
Investment Personnel shall not prevent a Fund in the same Complex from
trading in the same or an equivalent security. However, such a
transaction shall be subject to independent review by the Compliance
Officer.
(iii) If trades are effected during the periods proscribed in
(i) or (ii) above, except as provided in (iv) below with respect to (i)
above, any profits realized on such trades will be promptly required to
be disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6
below and without prior knowledge of trading by any fund in the Complex
in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel are
prohibited from profiting from a purchase and sale, or sale and purchase, of the
same or an equivalent Security within any 60 calendar day period. If trades are
effected during the proscribed period, any profits realized on such trades will
be immediately required to be disgorged to the Fund.
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
<PAGE> 9
in the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put
option on a security owned by any Fund in the Complex. Access Persons may
purchase options on securities not held by any Fund in the Complex, or purchase
call options or write put options on securities owned by any Fund in the
Complex, subject to preclearance and the same restrictions applicable to other
Securities. Access Persons may write covered call options or buy covered put
options on a Security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account
over which the Access Person has no direct or indirect influence or
control or in any account of the Access Person which is managed on a
discretionary basis by a person other than such Access Person and with
respect to which such Access Person does not in fact influence or
control such transactions.
(b) Purchases or sales of Securities (or their equivalents)
which are not eligible for purchase or sale by any fund in the Complex.
<PAGE> 10
(c) Purchases or sales of Securities which are non-volitional
on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic
dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by
an issuer pro rata to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Access Person has no prior
knowledge of activity in such security by any fund in the Complex and
(ii) the issuer is listed on The New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based
index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior
approval of the Compliance Officer (such person having no personal
interest in such purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales are not likely to
have any economic impact on any fund in the Complex or on its ability
to purchase or sell Securities of the same class or other Securities of
the same issuer.
(j) Purchases or sales of Unit Investment Trusts.
(1) Exhibit B will be amended by the Compliance Officer as necessary.
<PAGE> 11
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed no later than 5:00
p.m. local time on the business day following the date preclearance is granted.
If any order is not timely executed, a request for preclearance must be
resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of
the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a Disinterested Director/Trustee is
not required to make a report with respect to transactions effected in any
account over which such Director/Trustee does not
<PAGE> 12
have any direct or indirect influence or control or in any account of the
Disinterested Director/Trustee which is managed on a discretionary basis by a
person other than such Director/Trustee and with respect to which such
Director/Trustee does not in fact influence or control such transactions. The
Secretary of the Fund or the Compliance Officer shall maintain such reports and
such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations
<PAGE> 13
of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
Within ten days after an individual first becomes an Access Person and
<PAGE> 14
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential
<PAGE> 15
conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report which
at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
(ii) summarizes existing procedures concerning personal investing and any
changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed
<PAGE> 16
in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action is
required.
<PAGE> 17
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or those of its directors
or officers who are not Directors/Trustees or Officers of the Fund since they
are deemed not to constitute Access Persons or Advisory Persons as defined in
paragraphs (e)(1) and (2) of Rule 17j-1.
Dated: February 29, 2000
<PAGE> 18
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE> 19
Exhibit B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
------------- -----------
<S> <C>
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT (P)(3)
[LOGO]
INVESCO U.S. INSTITUTIONAL GROUP
LEGAL/COMPLIANCE
COMPLIANCE MANUAL
II. CODE OF ETHICS AND PROFESSIONAL STANDARDS; GUIDELINES FOR AVOIDING
PROHIBITED ACTS
A. CODE OF ETHICS AND PROFESSIONAL STANDARDS
One of the most important compliance goals for INVESCO is to avoid or
eliminate conflicts of interest between INVESCO and its clients and to maintain
a healthy and positive relationship with the general public. As professional
organizations serving the public in the area of asset management, all members of
INVESCO U.S. Institutional Group (USIG) are guided in their actions by high
ethical and professional standards and, as applicable, subscribe to the Code of
Ethics and Standards of Professional Conduct adopted by the Association of
Investment Management and Research (AIMR). Adherence to the following Code of
Ethics and Professional Standards should be considered a condition of
employment.
1. The general conduct of USIG personnel must at all times
reflect the professional nature of the business in which
INVESCO operates. USIG personnel are judicious, accurate,
objective and reasonable in dealing with both clients and
other parties. The personal integrity of all employees must be
beyond the slightest shadow of a doubt.
2. All members of the organization must act within the spirit and
the letter of all federal, state and local laws and
regulations pertaining to investment advisers and to the
general conduct of business.
3. At all times, the interest of INVESCO's clients has precedence
over personal interests. This applies particularly in the case
of purchases and sales of stocks and other securities that are
owned, purchased or sold in the advisory and fiduciary
accounts that INVESCO services.
4. USIG has adopted Insider Trading Policies (see Section III)
which set parameters for the establishment, maintenance and
enforcement of policies and procedures to detect and prevent
the misuse of material nonpublic information by USIG
personnel. The Insider Trading Policies are in addition to and
do not supersede this Code of Ethics and Professional
Standards.
5. All officers, directors and employees of USIG shall obtain
written approval of the USIG Legal Compliance Department, as
required by the Statement of Policy and Procedures Designed to
Detect and Prevent Insider Trading and to Govern Personal
Securities Trading (see Section III), prior to effecting any
securities transactions
II - 1
<PAGE> 2
for their direct or indirect personal gain or in which they
may have any beneficial interest and any such transaction
effected by, for, or on behalf of any member of their
household. In this regard, all USIG personnel on or before
February 1st of each calendar year shall provide a list of all
broker-dealers and account numbers in which, as of December 31
of the preceding year, they have any direct or indirect
beneficial ownership interest or involvement, other than
currency or commodity futures not involving securities, U.S.
government bonds, bank certificates of deposit, or shares of
registered open-end management investment companies (mutual
funds).
6. A USIG employee will not accept compensation of any sort for
services from outside sources without the prior approval of
the USIG Legal/Compliance Department (see Section X.B.
Activities Outside of INVESCO).
7. When an employee of USIG finds that his or her personal
interests conflict with the interests of INVESCO and its
clients, he or she will report the conflict to the USIG
Legal/Compliance Department for resolution.
8. The recommendations and actions of INVESCO are confidential
and private matters between INVESCO and its clients.
Accordingly, it is the policy of USIG to prohibit, prior to
general public release, the transmission, distribution or
communication of any information regarding securities
transactions of client accounts except to broker-dealers in
the ordinary course of business. In addition, no information
obtained during the course of employment regarding particular
securities (including reports and recommendations of INVESCO)
may be transmitted, distributed, or communicated to anyone who
is not affiliated with INVESCO, without the prior written
approval of the President, Chief Executive Officer or Chief
Operating Officer of the applicable INVESCO business unit or
such person as he may designate to act on his behalf.
9. The policies and guidelines set forth in this Code of Ethics
must be strictly adhered to by all USIG employees. Severe
disciplinary actions, including dismissal, may be imposed for
violations of this Code of Ethics and Professional Standards,
including the guidelines that follow.
No code can address every circumstance that may give rise to a conflict
of interest. Every employee is expected to be alert to such conflicts with
INVESCO's clients, and is expected to comply with the spirit as well as the
letter of the Code and to always place the interests of INVESCO's clients first.
II - 2
<PAGE> 3
II. CODE OF ETHICS AND PROFESSIONAL STANDARDS; GUIDELINES FOR AVOIDING
PROHIBITED ACTS
B. GUIDELINES FOR AVOIDING PROHIBITED ACTS
USIG employees are prohibited from engaging in the following
("Prohibited Acts"):
1. soliciting or recommending purchases, sales or reinvestment in
securities not in accordance with the client's investment
objectives and guidelines;
2. attempting to use his or her influence to cause any client
account to purchase, sell or retain any securities for the
purpose of seeking any form of personal gain. This prohibition
would apply, for example, where the employee, or any
associates or affiliates, purchased a security prior to any
purchase of the same security by any client account and
thereafter attempted to purchase or influence others to
purchase the same security for any client account;
3. warranting the value or price of any security or guaranteeing
its future performance;
4. promising or representing that an issuer of securities will
meet its obligations or fulfill its investment or business
objectives in the future;
5. agreeing to protect a client against loss by repurchasing a
security at some future time;
6. owning or taking title to any funds or assets of a client;
7. maintaining a joint brokerage or bank account with any client;
sharing any performance fees, carried interest, or benefit,
profit or loss resulting from securities transactions with any
client or entering into any business transaction with a
client;
8. borrowing money or securities from any client, regardless of
the relationship between the client and the INVESCO
representative;
9. owning, operating, managing or otherwise engaging in, or being
employed by, any outside business activity on either a
full-time or part-time basis without the prior written
approval of the USIG Legal/Compliance Department;
10. violating or failing to abide by USIG's Statement of Policy
and Procedures Designed to Detect and Prevent Insider Trading
and USIG's Insider Trading Guidelines and Policies for Buying
and Selling AMVESCAP PLC shares and ADRs (see Section III);
and
11. entering orders in any account for which there is no client.
If any USIG employee becomes aware of any conduct which might violate
the Prohibited Acts section of this Compliance Manual, any laws or regulations,
or becomes aware of any improper or unauthorized actions, the facts must be
reported as soon as possible to his or her supervisor. If there is any question
about the conduct required of USIG and its employees, the Legal/Compliance
Department should be consulted.
II - 3
<PAGE> 4
[INVESCO U.S. INSTITUTIONAL GROUP(R) LOGO]
LEGAL/COMPLIANCE
COMPLIANCE MANUAL
III. INSIDER TRADING POLICIES AND PERSONAL SECURITIES TRADING
A. STATEMENT OF POLICY AND PROCEDURES DESIGNED TO DETECT AND PREVENT
INSIDER TRADING AND TO GOVERN PERSONAL SECURITIES TRADING
PART 1. POLICY ON INSIDER TRADING
A. SCOPE
This statement of policy and procedures to detect and prevent insider
trading and to govern personal securities trading ("Policy Statement") covers
(i) all employees, officers and directors of all members of the INVESCO U.S.
Institutional Group (USIG) and (ii) all persons controlled by, or controlling,
the members of USIG. This Policy Statement shall also cover such other persons
as may from time to time come within the definition of "persons associated with
an investment adviser," as such term is defined under the Investment Advisers
Act of 1940.
This Policy Statement operates in conjunction with the Code of Ethics
and Professional Standards (see Section II) previously adopted by USIG as well
as the Codes of Ethics adopted by each investment company, fund, trust or client
advised, managed and/or sponsored by USIG; it is in addition to, not in
replacement of, those obligations imposed by those Codes of Ethics.
B. POLICY GOVERNING INSIDER TRADING
USIG FORBIDS ANY OFFICER, DIRECTOR OR EMPLOYEE FROM CONDUCTING TRADES,
EITHER PERSONALLY OR ON BEHALF OF OTHERS (SUCH AS INVESTMENT COMPANIES AND
PRIVATE ACCOUNTS MANAGED BY INVESCO), BASED ON MATERIAL NONPUBLIC INFORMATION OR
COMMUNICATING MATERIAL NONPUBLIC INFORMATION TO OTHERS IN VIOLATION OF THE LAW.
This Policy Statement applies to every officer, director and employee and
extends to activities within and outside their duties at INVESCO. Every officer,
director and employee must read and retain a copy of this Policy Statement. Any
questions regarding this Policy Statement should be referred to the USIG
Legal/Compliance Department.
THE TERM "INSIDER TRADING" IS NOT SPECIFICALLY DEFINED IN THE FEDERAL
SECURITIES LAWS, BUT GENERALLY IS USED TO REFER TO THE AFOREMENTIONED USE OF
MATERIAL NONPUBLIC INFORMATION TO TRADE IN SECURITIES (WHETHER OR NOT ONE IS AN
"INSIDER") OR TO THE COMMUNICATION OF MATERIAL NONPUBLIC INFORMATION TO OTHERS.
C. INSIDER TRADING LAW
III - 1
<PAGE> 5
While the law concerning insider trading is not static, it is generally
understood that the law prohibits:
1. trading by an insider, while in possession of material
nonpublic information; or
2. trading by a non-insider, while in possession of material
nonpublic information, where the information either was
disclosed to the non-insider in violation of an insider's duty
to keep it confidential or was misappropriated; or
3. communicating material nonpublic information to others.
The elements of insider trading and the penalties for such unlawful
conduct are discussed below. Any questions or concerns should be addressed to
the USIG Legal/Compliance Department.
INSIDER. The concept of "insider" is broad and can include officers,
directors and employees of a company. In addition, an "outsider" can become a
"temporary insider" if he or she enters into a special confidential relationship
in the conduct of a company's affairs and as a result is given access to
information solely for the company's purposes. A temporary insider can include,
among others, a company's attorneys, accountants, consultants, and bank lending
officers. In addition, a USIG member or an employee, officer or director of such
a member may become a temporary insider of a company that any member of USIG
advises or for which it performs other services. According to the Supreme Court,
the temporary insider must be aware of his or her status as an insider, and thus
understand that he or she is handling material nonpublic information, to be
truly considered an insider.
MATERIAL INFORMATION. Trading based on inside information is not a
basis for liability unless the information is material. "MATERIAL INFORMATION"
CAN BE ANY INFORMATION FOR WHICH THERE IS A SUBSTANTIAL LIKELIHOOD THAT A
REASONABLE INVESTOR WOULD CONSIDER IT IMPORTANT IN MAKING HIS OR HER INVESTMENT
DECISION, OR INFORMATION THAT IS REASONABLY CERTAIN TO HAVE A SUBSTANTIAL EFFECT
ON THE PRICE OF A COMPANY'S SECURITIES. Information that officers, directors and
employees should consider material can include, but is not limited to, any
legal, economic or structural change (or impending change) which could
potentially alter the value of a company or its affiliates, or any data which
may be reflective of a company's future performance. Common examples of
information that may be regarded as material are:
1. projection by the company's officers of future earnings or
losses different from market expectations
2. pending or proposed merger, acquisition or tender offer
3. significant sale of assets or the disposition of a subsidiary
4. changes in dividend policies or the declaration of a stock
split
5. the offering of additional securities
6. significant changes in senior management
7. the gain or loss of a substantial client or supplier
8. impending bankruptcy or financial liquidity problems
9. impending litigation matters
Material information does not necessarily have to relate directly to a
company's business. For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the
Supreme Court considered as material certain information about the contents of a
forthcoming newspaper column that was expected to affect the market price of a
security. In that case, a Wall Street Journal reporter was found criminally
liable for disclosing to others the dates that reports on various companies
would appear in the Journal and whether or not those reports would be favorable.
Likewise, a decision at an investment meeting or a decision by a member of USIG
to purchase or sell that security for one or more accounts may be
III - 2
<PAGE> 6
considered material information.
NONPUBLIC INFORMATION. INFORMATION IS NONPUBLIC UNTIL IT HAS BEEN
EFFECTIVELY COMMUNICATED TO THE MARKET PLACE, AND IS PROVABLY AVAILABLE TO THE
GENERAL PUBLIC. For example, information found in a report filed with the SEC,
or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or
other publications of general circulation would be considered public. Once a
public release has occurred, information will normally be regarded as absorbed
and evaluated within two or three business days thereafter.
PENALTIES. Penalties for trading based on or communicating material
nonpublic information are severe, both for individuals involved in such unlawful
conduct and their employers. A person can be subject to some or all of the
penalties below, even if he or she does not personally benefit from the
violation. Penalties include:
1. civil injunctions
2. treble damages
3. prison sentences
4. fines for the person who committed the violation of up to
three times the profit gained or loss avoided, whether or not
the person actually benefited; and
5. fines for the employer or other controlling person of up to
the greater of $1,000,000 or three times the amount of the
profit gained or loss avoided.
In addition, any violation of this Policy Statement can be expected to
result in serious sanctions by USIG, including dismissal of the persons
involved.
PART 2. PROCEDURES TO IMPLEMENT USIG'S POLICY AGAINST INSIDER TRADING
AND TO GOVERN PERSONAL SECURITIES TRADING
The following procedures have been established to aid the officers,
directors and employees of USIG in avoiding insider trading and to aid USIG in
preventing, detecting and imposing sanctions against insider trading. Every
officer, director and employee of USIG must follow these procedures or risk
serious sanctions, including dismissal, substantial personal liability and
criminal penalties. Any questions in reference to these procedures should be
directed to the USIG Legal/Compliance Department.
A. IDENTIFYING INSIDER INFORMATION
Before trading for oneself or others, including the investment
companies or private accounts managed by INVESCO, in the securities of a company
about which one may have potential insider information, an employee should
consider the following questions:
1. Is the information material? Is this information that could be
considered important in making investment decisions? Is this
information that would substantially affect the market price
of the securities if generally disclosed?
2. Is the information public? To whom has this information been
provided? Has the information been published in Reuters, The
Wall Street Journal, or other publications of general
circulation?
If, after consideration of the above, it is believed that the
information is material and nonpublic, or if there are questions as to whether
the information is material and nonpublic, the following steps
III - 3
<PAGE> 7
should be taken:
1. Report the matter immediately to the USIG Legal/Compliance
Department.
2. Do not purchase or sell the securities on behalf of yourself
or others, including investment companies or private accounts
managed by INVESCO.
3. Do not communicate the information inside or outside INVESCO,
other than to the USIG Legal/Compliance Department.
After the USIG Legal/Compliance Department has reviewed the issue, the
employee in question either will be instructed to continue to follow the
prohibitions against trading and communication or will be allowed to trade and
communicate the information.
B. EMPLOYEE PROCEDURES FOR PERSONAL SECURITIES TRADING
All USIG employees, officers and directors (including the members of
their respective households) are subject to the following rules and regulations
regarding trading in marketable securities, including options on securities, for
themselves, their spouses and their immediate families.
1. The rules and procedures regarding Insider Trading set forth
in this Policy Statement apply fully to the personal trading
of USIG employees, officers and directors. Accordingly, no
employee, officer or director of USIG shall engage in personal
trading while in possession of material nonpublic information,
communicate material nonpublic information to others in
violation of the law or otherwise engage in activities that
would violate this Policy Statement.
2. CLIENTS' INTERESTS MUST ALWAYS COME AHEAD OF ANY PERSONAL
INTEREST. THEREFORE, INSOFAR AS POSSIBLE, INDIVIDUALS SHOULD
GENERALLY DO THEIR BUYING AND SELLING FOR PERSONAL ACCOUNTS
AFTER TRANSACTIONS HAVE BEEN COMPLETED FOR CLIENTS.
To implement these procedures, all officers, directors and
employees of USIG (including the members of their respective
households) shall obtain written approval prior to affecting:
(a) any securities transaction for their direct or indirect
personal gain or in which they may have any beneficial
interest and (b) any securities transaction by, for or on
behalf of any member of their household (note de minimis
exemption, described below). Further, no officer, director, or
employee of USIG shall directly or indirectly: (a) purchase
from or sell to any broker-dealer who transacts business with
INVESCO any security or other property upon terms more
favorable than those obtainable at the time by the general
public; (b) purchase from or sell to any broker-dealer or
representative or account executive who receives compensation
or credit for transacting business with INVESCO any security
or other property; or (c) participate in the purchase of any
new issue (this includes Initial Public Offerings (IPOs) and
other primary offerings). The prohibitions of this paragraph
apply to any securities transactions or accounts in which an
employee may have: (a) a direct or indirect interest,
including those in the name of a relative or friend; or (b)
discretionary control over the purchase and/or sale of
securities. APPROVAL SHALL BE SOUGHT BY MEANS OF COMPLETION OF
A REQUEST FOR PERMISSION TO ENGAGE IN PERSONAL SECURITIES
TRANSACTION, A CURRENT FORM OF WHICH IS ATTACHED. THIS FORM
MAY BE OBTAINED FROM THE USIG LEGAL/COMPLIANCE DEPARTMENT, AND
IS ALSO AVAILABLE ON THE SHARED PORTION OF THE EMAIL SYSTEM.
APPROVAL IS EFFECTIVE WITHIN ONE TRADING DAY FOLLOWING THE
TIME SHOWN BY THE TRADING OR LEGAL/COMPLIANCE DEPARTMENT TIME
STAMP ON THE REQUEST FOR PERMISSION TO ENGAGE IN PERSONAL
SECURITIES TRANSACTION FORM OR THE TIME SHOWN ON THE E-MAIL OF
APPROVAL SENT TO THE EMPLOYEE, OFFICER OR DIRECTOR REQUESTING
PERMISSION.
III - 4
<PAGE> 8
USIG employees' requests for transactions should be submitted
to the designee in the Atlanta Legal/Compliance Department via
email or fax. NOTE: EMPLOYEES IN THE INVESCO (NY) DIVISION OF
INVESCO, INC. ARE TO SUBMIT REQUESTS THROUGH THE NEW YORK
LEGAL/COMPLIANCE DEPARTMENT.
USIG officers, directors and employees are subject to a seven
(7) day "blackout" period and are therefore prohibited from
buying or selling a security seven (7) calendar days before
and after any portfolio managed for an INVESCO North American
client purchases or sells the same security. In this regard,
each requested security transaction will be checked for the
seven (7) days following the transaction in addition to seven
(7) days prior to the requested transaction date. If there has
been an INVESCO portfolio transaction involving the same
security within the seven (7) days prior to the employee
transaction, approval for the trade will be denied. In the
event of a match seven (7) days forward, the individual will
be notified, and he or she will be required to provide to the
USIG Legal/Compliance Department a written explanation of the
transaction in question to determine what additional action
may be necessary.
A "de minimis" exemption may be requested when the trade to be
executed involves the purchase or sale of 2,000 shares or
fewer and when the issuer has a market capitalization of at
least $1 billion. Approval will be granted when a trade comes
within the parameters of the "de minimis" exemption, provided
that written documentation evidencing the market
capitalization is provided with the Request for Permission to
Engage in Personal Securities Transaction form and that such
approval is not being requested by an USIG officer, director
or employee who is also buying or selling the same security
for an INVESCO client account. Permission under the "de
minimis" exemption may be granted for a particular security
only once every thirty (30) days. Additionally, permission
granted under the "de minimis" exemption will be valid for ten
(10) calendar days. For example, if permission to trade 25
shares of IBM is granted under the "de minimis" exemption on
July 1st such trade could be executed any time during the
period from July 1st through July 10th.
3. Prior approval shall not be required for transactions in
commodity futures, U.S. government bonds, bank certificates of
deposit, shares in registered open-end management investment
companies (mutual funds), or purchases which are part of an
automatic reinvestment plan.
4. When an officer, director, or employee of USIG (or member of
their household) affects a personal securities transaction in
which he or she has direct or indirect interest, except a
transaction in currency or commodity futures, U.S. government
bonds, bank certificates of deposit, or shares of registered
open-end management investment companies (mutual funds), such
officer, director or employee, or his broker, shall ensure
that a duplicate broker's confirmation of the transaction in
question is provided to the USIG Legal/Compliance Department
WITHIN (10) CALENDAR DAYS OF SETTLEMENT OF THE TRANSACTION.
All new USIG individuals should request that their
broker-dealers send duplicate confirmations and statements
(PHOTOCOPIES OF CONFIRMATIONS AND STATEMENTS WILL NOT BE
ACCEPTED) to the USIG Legal/Compliance Department. Upon
request, the Legal/Compliance Department can also send a
standard letter to the broker in question making such a
request on the employee's behalf. Where no broker is involved
in the transaction, the employee may provide other evidence of
a purchase or sale that is satisfactory to the USIG
Legal/Compliance Department and which explains the
circumstances surrounding the transaction, including the
manner in which it was executed, the title of each security
involved in the transaction, the amount of each security
purchased or sold, the date of the transaction, and the price
at which the
III - 5
<PAGE> 9
transaction was executed, if any. Such confirmations or other
evidence of purchase or sale shall be retained by INVESCO for
a period of at least six years. NOTE: EMPLOYEES IN THE INVESCO
(NY) DIVISION OF INVESCO, INC. ARE TO DIRECT ALL TRADE
CONFIRMATIONS TO THE APPROPRIATE USIG LEGAL/COMPLIANCE
PERSONNEL IN NEW YORK.
Additionally, all USIG personnel on or before February 1st of
each calendar year shall provide to the USIG Legal/Compliance
Department a list of all broker-dealer accounts, securities
holdings, private placements, and securities related holdings
in which, as of December 31 of the preceding year, they have
any direct or indirect beneficial ownership interest or
involvement, other than currency or commodity futures, U.S.
government bonds, bank certificates of deposit, or shares of
registered open-end management investment companies (mutual
funds). Employees shall provide such information throughout
the year, as necessary. NOTE: EMPLOYEES IN THE INVESCO (NY)
DIVISION OF INVESCO, INC. SHALL REPORT TO THE APPROPRIATE USIG
LEGAL/COMPLIANCE PERSONNEL IN NEW YORK.
Again, even the APPEARANCE of violation is to be avoided, and
the USIG Legal/Compliance Department maintains such detailed
records to accurately and consistently track employee
activity.
5. Purchases and sales of securities based futures (such as S&P
futures), options and options on futures contracts (Contracts)
shall be permitted only if prior approval is obtained. A "de
minimis" exemption may be requested if 20 or fewer Contracts
are being traded, the issuer of the underlying security or
applicable index has a market capitalization of at least $1
billion and the USIG officer, director or employee requesting
permission is not buying or selling the Contracts or
underlying security for an INVESCO client account; approval
will also be given if the purchaser can demonstrate that no
potential conflict of interest issues will arise if he or she
is permitted to purchase the Contracts. In this regard,
written documentation evidencing the market capitalization of
the issuer of the underlying security or applicable securities
index must be provided with the Request for Permission to
Engage in Personal Securities Transaction form. THE PURCHASE
AND/OR SALE OF OPTION CONTRACTS MAY NOT BE USED TO CIRCUMVENT
THE 60-DAY SHORT-TERM TRADING RULES (see paragraph 9, below).
Therefore, option contracts should not be entered into solely
for the purpose of locking in prices due to the purchase
and/or sale of options with a high probability of near term
exercise.
6. Purchases of privately placed securities of any issuers shall
be permitted only if pre-approved by the USIG Legal/Compliance
Department. Such approval will only be given if the purchaser
can demonstrate that no current or potential conflict of
interest issue(s) will arise if the employee is permitted to
purchase the security in question. The de minimis exemption
set forth in paragraph 2 does NOT apply to privately placed
security purchases. Employees having ownership of privately
placed securities at the time of employment by INVESCO, or
employees permitted to purchase such securities while employed
by INVESCO, may at any time be required to halt any and all
transactions involving such securities or even divest in such
securities due to potential conflicts of interest.
7. Participation in an investment club by an INVESCO officer,
director or employee shall be permitted only if approved in
advance by the USIG Legal/Compliance Department. Such approval
will only be given if the participant can demonstrate that no
potential conflict of interest issue(s) will arise if approval
is granted. Additionally, the participant should be able to
demonstrate that he/she does not have sole control concerning
investment decisions; he/she agrees to submit quarterly
statements from the
III - 6
<PAGE> 10
investment club evidencing securities holdings and
transactions. Such approval may be reviewed and revoked at any
time. Should a USIG or other covered business units' officer,
director or employee contribute to, but not necessarily
control, investment decision-making for the investment club,
all transactions by the investment club would be subject to
pre-clearance.
8. PURCHASES, DIRECTLY OR INDIRECTLY, OF NEW ISSUES (INITIAL
PUBLIC OFFERINGS) ARE PROHIBITED. In the event that an USIG
officer, director or employee holds securities of a company
that is about to engage in an initial public offering, he/she
must disclose the investment to the General Counsel of the
USIG Legal/Compliance Department.
9. ALL COVERED OFFICERS, DIRECTORS OR EMPLOYEES ARE PROHIBITED
FROM ENGAGING IN SHORT SALES OF SECURITIES.
10. All covered officers, directors or employees are generally
prohibited from engaging in an "opposite transaction" in the
same or equivalent security within sixty (60) calendar days of
its purchase or sale. Any rare exemption to this prohibition
must be pre-approved by the USIG Legal/Compliance Department.
11. Officers, directors and employees do not need to pre-clear
transactions in any account over which they have no direct or
indirect influence or control (a "Non-Discretionary Account").
Non-Discretionary Accounts must meet the following
requirements: (a) the investment decisions for the account
must be made by an independent fiduciary who is authorized by
a written agreement to make all investment decisions and who
does not discuss any such investment decisions with the USIG
employee; (b) the employee must certify to INVESCO that he or
she does not discuss investment decisions with the individual
in question prior to any transactions; and (c) the employee
must certify in writing that he or she has not and will not
discuss any potential investment decisions with the
independent fiduciary or household member. Written approval
must be obtained from the USIG Legal/Compliance Department for
any Non-Discretionary Account. Trades for Non-Discretionary
Accounts need to be reported to INVESCO, but they do not need
to be pre-cleared and, thus, are not subject to the "blackout"
period. Note that pre-clearance is required for all
transactions involving AMVESCAP stocks or options, including
trades for Non-Discretionary Accounts.
12. In addition to any other sanctions which may be imposed upon
an officer, director or employee of USIG who has violated this
USIG Compliance Manual, the officer, director, or employee of
USIG having engaged in the violation of this section may be
required either to unwind the purchase or sale transaction or,
if that is impractical, disgorge all profits from the
transaction.
13. NO SET OF RULES CAN POSSIBLY ANTICIPATE ALL THE POTENTIAL
TRADING CONFLICTS OF INTEREST BETWEEN INVESCO CLIENTS AND
INVESCO PERSONNEL. ANY SITUATION SUBJECT TO INTERPRETATION
SHOULD BE DECIDED IN FAVOR OF THE PROTECTION OF THE BEST
INTERESTS OF THE CLIENTS. FOR INSTANCE, IT WOULD BE UNETHICAL
TO EXECUTE A PERSONAL TRADE IN A SECURITY IF THE USIG EMPLOYEE
KNEW OR HAD REASON TO KNOW THAT A SUBSTANTIAL ORDER IN THE
SECURITY IN QUESTION WAS LIKELY TO BE IMPLEMENTED FOR A CLIENT
OR CLIENTS IN THE FORESEEABLE FUTURE, EVEN THOUGH TO EXECUTE
THE PERSONAL TRADE WOULD BE WITHIN THE LETTER OF THE
REGULATIONS AS SET FORTH ABOVE.
C. RESTRICTING ACCESS TO MATERIAL NONPUBLIC INFORMATION
III - 7
<PAGE> 11
Information in an employee's possession that can be considered material
and nonpublic may not be communicated to anyone, including persons within
INVESCO, except as provided for above. In addition, care should be taken so that
such information is secure. For example, files containing material nonpublic
information should be sealed, and access to computer files containing material
nonpublic information should be restricted (see Section III.D. Need-to-Know
Policy).
D. RESOLVING ISSUES CONCERNING INSIDER TRADING
If, after consideration of the items set forth above, doubt remains as
to whether information is material or nonpublic, or if there is any unresolved
question as to the applicability or interpretation of the foregoing procedures,
or as to the propriety of any action, it must be discussed with the USIG
Legal/Compliance Department before trading or communicating the information to
anyone.
PART 3. SUPERVISORY PROCEDURES
A. REDUCTION OF INSIDER TRADING
To reduce insider trading, the USIG Legal/Compliance Department will:
1. provide educational programs to familiarize officers,
directors and employees with this Policy Statement;
2. answer questions regarding this Policy Statement;
3. resolve issues of whether information received by an officer,
director or employee of USIG is material and nonpublic;
4. review on a regular basis and update as necessary this Policy
Statement;
5. when it has been determined that an officer, director or
employee of USIG has material nonpublic information:
a. implement such measures to prevent dissemination of
such information; and
b. if necessary, restrict officers, directors and
employees from trading the securities in question.
B. DETECTION OF INSIDER TRADING
To detect potential insider trading, the USIG Legal/Compliance
Department will:
1. review trading activity documentation (including all Request
for Permission to Engage in Personal Securities Transaction
forms and broker-dealer confirmations and statements) for each
officer, director and employee pursuant to the applicable
policies; and
2. coordinate the review of such reports with other appropriate
officers, directors or employees of the USIG business units.
C. SPECIAL REPORTS TO MANAGEMENT
Promptly, upon learning of a potential violation of this Policy
Statement, the USIG Legal/Compliance Department will prepare a written report to
USIG management providing full details and recommendations for further action.
D. ANNUAL REPORTS TO MANAGEMENT
III - 8
<PAGE> 12
On an annual basis, the Director of Compliance will prepare a written
report to USIG management setting forth the following:
1. a summary of existing procedures to detect and prevent insider
trading;
2. full details of any investigation, either internal or by a
regulatory agency, of any suspected insider trading and the
results of such investigation;
3. an evaluation of the current procedures and any
recommendations for improvement; and
4. a description of the USIG continuing educational program
regarding insider trading, including the dates of such
programs since the last report to management.
III - 9
<PAGE> 13
REQUEST FOR PERMISSION TO ENGAGE IN PERSONAL SECURITIES TRANSACTION
I hereby request permission to [ ] BUY [ ] SELL (check one) the specified
security in the company indicated below for my own account or other account in
which I have a beneficial interest or legal title:
____________________________ ________________________________________
DATE NAME OF INVESCO UNIT
<TABLE>
<CAPTION>
# OF SHARES NAME OF SECURITY SYMBOL BROKER
- --------------------- ------------------------------------------------ -------------------- ----------------------------------------
<S> <C> <C> <C>
- --------------------- ------------------------------------------------ -------------------- ----------------------------------------
</TABLE>
I believe that the above listed transaction is not prohibited by the Code of
Ethics or the INVESCO Statement of Policy and Procedures Designed to Detect and
Prevent Insider Trading and to Govern Personal Securities Trading (found in the
INVESCO U.S. Institutional Group Compliance Manual) to which I am subject.
TO THE BEST OF MY KNOWLEDGE,
(i) THIS TRANSACTION IS NOT POTENTIALLY HARMFUL TO ANY "ACCOUNTS OR PORTFOLIOS"*
DISTRIBUTED, MANAGED AND/OR SERVICED BY ANY OF THE INVESCO NORTH AMERICAN GROUP
MEMBERS NAMED BELOW, GIVEN THE SIZE OF THE TRANSACTION COMPARED TO THE EXISTING
MARKET FOR SUCH SECURITIES;
(ii) NONE OF THE "ACCOUNTS OR PORTFOLIOS"* DISTRIBUTED, MANAGED AND/OR SERVICED
BY ANY INVESCO GROUP MEMBER NAMED BELOW HAS PURCHASED OR SOLD THE SECURITY
LISTED ABOVE DURING THE LAST SEVEN DAYS;
(iii) THE REQUESTED TRANSACTION WILL NOT RESULT IN A MISUSE OF INSIDE
INFORMATION OR IN ANY CONFLICT OF INTEREST OR IMPROPRIETY WITH REGARD TO ANY
ACCOUNTS OR PORTFOLIOS* DISTRIBUTED, MANAGED AND/OR SERVICED BY ANY INVESCO
GROUP MEMBER NAMED BELOW; AND
(iv) THE SECURITY INDICATED ABOVE IS NOT BEING CONSIDERED FOR PURCHASE OR SALE
BY ANY ACCOUNTS OR PORTFOLIOS* DISTRIBUTED, MANAGED AND/OR SERVICED BY ANY
INVESCO GROUP MEMBER NAMED BELOW.
Additionally: (Please check any or all that apply)
[ ] The security indicated above is thinly traded as evidenced by the
following daily trading volume for such security over the last week.
________
[ ] The security indicated above will be [ ] acquired [ ] sold (check
one) in a private placement or is not of an issuer publicly traded or
registered with the SEC.
[ ] The proposed purchase of the above listed security, together with my
current holdings, will result in my having a beneficial interest in
more than 5% of the outstanding voting securities of the company. If
this item is checked, state the beneficial interest you will have in
the company's voting securities after this purchase. _________
[ ] I wish to effect the above transaction which complies with the de
minimis exemption since the transaction involves 2,000 shares or less
and the issuer has a market capitalization of at least $1 billion
(evidence attached). I also hereby certify that I have not received
permission for this de minimis exemption in the last 30 days with
regard to the security indicated above.
I SHALL DIRECT MY BROKERAGE FIRM TO PROVIDE A COPY OF A CONFIRMATION OF THE
REQUESTED TRANSACTION(S) TO THE LEGAL/COMPLIANCE DEPARTMENT WITHIN 10 DAYS OF
THE TRANSACTION.
________________________ __________________________ __________________
SIGNATURE PRINT NAME TELEPHONE NUMBER
PERMISSION IS EFFECTIVE ONLY ON THE DATE SHOWN BY THE TIME STAMP
*"ACCOUNTS OR PORTFOLIOS" ARE DEFINED AS ANY AND ALL INVESTMENT COMPANIES,
PRIVATE ACCOUNTS AND ALL OTHER CLIENTS OF THE FOLLOWING INVESCO NORTH AMERICAN
GROUP MEMBERS: INVESCO FUNDS GROUP, INC., INVESCO TRUST COMPANY, INC., INVESCO
RETIREMENT PLAN SERVICES, INVESCO GLOBAL ASSET MANAGEMENT (N.A.) INC., INVESCO
GLOBAL ASSET MANAGEMENT, LIMITED (BERMUDA), INVESCO PRIVATE CAPITAL, INC.,
INVESCO SENIOR SECURED MANAGEMENT, INC., INVESCO, INC. AND ANY OF ITS DIVISIONS
(I.E., INVESCO CAPITAL MANAGEMENT, INVESCO REALTY ADVISORS, INVESCO MANAGEMENT
AND RESEARCH, INVESCO (NY), PRIMCO CAPITAL MANAGEMENT)
CONFIRMATION: NO TRANSACTION WITH RESPECT TO THE SECURITY INDICATED ABOVE IS
KNOWN TO BE PENDING OR IN PROGRESS FOR ANY PORTFOLIO UNDER MANAGEMENT.
LEGAL/COMPLIANCE DEPARTMENT TIME STAMP - ATLANTA
TRADING DEPARTMENT CONTACT PERSONS
__________________________________
Contact Person - Boston
__________________________________
Contact Person - Denver
__________________________________
Contact Person - New York or Atlanta
USIG LEGAL/COMPLIANCE REVIEW
__________________________________
LEGAL/COMPLIANCE: (FAX) 404-479-2900 Signature - USIG Legal/Compliance
III - 10
<PAGE> 14
[INVESCO U.S. INSTITUTIONAL GROUP(R) LOGO]
LEGAL/COMPLIANCE
INVESTMENT CLUB PRE-APPROVAL FORM
Date:
PERSONAL INFORMATION
Name:
Unit Employed by:
Department:
INVESTMENT CLUB(S) INFORMATION
Name of Investment Club(s):
Principals of Investment Club(s):
Person who did the trade: Self Spouse Other (explain)
Positions held:
Are you on the Board of Directors?
Are you on an investment decision-making committee?
Are you involved in making security transactions recommendations?
Are you involved in subsidizing the Fund?
* I am fully aware I must continue to abide by INVESCO U.S. Institutional Group
Compliance and Insider Trading Regulations.
I will direct Club to send confirmations to the Legal/Compliance Department.
Signature Date
DEPARTMENTAL USE
Date Received:
cc: Director of Compliance
III - 11
<PAGE> 15
[INVESCO U.S. INSTITUTIONAL GROUP(R) LOGO]
LEGAL/COMPLIANCE
PRIVATE PLACEMENT PRE-APPROVAL FORM
Date:
PERSONAL INFORMATION
Name:
Business Unit:
Department:
PRIVATE PLACEMENT INFORMATION
Date of Investment: Initial Investment:
Additional Investment(s):
Private Placement (Company) Name:
Type of Company: Industry:
Percentage Owned: Relationship to Company:
Is there any known relationship between the Company and any AMVESCAP business
unit?
If so, please describe the relationship.
Are/will you be a member of the Board of Directors? If so, position held:
Senior Officers of Company:
How did you learn of the opportunity?
Additional Information:
* I am fully aware I must continue to abide by INVESCO USIG Compliance and
Insider Trading Regulations. To my knowledge, I will not be violating any
federal/state/firm rules or regulations and if circumstances change I will
notify the Legal/Compliance Department.
* I will notify INVESCO as I learn of the company going public or of any
imminent public offering by the company.
Signature Date
DEPARTMENTAL USE
Date Received:
cc: Director of Compliance, General Counsel
III - 12
<PAGE> 16
III. INSIDER TRADING POLICIES AND PERSONAL SECURITIES TRADING
B. INSIDER TRADING GUIDELINES AND POLICIES FOR BUYING AND SELLING AMVESCAP
PLC SHARES AND ADRS
AMVESCAP PLC shares are traded on the London Stock Exchange and are
available as American Depository Receipts ("ADRs") (Cusip No. 46127D102) (Stock
Symbol "AVZ") on the New York Stock Exchange. One ADR is the equivalent of five
(5) AMVESCAP PLC shares. As representatives of a publicly traded company,
employees are subject to certain restrictions on their ability to buy or sell
AMVESCAP PLC shares and ADRs. In short, federal securities law prohibits the
purchase or sale of a security at a time when the person trading that security
possesses material nonpublic information of the company in question.
It is INVESCO's policy to comply with all U.S. federal and state
securities laws as well as those to which we are subject in the United Kingdom
and in other jurisdictions. As a result, all employees must be aware of the
following:
1. Officers, directors and employees shall not buy or sell
AMVESCAP PLC shares or ADRs when in possession of material
nonpublic information, regardless of how that information was
obtained.
2. In order to conform with AMVESCAP PLC guidelines, no officer,
director or employee of USIG shall buy or sell AMVESCAP PLC
shares or ADRs within the 60 days prior to the announcement of
yearly and half yearly results and within the 30 days prior to
quarterly results. Once the information is freely disseminated
in the market, the closed period will be lifted. Furthermore,
the Board of Directors of AMVESCAP PLC has the right, at its
own discretion, to enforce additional blackout periods
whenever it deems necessary. Those additional blackout periods
are subject to the same trading restrictions as the quarterly
earnings blackout period. As with all such periods, the USIG
Legal/Compliance Department will notify all employees in
writing or via email of all effective blackout dates.
3. Material nonpublic information concerning INVESCO activities
must not be passed along to others, inside or outside of
INVESCO, except as needed in the ordinary course of employment
with the company. In particular, material nonpublic
information shall not be disclosed to third parties where
improper trading can be anticipated.
4. As indicated, the securities laws prohibiting illegal insider
trading apply to any company, not just INVESCO. As
representatives of INVESCO, we may have an opportunity to
become aware of material nonpublic information regarding a
publicly traded company with which INVESCO has a relationship
such as a supplier or customer. INVESCO representatives must
refrain from buying securities of any such company so long as
the representatives are in possession of any material
nonpublic information.
SAFEST TIME TO TRADE. As a general guideline, and assuming that one
does not otherwise possess any material nonpublic information, the safest time
to conduct a trade is between three to ten days after the issuance of a widely
disseminated press release stating AMVESCAP's earnings or otherwise announcing
material and previously nonpublic information about AMVESCAP. In addition,
senior management may, from time to time, impose further restrictions on
trading, including completely prohibiting trades during specified periods of
time. NOTE THAT USIG EMPLOYEES MUST PRE-CLEAR ALL AMVESCAP STOCKS OR OPTIONS
TRANSACTIONS, EVEN IN THOSE CASES INVOLVING NON-DISCRETIONARY ACCOUNTS.
III - 13
<PAGE> 17
PENALTIES. As discussed earlier in this section, the penalties for
engaging in illegal insider trading are very severe. Among other things, the SEC
can impose damages as large as three times the profit made or loss avoided by
the individual. Individuals may also face criminal fines as large as $1,000,000
and prison terms of up to ten years. In addition, AMVESCAP and individuals with
the power to influence or control, directly or indirectly, the activities of the
trading person may face damages of up to $1,000,000.
OTHER INVESCO POLICIES. EVERYONE SHOULD BE AWARE THAT THE INSIDER
TRADING GUIDELINES AND POLICIES IN PART "B" OF THIS SECTION RELATE ONLY TO THE
PURCHASE AND SALE OF AMVESCAP SHARES OR ADRS. ALL OTHER INVESCO POLICIES AND
GUIDELINES, INCLUDING THE CODE OF ETHICS AND PROFESSIONAL STANDARDS WITH RESPECT
TO INSIDER TRADING AND SECURITIES TRADING IN GENERAL (SUCH AS THOSE CONTAINED IN
PART "A" OF THIS SECTION) CONTINUE IN FULL FORCE AND EFFECT. THIS MEMORANDUM IS
IN ADDITION TO SUCH OTHER POLICIES AND SHOULD BE READ IN CONJUNCTION WITH THEM.
The laws dealing with insider trading are complex; any and all
questions or concerns should be addressed to the USIG Legal/Compliance
Department.
III - 14
<PAGE> 18
III. INSIDER TRADING POLICIES AND PERSONAL SECURITIES TRADING
C. TRANSACTION REQUIREMENT MATRIX
The following chart contains many of the common investment instruments, though
it is NOT all-inclusive.
<TABLE>
<CAPTION>
PRECLEARANCE CONFIRMATION
TRANSACTION REQUIRED? REQUIRED?
MUTUAL
<S> <C> <C>
INVESCO Mutual Funds (open-ended) No No
AIM Mutual Funds (open-ended) No No
Other Mutual Funds (open-ended) No No
Mutual Fund (closed-end) Yes Yes
Unit Trusts No Yes
Variable & Fixed Annuities No No
EQUITIES
AMVESCAP Yes Yes
Common Stocks Yes Yes
ADRs Yes Yes
DRIPS No Yes
Stock Splits No Yes
Rights and Warrants (exercised) Yes Yes
Tenders (Non-Voluntary) No Yes
Tenders (Voluntary) Yes Yes
Preferred Stock Yes Yes
IPOs PROHIBITED PROHIBITED
OPTIONS (Stock) Yes Yes
AMVESCAP (options) Yes Yes
FUTURES
Currency Yes Yes
Commodity No No
S&P No Yes
FIXED INCOME
US Treasury No No
CDs No No
Money Market No No
BONDS
US Government No No
Corporate Yes Yes
Convertibles (converted) Yes Yes
Municipal Yes Yes
PRIVATE PLACEMENTS Yes Yes
LIMITED PARTNERSHIPS Yes Yes
</TABLE>
III - 15
<PAGE> 19
III. INSIDER TRADING POLICIES AND PERSONAL SECURITIES TRADING
D. NEED-TO-KNOW POLICY (FIRE WALL)
As a professional organization serving the public in the area of asset
management, all members of USIG are guided in their actions by the highest
ethical and professional standards. In this regard, USIG has adopted numerous
policies and procedures designed to prevent even the appearance of impropriety.
These include, without limitation, the Code of Ethics and Statements of Policy
and Procedures Designed to Detect and Prevent Insider Trading and to Govern
Personal Securities Trading, as well as such other policies and procedures as
might have been adopted by each particular USIG member.
As INVESCO diversifies its product offerings beyond traditional asset
management to areas such as administration and record keeping services for
retirement plans, we must be aware that potential conflicts may arise from those
activities as well as from our traditional asset management activities. For
example, as part of its retirement plan administration and record keeping
functions, INVESCO Retirement Plan Services ("IRPS") may receive confidential
information about its clients (e.g., information about imminent employee
lay-offs, etc.) that may be material to a portfolio manager at INVESCO Capital
Management ("ICM") in determining whether to buy or sell the securities held in
the portfolio of IRPS's particular client (e.g., in order to have cash available
for potential distributions). Additionally, while IRPS is receiving material
nonpublic information, other ICM portfolio managers (i.e., managers other than
those directly involved with the affected IRPS client) and other USIG members
may be considering the purchase or sale of the particular client's securities
for their other managed portfolios.
Under the law, and in consideration of our professional
responsibilities, INVESCO must not use material nonpublic information improperly
to benefit itself or its clients. Indeed, USIG personnel should always make
every effort to avoid even the appearance of misusing material nonpublic
information. For these purposes, and as stated earlier in this section,
information is considered material if it would be important to an investor in
making a decision to buy or sell a security. Information normally is considered
nonpublic until it has effectively been circulated to the general public by
means such as a newswire story, press release or filing with the Securities and
Exchange Commission.
In light of the foregoing, USIG employees who have material nonpublic
information must not disclose it to anyone who does not have a "need to know."
This policy of nondisclosure, known as a "Fire Wall," is designed to keep the
information confidential, even within INVESCO itself. Strict adherence to the
Fire Wall is absolutely vital to the functioning of a multi-service firm like
INVESCO. While there may be circumstances in which trading or other activities
must be restricted, reliance on a successfully operating Fire Wall allows USIG
to minimize such restrictions. In doing so, the Fire Wall permits USIG personnel
in non-affected areas to continue to engage in activities involving a particular
company's securities.
Under the Fire Wall policy, those on the "informed" side of the wall
have a special duty to ensure that appropriate standards of confidentiality are
maintained. For those on the "uninformed" side of the wall, a corresponding duty
exists. All USIG personnel are prohibited from making any effort to obtain
nonpublic information that may be in the possession of other parts of the firm.
Again, USIG employees who have nonpublic information must not disclose it to
anyone who does not have a need to know.
When the communication of material nonpublic information occurs,
personnel who receive the information are then "brought over the wall" and are
thereafter, with reference to the affected securities, prohibited from effecting
transactions for their own or related account and any account over which they
exercise discretion until that information either is made available to the
general public
III - 16
<PAGE> 20
or ceases to be material. For this reason, extreme care should be taken to
ensure that personnel are not put in a position of knowledge that might
prejudice or inhibit the appropriate performance of their other functions in
their normal area of operation.
Any questions or issues regarding this policy should be brought to the
immediate attention of the USIG Legal/Compliance Department or a senior
management officer of USIG.
III - 17
<PAGE> 1
EXHIBIT (P)(4)
SECTION 18
================================================================================
CODE OF ETHICS
While SAM is confident of its employees integrity and good faith, there are,
certain instances, where employees possess knowledge regarding present or future
transactions or have the ability to influence portfolio transactions made by the
Company for its clients in securities in which they personally invest. In these
situations personal interest may conflict with that of the Company's clients.
In view of the above, SAM has adopted this Code of Ethics to specify or prohibit
certain types of transactions deemed to create conflicts of interest (or the
potential for or appearance of), and to establish reporting requirements and
enforcement procedures.
18.1 STATEMENT OF GENERAL PRINCIPLES
In recognition of the trust and confidence placed in SAM by its
clients and to stress SAM's belief that its operations are directed
to the benefit of its clients, the Company has developed and adopted
the following general principles to guide its employees, officers,
and directors.
1. The interests of the clients are paramount and all associated persons of
the Company must conduct themselves in such a manner that the interests of
the clients take precedence over all others.
2. All personal securities transactions by associated persons of the Company
must be accomplished in such a way as to avoid any conflict between the
interest of the Company's clients and the interest of any associated
person.
3. All associated persons of the Company must avoid actions or activities
that allow personal benefit or profit from their position with regard to
the Company's clients.
18.2 DEFINITIONS
1. "Access Person"-any director, officer, or associated person who recommends
the purchase or sale of securities for the Company on behalf of the
client.
2. "Beneficial Ownership" of a security - a person is considered to be a
beneficial owner of any securities in which he has a direct or indirect
monetary interest or is held by his spouse, his minor children, a relative
who shares his home, or other persons by reason of any contract,
arrangement, understanding or relationship that provides him with sole or
shared voting or investment power.
18-1
3. "Control" - means the power to exercise a controlling influence over the
management or policies of a company, unless such power is solely the
result of an official position with such company. Ownership of 25% or more
of a company's outstanding voting security is presumed to give the holder
control over the company.
<PAGE> 2
4. "Investment Personnel" - means all Access Persons who occupy the position
of portfolio manager with respect to the clients of SAM or any
separately-managed series thereof (a "Fund"), and all Access Persons who
provide or supply information and/or advice to any portfolio manager (or
Trust Officer), or who execute or help execute any portfolio manager's
decisions.
5. "Purchase or Sale of a Security" includes, among other things, the writing
of an option to purchase or sell a security.
6. "Security" shall have the same meaning as that set forth in Section
2(a)(36) of the 1940 Act, except that it shall not include securities
issued by the Government of the United States or an agency thereof,
banker's acceptances, bank certificates of deposit, commercial paper and
registered open-end mutual funds.
7. A "Security Held or to be Acquired" by the clients means any security
which, within the most recent fifteen days, (i) is or has been held by the
clients or (ii) is being or has been considered by the Company for
purchase by the clients.
8. A Security is "being purchased or sold" by the clients from the time when
a purchase or sale has been communicated to the Company until the time
when such transaction has been fully completed or terminated.
18.3 PROHIBITED PURCHASES AND SALES OF SECURITIES
1. No access person shall, in connection with the purchase or sale, directly
or indirectly:
a. employ any device, scheme or artifice to defraud;
b. make any untrue statement of a material fact or omit to state a
material fact;
c. engage in any act, practice or course of business which would
operate as a fraud or deceit; or
d. engage in any manipulative practice.
2. No access person may purchase or sell, directly or indirectly, any
security in which he had or by reason of such transaction acquires any
beneficial ownership, within 24 hours before or after the time that the
same (or a related) security is being purchased or sold by a client.
3. No investment personnel may acquire securities as part of an initial
public offering by the issuer.
4. No investment personnel shall purchase or sell, directly or indirectly,
any security in which he had or by reason of such transaction acquires any
beneficial ownership within 7 days before or after the time that the same
(or a related) security is being purchased or sold by any client for which
he acts as the portfolio manager.
18.4 PRE-CLEARANCE OF TRANSACTIONS
18-2
1. Except as provided in Section 18.4.2, below, all investment personnel must
pre-clear each proposed transaction in securities with a designated
Supervisor prior to proceeding with the transaction. In determining
whether to grant such clearance, the designated Supervisor shall refer to
the Section 18.4.3, below.
2. The requirements of Section 18.4.1 shall not apply to the following
transactions:
<PAGE> 3
a. Purchases or sales over which the Investment Personnel has no direct
or indirect influence or control.
b. Purchases or sales which are non-volitional on the part of either
the Investment Personnel or any Fund, including purchases or sales
upon exercise of puts or calls written by the Investment Personnel
and sales from a margin account pursuant to a bona fide margin call.
c. Purchases which are part of an automatic dividend reinvestment plan.
d. Purchases effected upon the exercise of rights issued by an issuer
pro rata to all
e. holders of a class of its securities, to the extent such rights were
acquired from such issuer.
3. The following transactions must be approved by the designated Supervisor.
a. Transactions which appear upon reasonable inquiry and investigation
to present no reasonable likelihood of harm to the clients and which
are otherwise in accordance with Rule 17j-1.
b. Purchases or sales of securities which are not eligible for purchase
or sale by any client, as determined by reference to the Act and
blue sky laws and regulations hereunder, the investment objectives
and policies and investment restrictions of the clients and their
series, and undertakings made to regulatory authorities.
c. Transactions which the designated Supervisor after consideration of
all the facts and circumstances, determines to be in accordance with
Section 18.3 and to present no reasonable likelihood of harm to the
clients.
18.5 ADDITIONAL RESTRICTIONS AND REQUIREMENTS
1. No Access Person shall accept or receive any gift in excess of $100 value
from any person or entity that does business with or on behalf of SAM.
2. EACH ACCESS PERSON MUST HAVE DUPLICATE STATEMENTS FOR ALL PERSONAL
BROKERAGE ACCOUNTS SENT TO THE DESIGNATED SUPERVISOR DIRECTLY FROM HIS/HER
BROKER/DEALER. Compliance with this provision can be effected by the
Access Person providing duplicate copies of all such statements directly
to the designated Supervisor within two business days of receipt by the
Access Person.
3. No Investment Personnel may accept a position as a director, trustee or
general partner of a publicly-traded company unless such position has been
presented to and approved by the Company and by Trusts' Board of Trustees
as consistent with the interests of the Trusts and their shareholders.
4. All Investment Personnel must provide to the designated Supervisor a
complete listing of all securities owned by such person as of the
effective date of employment, and thereafter must submit a revised list of
such holdings to the designated Supervisor as of January 1 of each
subsequent year. The initial listing must be submitted within 10 days of
the date upon which such person first became an Access Person of the
Trusts, a
18-3
<PAGE> 4
and each update thereafter must be provided no later than 10 days after the
start of the subsequent year. A report form and reminder will be sent to all
Investment Personnel prior to year-end. (see Exhibit 10).
5. INVESTMENT PERSONNEL MAY NOT PROFIT FROM THE PURCHASE AND SALE OR SALE AND
PURCHASE OF A SECURITY WITHIN 60 DAYS OF ACQUIRING OR DISPOSING OF
BENEFICIAL OWNERSHIP OF THAT SECURITY. THIS PROHIBITION DOES NOT APPLY TO
TRANSACTIONS RESULTING IN A LOSS, OR TO FUTURES OR OPTIONS ON FUTURES ON
BROAD-BASED SECURITIES INDEXES OR U.S. GOVERNMENT SECURITIES.
18.6 REPORTING OBLIGATION
1. The Advisor shall create and maintain a listing of all Access Persons,
Investment Personnel, and designated Supervisors.
2. Each Access Person shall report all transactions in securities in which
the person has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership. (see Exhibit 5).
3. Each Access Person shall sign an acknowledgment at the time this Code is
adopted or at the time such person becomes an Access Person and on an
annual basis thereafter that he has read, understands, and agrees to abide
by this Code.
18.7 REPORTS
1. Each Access Person shall submit quarterly reports of personal securities
transactions to the designated Supervisor. The designated Supervisor shall
submit confidential quarterly reports with respect to his or her own
personal securities transactions to an officer designated to receive his
or her reports ("Alternate designated Supervisor"), who shall act in all
respects in the manner prescribed herein for the designated Supervisor.
2. Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he has any
direct or indirect beneficial ownership in the security to which the
report relates.
3. Every Access Person shall report the name of any publicly-owned company
(or any company anticipating a public offering of its equity securities)
and the total number of its shares beneficially owned by him if such total
ownership is more than 1/2 of 1% of the company's outstanding shares.
4. Every report shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report relates was
effected, and shall contain the following information:
a. The date of the transaction, the title and the number of shares or
the principal amount of each security involved;
b. The nature of the transaction (i.e., purchase, sale or any other
type of acquisition or disposition);
c. The price at which the transaction was effected;
d. The name of the broker/dealer or bank with or through whom the
transaction was effected; and
e. The date the report was signed.
<PAGE> 5
18-4
5. In the event no reportable transactions occurred during the quarter, the
report should be so noted and returned, signed and dated.
6. Report forms will be sent to all Access Persons by the designated
Supervisor prior to the end of each quarter.
18.8 REVIEW AND ENFORCEMENT
The designated Supervisor shall review reported personal securities
transactions, brokerage statements, and/or the clients' securities
transactions to determine whether a violation of this Code may have
occurred. Before making any determination that a violation has been
committed by any person, the designated Supervisor shall give such
person an opportunity to supply additional explanatory material.
If the designated Supervisor determines that a violation of this
Code may have occurred, he shall submit his written determination,
together with the confidential monthly report and any additional
explanatory material provided by the individual, to the Counsel for
the Advisor, who shall make an independent determination as to
whether a violation has occurred.
If the Counsel for the Advisor finds that a violation has occurred,
the Counsel for the Advisor shall impose upon the individual such
sanctions as he or she deems appropriate and shall report the
violation and the sanction imposed to the Board of Trustees of the
Trusts.
No person shall participate in a determination of whether he has
committed a violation of the Code or of the imposition of any
sanction against himself. If a securities transaction of the Counsel
for the Advisor is under consideration, any other Counsel shall act
in all respects in the manner prescribed herein for the Counsel for
the Advisor.
18.9 RECORDS
The Company shall maintain records in the manner and to the extent
set forth below, and will make them available for examination by
representatives of the Securities and Exchange Commission.
1. A copy of this Code and any other code which is, or at any time within the
past five years has been, in effect shall be preserved in an easily
accessible place;
2. A record of any violation of this Code and any action taken as a result of
such violation shall be preserved in an easily accessible place for a
period of not less than five years following the end of the fiscal year in
which the violation occurs;
18-5
<PAGE> 6
3. A copy of each report made by an officer or Supervisor pursuant to this
Code shall be preserved for a period of not less than five years from the
end of the fiscal year in which it is made, the first two years in an
easily accessible place; and
4. A list of all persons who are, or within the past five years have been,
required to make reports pursuant to this Code shall be maintained in an
easily accessible place.
18.10 MISCELLANEOUS
All reports of securities transactions and any other information
filed with the Company pursuant to this Code shall be treated as
confidential. The Company may from time to time adopt such
interpretations of this Code as it deems appropriate.
The Counsel for the Company, or an appropriate member of SAM, shall
report to SAM and to the Board of Trustees of the Trusts at least
annually as to the operation of this Code and shall address in any
such report the need (if any) for further changes or modifications
to this Code.
<PAGE> 1
Exhibit (P)(5)
LAZARD ASSET MANAGEMENT
A DIVISION OF
LAZARD FRERES & CO. LLC. ("LAM")
CODE OF ETHICS
Set forth below is LAM's policy on personal securities transactions. As a
general rule, LAM personnel are reminded that the interests of LAM clients take
priority over the investment desires of LAM personnel. All LAM personnel must
conduct themselves in a manner consistent with LAM's requirements as set forth
in this Code of Ethics and the respective Codes of Ethics of The Lazard Funds,
Inc. and Lazard Retirement Series, Inc. as well as the Compliance Manual of
Lazard Freres & Co. LLC ("LF&Co" or the "Firm") then in effect. Please review
this Code of Ethics carefully and contact the Compliance Department if there are
any questions.
PERSONAL SECURITIES ACCOUNTS COVERED
The restrictions set forth below apply to trading for all "Personal Securities
Accounts." These include:
- - Accounts in the Managing Director's or employee's name or accounts in which
the Managing Director or employee or any Related Person has a direct or
indirect beneficial interest other than an account which is managed by
another manager, or by other LAM portfolio managers, for a fee;
- - Accounts in the name of the Managing Director's or employee's spouse;
- - Accounts in the name of children under the age of 21, whether or not living
with the Managing Director or employee, and relatives or other individuals
living with the Managing Director or employee or for whose support the
Managing Director or employee is wholly or partially responsible (together
with the Managing Director's or employee's spouse, "Related Persons");
- - Accounts in which the Managing Director or employee or any Related Person
directly or indirectly controls, participates in, or has the right to
control or participate in, investment decisions, except for trades where the
Managing Director or employee or Related Person does not provide input.
RESTRICTIONS
The following restrictions apply to trading for Personal Securities Accounts of
LAM personnel, all of which are subject to certain de minimus provisions and may
be waived upon consent of LAM's or; to the extent applicable, LF&Co's,
compliance personnel:
<PAGE> 2
1. No transactions for a Personal Securities Account may be made in a security
that is on the Restricted List;
2. No security may be purchased or sold for a Personal Securities Account: (a)
if the security is currently being considered for purchase or sale for an
LAM client; or (b) if the security is being purchased or sold for an LAM
client on that day or has been purchased or sold for an LAM client within
the immediately preceding 7 calendar day period;
3. No purchase and sale, or sale and purchase, of a security for a Personal
Securities Account may occur within any 60-day period without prior approval
of Norman Eig, Herb Gullquist or Bill Butterly;
4. No transaction for a Personal Securities Account may be made in securities
offered pursuant to a public offering. Securities offered pursuant to a
private placement may not be purchased for Personal Securities Accounts
without the approval of Norman Eig, Herb Gullquist or Bill Butterly;
5. No transaction for a Personal Securities Account may be made in "deal" or
"rumor" securities, which are defined as securities of companies that are
the subject of reports or rumors of actual or anticipated extraordinary
corporate transactions or other corporate events;
6. Absent approval from the appropriate compliance personnel, Managing
Directors and employees are prohibited from engaging in the trading of
options or futures and from engaging in speculative trading as opposed to
investment activity. When such approval is given and Managing Directors and
employees effect opening transactions in options, the resulting closing
transaction will be considered effected on the day that the opening
transaction was effected for compliance purposes. The Managing Director or
employee must wait 60 days from the date of the opening transaction before
effecting the closing transaction. Managing Directors and employees are
prohibited from engaging in short sales of any security.
7. No transaction may be made in violation of the Material Non-Public
Information Policies and Procedures as outlined in Chapter X of LF&Co's
Compliance Manual; and
8. All transactions for Personal Securities Accounts must be approved by a
Managing Director of LAM, preferably the Managing Director to whom the
employee reports, and pre-cleared by Don Klein and Bill Butterly, or their
respective representatives. These approvals should be written on the trade
ticket. In addition, each Managing Director or employee should complete and
deliver to Bill Butterly, prior to the transaction, the attached personal
securities transaction form. The procedure for pre-clearing a personnel
trade is explained in greater detail below.
EXEMPTIONS
The restrictions and prohibitions contained in this Code shall not apply to:
2
<PAGE> 3
(a) Purchases or sales of securities which receive the prior
approval of either Norman Eig or Herbert W. Gullquist and Bill
Butterly (the approving officer having no personal interest in
such purchases or sales) because such purchases or sales are
not likely to have any economic impact on any client account
managed or advised by LAM
(b) Any securities transaction, or series of related transactions
during any 30-day period, involving 500 shares or less in the
aggregate of any security, if the issuer has a market
capitalization (outstanding shares multiplied by the current
price per share) greater than US $1 billion ("de minimus
exemption"). This provision does not provide an exemption from
the 60-day holding period.
OTHER ITEMS
1. LAM personnel may not serve on the board of directors of any corporation
(other than a not-for-profit corporation or a related Lazard entity)
without the prior approval of Norman Eig or Herb Gullquist;
2. All LAM personnel must complete quarterly Personal Security Account
transaction reports. By law, these reports must be returned to
Compliance by the tenth day following the end of the quarter. To ensure
strict compliance with these requirements, the forms should be returned
by the seventh day following the end of the quarter; and
3. Each LAM Managing Director and employee must annually certify compliance
with the LAM Code of Ethics with respect to all Personal Securities
Accounts.
SECURITIES COVERED
LAM's policies and procedures regarding personal securities trading set forth
herein apply to transactions involving all equity and debt securities, including
common and preferred stock, investment and non-investment grade debt securities,
investments convertible into or exchangeable for stock or debt securities, or
any derivative instrument relating to any such security or securities index,
including options, warrants and futures, or any interest in a partnership or
other entity that invests in any of the foregoing. Investments in mutual funds,
certificates of deposit and federal government obligations are not covered by
these policies and procedures. Any other exception to personal securities
trading policies and procedures must be approved.
TRANSACTION APPROVAL PROCEDURES
INTERNAL ACCOUNTS
To pre-clear a transaction being made in a Personal Securities Account held at
the Firm (an "Internal Account"), LAM personnel must:
1. Electronically complete and "sign" a "New Equity Order" or "New Bond
Order" trade ticket located in the Firm's Lotus-Notes e-mail
application under the heading "Employee Trades." The ticket should be
directed to the employee's supervising Managing Director, or, in the
absence of the supervising Managing Director, to another LAM Managing
Director or one of the LAM Directors designated in the database.
3
<PAGE> 4
2. Upon review of the ticket by the designated supervisor, the employee
should receive an automatic e-mail notification informing her/him that
the trade has been approved or rejected.
3. Following the supervisor's approval, the ticket is transmitted to the
Compliance Department where it is processed and, if approved, is routed
to the trading desk for execution, provided the employee had selected
the "Direct Execution" button when completing the ticket.
The cut-off time for receipt of supervisor-approved tickets in the Compliance
Department is 9.30 a.m. each trading day. Any ticket received after this time
will be processed for execution the next trading day. It is the responsibility
of each employee to ensure that tickets sent to a supervisor for approval
receive the supervisor's timely attention.
NOTE
In completing a new ticket, if the employee de-selects the "Direct Execution"
button, the ticket will be returned to her/him after Compliance approval for
submission to the trading desk. In such case, the trade must be submitted within
2 days or it will expire and be null and void.
To assist each employee with monitoring the status of a trade ticket submitted
for approval, the system is designed to generate an e-mail notification to the
employee every time the ticket is reviewed or acted upon by the supervisor,
compliance department or the trading desk. Additionally, every supervisor's
assistant is set up to receive a summary of the each approval request sent to
the supervisor so that in the absence of the supervisor, the assistant would
advise the employee to re-rout the trade to another supervisor. For more details
on the set-up and use of the Employee Trades database, please contact David
Osunkwo at ext. 6065.
OUTSIDE ACCOUNTS
LAM personnel may not maintain a securities or commodities account (including a
foreign securities account) at any other broker or dealer or bank (an "Outside
Account") without the prior written consent of the Firm. Where such consent is
given, employees must provide the Firm with the name of the broker-dealer firm
with whom they carry their personal accounts and must request that the
broker-dealer send to Lazard, to the attention of both Donald Klein and Bill
Butterly, copies of monthly account statements and all trade confirmations.
These same principles apply to establishing an account at another brokerage
house where the employee has control over the trading in that account (such as a
discretionary account, a nominee account, an account for a general or limited
partnership, a trust account), or an account of a corporation where trading is
controlled or influenced by the LAM employee. If you already have an Outside
Account, please notify Bill Butterly as soon as possible to facilitate the
distribution and review of your monthly account statements and trade
confirmations.
Managing Directors and employees are required to report promptly to Donald Klein
and Bill Butterly any change in status or location of any account in which they
have a beneficial interest as defined above. With respect to a trust account of
which a Managing Director or employee or member of his immediate family is a
beneficiary, the Firm policy requires that the Firm receive duplicate
confirmations and monthly account statements for each such account. Similarly,
4
<PAGE> 5
Managing Directors and employees are required to report private securities and
commodities transactions effected by or for (i) themselves, (ii) spouses and
unemancipated family members, (iii) accounts over which the employee has control
as described above, or (iv) accounts of which the employee or a member of his
family is a beneficiary, or (v) accounts of family members including accounts of
in-laws where introduced or carried by an employee or Managing Director's member
organization. Deviations from the foregoing policies will be permitted only with
the prior written approval of an appropriate individual with compliance
responsibilities.
To pre-clear a transaction being made in an outside account, LAM personnel must
follow the "Transaction Approval Procedures" relating to Internal Accounts.
NOTE:
Once a Managing Director or employee receives approval, the LAM personnel must
transmit appropriate trade instructions to their outside broker within two days,
or the approval will become null and void.
5
<PAGE> 1
Exhibit (P)(6)
Wellington Management Company, llp
Wellington Trust Company, na
Wellington Management International
Wellington International Management Company Pte Ltd.
Code of Ethics
Summary Wellington Management Company, llp and its affiliates
have a fiduciary duty to investment company and
investment counseling clients which requires each
employee to act solely for the benefit of clients. Also,
each employee has a duty to act in the best interest of
the firm. In addition to the various laws and
regulations covering the firm's activities, it is
clearly in the firm's best interest as a professional
investment advisory organization to avoid potential
conflicts of interest or even the appearance of such
conflicts with respect to the conduct of the firm's
employees. Wellington Management's personal trading and
conduct must recognize that the firm's clients always
come first, that the firm must avoid any actual or
potential abuse of our positions of trust and
responsibility, and that the firm must never take
inappropriate advantage of its positions. While it is
not possible to anticipate all instances of potential
conflict, the standard is clear.
In light of the firm's professional and legal
responsibilities, we believe it is appropriate to
restate and periodically distribute the firm's Code of
Ethics to all employees. It is Wellington Management's
aim to be as flexible as possible in its internal
procedures, while simultaneously protecting the
organization and its clients from the damage that could
arise from a situation involving a real or apparent
conflict of interest. While it is not possible to
specifically define and prescribe rules regarding all
possible cases in which conflicts might arise, this Code
of Ethics is designed to set forth the policy regarding
employee conduct in those situations in which conflicts
are most likely to develop. If an employee has any doubt
as to the propriety of any activity, he or she should
consult the President or Regulatory Affairs Department.
The Code reflects the requirements of United States law,
Rule 17j-1 of the Investment Company Act of 1940, as
amended on October 29, 1999, as well as the
recommendations issued by an industry study group in
1994, which were strongly supported by the SEC. The term
"Employee" includes all employees and Partners.
Policy on Personal Essentially, this policy requires that all personal
Securities securities transactions (including acquisitions or
Transactions dispositions other than through a purchase or sale)
by all Employees must be cleared prior to execution. The
only exceptions to this policy of prior clearance are
noted below.
Definition of The following transactions by Employees are considered
"Personal Securities "personal" under applicable SEC rules and therefore
Transactions" subject to this statement of policy:
<PAGE> 2
Code of Ethics
Page 2
1
Transactions for an Employee's own account, including
IRA's.
2
Transactions for an account in which an Employee has
indirect beneficial ownership, unless the Employee has
no direct or indirect influence or control over the
account. Accounts involving family (including husband,
wife, minor children or other dependent relatives), or
accounts in which an Employee has a beneficial interest
(such as a trust of which the Employee is an income or
principal beneficiary) are included within the meaning
of "indirect beneficial interest".
If an Employee has a substantial measure of influence or
control over an account, but neither the Employee nor
the Employee's family has any direct or indirect
beneficial interest (e.g., a trust for which the
Employee is a trustee but not a direct or indirect
beneficiary), the rules relating to personal securities
transactions are not considered to be directly
applicable. Therefore, prior clearance and subsequent
reporting of such transactions are not required. In all
transactions involving such an account an Employee
should, however, conform to the spirit of these rules
and avoid any activity which might appear to conflict
with the investment company or counseling clients or
with respect to the Employee's position within
Wellington Management. In this regard, please note
"Other Conflicts of Interest", found later in this Code
of Ethics, which does apply to such situations.
Preclearance EXCEPT AS SPECIFICALLY EXEMPTED IN THIS SECTION, ALL
Required EMPLOYEES MUST CLEAR PERSONAL SECURITIES TRANSACTIONS
PRIOR TO EXECUTION. This includes bonds, stocks
(including closed end funds), convertibles, preferreds,
options on securities, warrants, rights, etc. for
domestic and foreign securities, whether publicly traded
or privately placed. The only exceptions to this
requirement are automatic dividend reinvestment and
stock purchase plan acquisitions, broad-based stock
index and U.S. government securities futures and options
on such futures, transactions in open-end mutual funds,
U.S. Government securities, commercial paper, or
non-volitional transactions. Non-volitional transactions
include gifts to an Employee over which the Employee has
no control of the timing or transactions which result
from corporate action applicable to all similar security
holders (such as splits, tender offers, mergers, stock
dividends, etc.). Please note, however, that most of
these transactions must be reported even though they do
not have to be precleared. See the following section on
reporting obligations.
Clearance for transactions must be obtained by
contacting the Director of Global Equity Trading or
those personnel designated by him for this purpose.
Requests for clearance and approval for transactions may
be communicated orally or via email. The Trading
Department will maintain a log of all requests for
approval as coded confidential records of the firm.
Private placements (including both
<PAGE> 3
Code of Ethics
Page 3
securities and partnership interests) are subject to
special clearance by the Director of Regulatory Affairs,
Director of Enterprise Risk Management or the General
Counsel, and the clearance will remain in effect for a
reasonable period thereafter, not to exceed 90 days.
CLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS FOR
PUBLICLY TRADED SECURITIES WILL BE IN EFFECT FOR ONE
TRADING DAY ONLY. THIS "ONE TRADING DAY" POLICY IS
INTERPRETED AS FOLLOWS:
- IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL
MARKET IN WHICH THE SECURITY TRADES IS OPEN,
CLEARANCE IS EFFECTIVE FOR THE REMAINDER OF THAT
TRADING DAY UNTIL THE OPENING OF THAT MARKET ON THE
FOLLOWING DAY.
- IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL
MARKET IN WHICH THE SECURITY TRADES IS CLOSED,
CLEARANCE IS EFFECTIVE FOR THE NEXT TRADING DAY
UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING
DAY.
Filing of Reports Records of personal securities transactions by Employees
will be maintained. All Employees are subject to the
following reporting requirements: 1
1
Duplicate Brokerage All Employees must require their securities brokers to
Confirmations send duplicate confirmations of their securities
transactions to the Regulatory Affairs Department.
Brokerage firms are accustomed to providing this
service. Please contact Regulatory Affairs to obtain a
form letter to request this service. Each employee must
return to the Regulatory Affairs Department a completed
form for each brokerage account that is used for
personal securities transactions of the Employee.
Employees should not send the completed forms to their
brokers directly. The form must be completed and
returned to the Regulatory Affairs Department prior to
any transactions being placed with the broker. The
Regulatory Affairs Department will process the request
in order to assure delivery of the confirms directly to
the Department and to preserve the confidentiality of
this information. When possible, the transaction
confirmation filing requirement will be satisfied by
electronic filings from securities depositories.
2
Filing of Quarterly SEC rules require that a quarterly record of all
Report of all personal securities transactions submitted by each
"Personal Securities person subject to the Code's requirements and that this
Transactions" record be available for inspection. To comply with
these rules, every Employee must file a quarterly
personal securities transaction report within 10
calendar days after the end of each calendar quarter.
Reports are filed electronically utilizing the firm's
proprietary Personal Securities Transaction Reporting
System (PSTRS) accessible to all Employees via the
Wellington Management Intranet.
<PAGE> 4
Code of Ethics
Page 4
At the end of each calendar quarter, Employees will be
notified of the filing requirement. Employees are
responsible for submitting the quarterly report within
the deadline established in the notice.
Transactions during the quarter indicated on brokerage
confirmations or electronic filings are displayed on the
Employee's reporting screen and must be affirmed if they
are accurate. Holdings not acquired through a broker
submitting confirmations must be entered manually. All
Employees are required to submit a quarterly report,
even if there were no reportable transactions during the
quarter.
Employees must also provide information on any new
brokerage account established during the quarter
including the name of the broker, dealer or bank and the
date the account was established.
IMPORTANT NOTE: The quarterly report must include the
required information for all "personal securities
transactions" as defined above, except transactions in
open-end mutual funds, money market securities, U.S.
Government securities, and futures and options on
futures on U.S. government securities. Non-volitional
transactions and those resulting from corporate actions
must also be reported even though preclearance is not
required and the nature of the transaction must be
clearly specified in the report.
3
Certification As part of the quarterly reporting process on PSTRS,
of Compliance Employees are required to confirm their compliance with
the provisions of this Code of Ethics.
4
Filing of Personal Annually, all Employees must file a schedule indicating
Holding Report their personal securities holdings as of December 31 of
each year by the following January 30. SEC Rules require
that this report include the title, number of shares and
principal amount of each security held in an Employee's
personal account, and the name of any broker, dealer or
bank with whom the Employee maintains an account.
"Securities" for purposes of this report are those which
must be reported as indicated in the prior paragraph.
Newly hired Employees are required to file a holding
report within ten (10) days of joining the firm.
Employees may indicate securities held in a brokerage
account by attaching an account statement, but are not
required to do so, since these statements contain
additional information not required by the holding
report.
5
Review of Reports All reports filed in accordance with this section will
be maintained and kept confidential by the Regulatory
Affairs Department. Reports will be reviewed by the
Director of Regulatory Affairs or personnel designated
by her for this purpose.
<PAGE> 5
Code of Ethics
Page 5
Restrictions on While all personal securities transactions must be
"Personal Securities cleared prior to execution, the following guidelines
Transactions" indicate which transactions will be prohibited,
discouraged, or subject to nearly automatic clearance.
The clearance of personal securities transactions may
also depend upon other circumstances, including the
timing of the proposed transaction relative to
transactions by our investment counseling or investment
company clients; the nature of the securities and the
parties involved in the transaction; and the percentage
of securities involved in the transaction relative to
ownership by clients. The word "clients" refers
collectively to investment company clients and
counseling clients. Employees are expected to be
particularly sensitive to meeting the spirit as well as
the letter of these restrictions.
Please note that these restrictions apply in the case of
debt securities to the specific issue and in the case of
common stock, not only to the common stock, but to any
equity-related security of the same issuer including
preferred stock, options, warrants, and convertible
bonds. Also, a gift or transfer from you (an Employee)
to a third party shall be subject to these restrictions,
unless the donee or transferee represents that he or she
has no present intention of selling the donated
security.
1
No Employee may engage in personal transactions
involving any securities which are:
- being bought or sold on behalf of clients until one
trading day after such buying or selling is
completed or canceled. In addition, no Portfolio
Manager may engage in a personal transaction
involving any security for 7 days prior to, and 7
days following, a transaction in the same security
for a client account managed by that Portfolio
Manager without a special exemption. See "Exemptive
Procedures" below. Portfolio Managers include all
designated portfolio managers and others who have
direct authority to make investment decisions to buy
or sell securities, such as investment team members
and analysts involved in Research Equity portfolios.
All Employees who are considered Portfolio Managers
will be so notified by the Regulatory Affairs
Department.
- the subject of a new or changed action
recommendation from a research analyst until 10
business days following the issuance of such
recommendation;
- the subject of a reiterated but unchanged
recommendation from a research analyst until 2
business days following reissuance of the
recommendation
<PAGE> 6
Code of Ethics
Page 6
- actively contemplated for transactions on behalf of
clients, even though no buy or sell orders have been
placed. This restriction applies from the moment
that an Employee has been informed in any fashion
that any Portfolio Manager intends to purchase or
sell a specific security. This is a particularly
sensitive area and one in which each Employee must
exercise caution to avoid actions which, to his or
her knowledge, are in conflict or in competition
with the interests of clients.
2
The Code of Ethics strongly discourages short term
trading by Employees. In addition, no Employee may take
a "short term trading" profit in a security, which means
the sale of a security at a gain (or closing of a short
position at a gain) within 60 days of its purchase,
without a special exemption. See "Exemptive Procedures".
The 60 day prohibition does not apply to transactions
resulting in a loss, nor to futures or options on
futures on broad-based securities indexes or U.S.
government securities.
3
No Employee engaged in equity or bond trading may engage
in personal transactions involving any equity securities
of any company whose primary business is that of a
broker/dealer.
4
Subject to preclearance, Employees may engage in short
sales, options, and margin transactions, but such
transactions are strongly discouraged, particularly due
to the 60 day short term profit-taking prohibition. Any
Employee engaging in such transactions should also
recognize the danger of being "frozen" or subject to a
forced close out because of the general restrictions
which apply to personal transactions as noted above. In
specific case of hardship an exception may be granted by
the Director of Regulatory Affairs or her designee upon
approval of the Ethics Committee with respect to an
otherwise "frozen" transaction.
5
No Employee may engage in personal transactions
involving the purchase of any security on an initial
public offering. This restriction also includes new
issues resulting from spin-offs, municipal securities
and thrift conversions, although in limited cases the
purchase of such securities in an offering may be
approved by the Director of Regulatory Affairs or her
designee upon determining that approval would not
violate any policy reflected in this Code. This
restriction does not apply to open-end mutual funds,
U. S. government issues or money market investments.
<PAGE> 7
Code of Ethics
Page 7
6
EMPLOYEES MAY NOT PURCHASE SECURITIES IN PRIVATE
PLACEMENTS UNLESS APPROVAL OF THE DIRECTOR OF REGULATORY
AFFAIRS, DIRECTOR OF ENTERPRISE RISK MANAGEMENT OR THE
GENERAL COUNSEL HAS BEEN OBTAINED. This approval will be
based upon a determination that the investment
opportunity need not be reserved for clients, that the
Employee is not being offered the investment opportunity
due to his or her employment with Wellington Management
and other relevant factors on a case-by-case basis. If
the Employee has portfolio management or securities
analysis responsibilities and is granted approval to
purchase a private placement, he or she must disclose
the privately placed holding later if asked to evaluate
the issuer of the security. An independent review of the
Employee's analytical work or decision to purchase the
security for a client account will then be performed by
another investment professional with no personal
interest in the transaction.
Gifts and Other Employees should not seek, accept or offer any gifts or
Sensitive Payments favors of more than minimal value or any preferential
treatment in dealings with any client, broker/dealer,
portfolio company, financial institution or any other
organization with whom the firm transacts business.
Occasional participation in lunches, dinners, cocktail
parties, sporting activities or similar gatherings
conducted for business purposes are not prohibited.
However, for both the Employee's protection and that of
the firm it is extremely important that even the
appearance of a possible conflict of interest be
avoided. Extreme caution is to be exercised in any
instance in which business related travel and lodgings
are paid for other than by Wellington Management, and
prior approval must be obtained from the Regulatory
Affairs Department.
Any question as to the propriety of such situations
should be discussed with the Regulatory Affairs
Department and any incident in which an Employee is
encouraged to violate these provisions should be
reported immediately. An explanation of all
extraordinary travel, lodging and related meals and
entertainment is to be reported in a brief memorandum to
the Director of Regulatory Affairs.
Employees must not participate individually or on behalf
of the firm, a subsidiary, or any client, directly or
indirectly, in any of the following transactions:
1
Use of the firm's funds for political purposes.
<PAGE> 8
Code of Ethics
Page 8
2
Payment or receipt of bribes, kickbacks, or payment or
receipt of any other amount with an understanding that
part or all of such amount will be refunded or delivered
to a third party in violation of any law applicable to
the transaction.
3
Payments to government officials or employees (other
than disbursements in the ordinary course of business
for such legal purposes as payment of taxes).
4
Payment of compensation or fees in a manner the purpose
of which is to assist the recipient to evade taxes,
federal or state law, or other valid charges or
restrictions applicable to such payment.
5
Use of the funds or assets of the firm or any subsidiary
for any other unlawful or improper purpose.
Other Conflicts of Employees should also be aware that areas other than
Interest personal securities transactions or gifts and sensitive
payments may involve conflicts of interest. The
following should be regarded as examples of situations
involving real or potential conflicts rather than a
complete list of situations to avoid.
"Inside Information" Specific reference is made to the firm's policy on the
use of "inside information" which applies to personal
securities transactions as well as to client
transactions.
Use of Information Information acquired in connection with employment by
the organization may not be used in any way which might
be contrary to or in competition with the interests of
clients. Employees are reminded that certain clients
have specifically required their relationship with us to
be treated confidentially.
Disclosure of Information regarding actual or contemplated investment
Information decisions, research priorities or client interests
should not be disclosed to persons outside our
organization and in no way can be used for personal
gain.
Outside All outside relationships such as directorships or
Activities trusteeships of any kind or membership in investment
organizations (e.g., an investment club) must be cleared
by the Director of Regulatory Affairs prior to the
acceptance of such a position. As a general matter,
directorships in unaffiliated public companies or
companies which may reasonably be expected to become
public companies will not be authorized because of the
potential for conflicts which may impede our freedom to
act in the best interests of clients. Service with
charitable organizations
<PAGE> 9
Code of Ethics
Page 9
generally will be authorized, subject to considerations
related to time required during working hours and use of
proprietary information.
Exemptive Procedure The Director of Regulatory Affairs, the Director of
Enterprise Risk Management, the General Counsel or the
Ethics Committee can grant exemptions from the personal
trading restrictions in this Code upon determining that
the transaction for which an exemption is requested
would not result in a conflict of interest or violate
any other policy embodied in this Code. Factors to be
considered may include: the size and holding period of
the Employee's position in the security, the market
capitalization of the issuer, the liquidity of the
security, the reason for the Employee's requested
transaction, the amount and timing of client trading in
the same or a related security, and other relevant
factors.
Any Employee wishing an exemption should submit a
written request to the Director of Regulatory Affairs
setting forth the pertinent facts and reasons why the
employee believes that the exemption should be granted.
Employees are cautioned that exemptions are intended to
be exceptions, and repetitive exemptive applications by
an Employee will not be well received.
Records of the approval of exemptions and the reasons
for granting exemptions will be maintained by the
Regulatory Affairs Department.
Compliance with Adherence to the Code of Ethics is considered a basic
The Code of Ethics condition of employment with our organization. The
Ethics Committee monitors compliance with the Code and
reviews violations of the Code to determine what action
or sanctions are appropriate.
Violations of the provisions regarding personal trading
will presumptively be subject to being reversed in the
case of a violative purchase, and to disgorgement of any
profit realized from the position (net of transaction
costs and capital gains taxes payable with respect to
the transaction) by payment of the profit to any client
disadvantaged by the transaction, or to a charitable
organization, as determined by the Ethics Committee,
unless the Employee establishes to the satisfaction of
the Ethics Committee that under the particular
circumstances disgorgement would be an unreasonable
remedy for the violation.
Violations of the Code of Ethics may also adversely
affect an Employee's career with Wellington Management
with respect to such matters as compensation and
advancement.
Employees must recognize that a serious violation of the
Code of Ethics or related policies may result, at a
minimum, in immediate dismissal. Since many provisions
<PAGE> 10
Code of Ethics
Page 10
of the Code of Ethics also reflect provisions of the
U.S. securities laws, Employees should be aware that
violations could also lead to regulatory enforcement
action resulting in suspension or expulsion from the
securities business, fines and penalties, and
imprisonment.
Again, Wellington Management would like to emphasize the
importance of obtaining prior clearance of all personal
securities transactions, avoiding prohibited
transactions, filing all required reports promptly and
avoiding other situations which might involve even an
apparent conflict of interest. Questions regarding
interpretation of this policy or questions related to
specific situations should be directed to the Regulatory
Affairs Department or Ethics Committee.
Revised: Revised February 16, 2000
<PAGE> 1
EXHIBIT (p)(7)
CODE OF ETHICS
DELAWARE MANAGEMENT BUSINESS TRUST
DELAWARE DISTRIBUTORS, L.P.
DELAWARE SERVICE COMPANY, INC.
DELAWARE MANAGEMENT TRUST COMPANY
DELAWARE INTERNATIONAL ADVISERS LTD.
DELAWARE CAPITAL MANAGEMENT, INC.
DELAWARE INVESTMENT RETIREMENT SERVICES, INC.
CREDO
IT IS THE DUTY OF ALL EMPLOYEES, OFFICERS AND DIRECTORS TO CONDUCT THEMSELVES
WITH INTEGRITY, AND AT ALL TIMES TO PLACE THE INTERESTS OF THE SHAREHOLDERS
FIRST. IN THE INTEREST OF THIS CREDO ALL PERSONAL SECURITIES TRANSACTIONS WILL
BE CONDUCTED CONSISTENT WITH THE CODE OF ETHICS AND IN SUCH A MANNER AS TO AVOID
ANY ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S
POSITION OF TRUST AND RESPONSIBILITY. THE FUNDAMENTAL STANDARD OF THIS CODE IS
THAT PERSONNEL SHOULD NOT TAKE ANY INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
The Securities and Exchange Commission has adopted Rule 17j-1 under the
Investment Company Act of 1940. This Rule makes it unlawful for certain persons,
including any employee, officer or director of the Fund, in connection with the
purchase or sale by such person of a security held or to be acquired(1) by the
Fund:
(1) To employ any device, scheme or artifice to defraud the Fund;
(2) To make to the Fund any untrue statement of a material fact or omit
to state to the Fund a material fact necessary in order to make the statements
made, in light of the circumstances in which they are made, not misleading;
(3) To engage in any act, practice or course of business that operates
or would operate as a fraud or deceit upon the Fund; or
(4) To engage in any manipulative practice with respect to the Fund.
- --------
(1) A security is deemed to be "held or to be acquired" if within the most
recent fifteen days it (i) is or had been held by the Fund or (ii) is being or
had been considered by the Fund or its investment adviser for purchase by the
Fund.
2
<PAGE> 2
The Rule also requires that the Fund and Delaware Management Business Trust
shall adopt a written code of ethics containing provisions reasonably necessary
to prevent persons from engaging in acts in violation of the above standard and
shall use reasonable diligence and institution procedures reasonably necessary
to prevent violations of the Code.
This Code of Ethics is being adopted by Delaware Management Business Trust
("DMBT") Delaware Management Business Trust ("DMST"), Delaware Distributors,
L.P., Delaware Service Company, Inc., Delaware management Trust Company,
Delaware International Advisers Ltd. ("International") and Delaware Capital
Management, Inc. ("DCM"), Delaware Investment Retirement Services, Inc.
("DIRSI"), (collectively "Delaware") in compliance with the requirement of Rule
17j-1 and to effect its purposes, the purposes of the Credo set forth above, and
the recommendations of the Investment Company Institute's Advisory Group on
Personal Investing.
DEFINITIONS
"AFFILIATED PERSON" means any employee of the Funds or any subsidiary of
Delaware Management Holdings, Inc. and any other person so designated by the
Compliance Department.
"ACCESS PERSON" means any director, officer, general partner or advisory person
of the Fund and shall include all Interested Directors, Portfolio Mangers, other
Investment Personnel and all Advisory Persons.
"ADVISORY PERSON" mean (i) any employee, officer or interested director of
Delaware, who in connection with his/her regular functions or duties, normally
makes, participates in, or obtains current information regarding the purchase or
sale of a security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales and (ii) any natural
person in a control relationship to any such company who regularly obtains
current information concerning recommendations made with regard to the purchase
or sale of a security by the Fund.
"INVESTMENT PERSONNEL" means portfolio managers, securities analysts and
traders, and those personnel who provide information and advice to a portfolio
manager or who help execute the portfolio manager's decisions.
A SECURITY IS BEING "CONSIDERED FOR PURCHASE OR SALE" OR IS "BEING PURCHASED OR
SOLD" when a recommendation to purchase or sell the security has been made and
communicated to the Order Room and with respect to the person making the
recommendation, when such person seriously considers making or when such person
knows or should know that another Advisory Person is seriously considering such
a recommendation.
"BENEFICIAL OWNERSHIP" shall be as defined in Section 16 or the Securities
Exchange Act of 1934 and the rules and regulations thereunder. Generally
speaking, a person who, directly or indirectly, through any contract,
arrangement understanding, relationship or otherwise, has or shares a direct or
indirect pecuniary interest in a security, is a "beneficial owner" of the
security. For instance:
- A person is normally regarded as the beneficial owner of securities
held by members of his or her immediate family sharing the same
household; and
3
<PAGE> 3
- Ownership of derivative securities such as options, warrants or
convertible securities which confer the right to acquire the underlying
security at a fixed price constitutes beneficial ownership of the
underlying security
itself.
"CONTROL" shall mean investment discretion in whole or in part of an account
regardless of beneficial ownership. Such as an account for which a person has
power of attorney or authority to effect transactions.
"SECURITY" shall have the meaning as set forth in Section 2(a)(36) of the
Investment Company Act of 1940, except that it shall not include securities
issued or guaranteed by the government of the United States or by any of it's
federal agencies, bankers' acceptances, bank certificates of deposit, commercial
paper and shares of open-end registered investment companies.
The purchase, sale or exercise of a derivative security shall constitute the
purchase or sale of the underlying security. However, the purchase or sale of
the debt instrument of an issuer which does not give the holder the right to
purchase the issuer's stock at a fixed price, does not constitute a purchase or
sale of the issuer's stock.
4
<PAGE> 4
PROHIBITED ACTIVITIES
AFFILIATED PERSONS, ACCESS PERSONS, INVESTMENT PERSONNEL AND PORTFOLIO MANAGERS
The following restrictions apply to all Portfolio Managers, Investment
Personnel, Access Persons and Affiliated Persons. Access Persons include
Interested Directors of the Funds.
(a) No Affiliated or Access Person shall engage in any act, practice or course
of conduct, which would violate the provision of Rule 17j-1 set forth above.
(b) No Affiliated or Access Person shall purchase or sell, directly or
indirectly, any security which to his/her knowledge is being actively
considered for purchase or sale by Delaware; except that this prohibition
shall not apply to:
(A) purchases or sales that are nonvolitional on the part of
either the Person or the Fund;
(B) purchases which are part of an automatic dividend reinvestment
plan;
(C) purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities,
to the extend such rights were acquired from such issuer, and
sales or such rights so acquired;
(D) other purchases and sales specifically approved by the
President or Chief Executive Officer, with the advice of the
General Counsel and the Compliance officer and deemed
appropriate because of unusual or unforeseen circumstances. A
list of securities excepted will be maintained by the
Compliance Department.
(c) No Affiliated or Access Person may execute a buy or sell order for an
account in which he or she has beneficial ownership or control until the
third trading day following the execution of a Delaware buy or sell order in
that same security.
(d) Despite any fault or impropriety, any Affiliated or Access Person who
executes a buy or sell for an account in which he/she has beneficial
ownership or control either (i) before the third trading day following the
execution of a Delaware order in the same security, or (ii) when there are
pending orders for a Delaware transaction as reflected on the Trader Order
Scan, shall forfeit any profits made (in the event of purchases) or loss
avoided (in the event of sales), whether realized or unrealized, in the
period from the date of the personal transaction to the end of the
proscribed trading period. Payment of the amount forfeited shall be made by
check or in cash to a charity of the person's choice and a copy of the check
or receipt must be forwarded to the Compliance Department.
(e) Each Affiliated or Access Person's personal transactions must be precleared
by using the Personal Transaction Preclearance Form. The form must be
submitted prior to entering any orders for personal transactions.
Preclearance is only valid for the day the form is submitted. If the order
is not executed the same day, the preclearance form must be resubmitted.
Regardless of preclearance, all transactions remain subject to the
provisions of (d) above.
5
<PAGE> 5
INVESTMENT PERSONNEL AND PORTFOLIO MANAGERS
The following additional restrictions apply to all Investment Personnel and
Portfolio Managers.
(a) All Investment Personnel are prohibited from purchasing any initial public
offering.
(b) All Investment Personnel are prohibited from purchasing any private
placement without express PRIOR written consent by the Compliance
Department. All private placement holdings are subject to disclosure to the
Compliance Department. Any Investment Person that holds a private placement
must receive permission from the Compliance or Legal Departments prior to
any participation by such person in Delaware's consideration of an
investment in the same issuer.
(c) Short term trading resulting in a profit is prohibited. All opening
positions must be held for a period of 60 days, in the aggregate, before
they can be closed at a profit. Any short term trading profits are subject
to the disgorgement procedures outlined above and at the maximum level of
profit obtained. The closing of positions at a loss is not prohibited.
(d) All Investment Personnel are prohibited from receiving anything of more than
ade minimis value from any person or entity that does business with or on
behalf of any fund or client. Things of value may include, but not be
limited to, travel expenses, special deals or incentives.
(e) All Investment Personnel require PRIOR written approval from the Legal or
Compliance Department before they may serve on the board of directors of any
public company.
PORTFOLIO MANAGERS
The following additional restrictions apply to Portfolio Managers
(a) No Portfolio Manager may execute a buy or sell order for an account for
which he/she has beneficial ownership within seven calendar days before or
after an investment company or separate account that he/she manages trades
in that security.
(b) Despite any fault or impropriety, any Portfolio Manager who executes a
personal transaction within seven calendar days before or after an
investment company or separate account that he/she manages trades in that
security, shall forfeit any profits made (in the event or purchases) or loss
avoided (in the event of sales), whether realized or unrealized, in the
period from the date of the personal transaction to the end of the
prescribed trading period. Payment of the amount forfeited shall be made by
check or in cash to a charity of the person's choice and a copy of the check
or receipt must be forwarded to the Compliance Department.
6
<PAGE> 6
REQUIRED REPORTS
AFFILIATED PERSONS, ACCESS PERSONS, INVESTMENT PERSONNEL, PORTFOLIO MANAGERS
AND DISINTERESTED DIRECTORS
The following reports are required to be made by all Affiliated Persons, Access
Persons, Investment Personnel and Portfolio Managers. Access Persons, Investment
Personnel and Portfolio Managers are Affiliated Persons by definition.
(a) All Affiliated Persons must disclose brokerage relationships at employment
and at the time of opening any new account.
(b) All Affiliated Persons will direct their brokers to supply to the Compliance
Department, on a timely basis, duplicate copies of all confirmation and
statements for all securities accounts. (In the U.K., all contract notes and
periodic statements)
(c) Each quarter, no later than the tenth day after the end of the calendar
quarter, each Affiliated Person will submit to the Compliance Department a
personal transaction summary showing all transactions in securities in
accounts which such person has or acquires any direct or indirect beneficial
ownership. Each Director who is not an interested person shall submit the
quarterly reports only for transactions where at the time of the transaction
the director knew, or in the ordinary course of fulfilling his official
duties as a director should have known, that during the fifteen day period
immediately preceding the date of the transaction by the director, such
security was purchased or sold by the Fund or was being considered for
purchase or sale by the Fund.
Every report will contain the following information:
(i) the date of the transaction, the name and the number of shares
and the principal amount of each security involved;
(ii) the nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank effecting the
transaction.
(d) If any security involved in a personal transaction is purchased or sold by a
Fund within fifteen days of the personal transaction, the Compliance
Department will request and the Affiliated person will provide additional
information relating to the circumstances surrounding the personal
transaction.
(e) All Affiliated Persons will certify annually that they have read and
complied with this Code of Ethics and all disclosure and reporting
requirements contained therein.
7
<PAGE> 7
INVESTMENT PERSONNEL AND PORTFOLIO MANAGERS
In addition to the above reporting requirements, all Investment Personnel, which
includes Portfolio Managers by definition, must disclose all personal securities
holdings on commencement of employment and thereafter on an annual basis.
ADMINISTRATIVE PROCEDURES
(a) The Legal Department of Delaware will identify all Affiliated Persons,
Access Persons, Investment Personnel and Portfolio Managers.
(b) The Legal Department shall promptly report to the President or Chief
Executive Officer of Delaware Management Business Trust any apparent
violations of the prohibitions or reporting requirements contained in this
Code of Ethics. Such chief Executive Officer or President, or both in
conjunction, will review the reports made and determine whether or not the
Code of Ethics has been violated and shall determine what sanctions, if any,
should be imposed.
When the Legal Department finds that a transaction otherwise reportable above
could not reasonably be found to have resulted in a fraud, deceit or
manipulative practice in violation of Rule 17j-1(a), it may, in it's discretion,
lodge a written memorandum of such finding in lieu of reporting the transaction.
8
<PAGE> 1
Exhibit (P)(8)
COLUMBUS CIRCLE INVESTORS
CODE OF ETHICS
Effective July 1, 1999
INTRODUCTION
FIDUCIARY DUTY
This Code of Ethics is based on the principle that you, as a Managing
Director, officer or employee of Columbus Circle Investors, owe a fiduciary duty
to the shareholders of the registered investment companies (the Funds) and other
clients (together with the Funds, the Advisory Clients) for which Columbus
Circle Investors serves as an advisor or subadvisor. Accordingly, you must avoid
activities, interests and relationships that might interfere or appear to
interfere with making decisions in the best interests of our Advisory Clients.
At all times, you must:
1. PLACE THE INTERESTS OF OUR ADVISORY CLIENTS FIRST. In other
words, as a fiduciary you must scrupulously avoid serving your
own personal interests ahead of the interests of our Advisory
Clients. You may not cause an Advisory Client to take action,
or not to take action, for your personal benefit rather than
the benefit of the Advisory Client. For example, you would
violate this Code if you caused an Advisory Client to purchase
a Security you owned for the purpose of increasing the price of
that Security. If you are a portfolio manager or an employee
who provides information or advice to a portfolio manager or
helps execute a portfolio manager's decisions (each, a
Portfolio Employee), you would also violate this Code if you
made a personal investment in a Security that might be an
appropriate investment for an Advisory Client without first
considering the Security as an investment for the Advisory
Client.
2. CONDUCT ALL OF YOUR PERSONAL SECURITIES TRANSACTIONS IN FULL
COMPLIANCE WITH THIS CODE. You must not take any action in
connection with your personal investments that could cause even
the appearance of unfairness or impropriety. Accordingly, you
must comply with the policies and procedures set forth in this
Code under the heading Personal Securities Transactions.
Doubtful situations should be resolved against your personal
trading.
3. AVOID TAKING INAPPROPRIATE ADVANTAGE OF YOUR POSITION. The
receipt of investment opportunities, gifts or gratuities from
persons seeking business with Columbus Circle Investors
directly or on behalf of an Advisory Client could call into
question the independence of your business judgment.
Accordingly, you must comply with the policies and procedures
set forth in this Code under
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<PAGE> 2
the heading Fiduciary Duties. Doubtful situations should be
resolved against your personal interest.
INVESTING IS A GOOD PRACTICE. Columbus Circle Investors believes that
personal investing which is consistent with Columbus Circle Investors'
investment philosophy provides useful training for the investment of our
Advisory Clients assets. Accordingly, Columbus Circle Investors encourages
personal investing. On the other hand, Columbus Circle Investors believes that
short-term trading is inconsistent with the Columbus Circle Investors'
investment philosophy which emphasizes an investment rather than a trading
approach to the achievement of favorable investment results.
APPENDICES
The following appendices are attached to this Code and are a part of
this Code:
I. Form for annual report of personal Securities holdings.
II. Form for acknowledgment of receipt of this Code.
III. Form for annual certification of compliance with this Code.
COMPLIANCE OFFICIALS
The Compliance Committee is comprised of the senior managing directors:
Donald A. Chiboucas, Anthony Rizza, Marc Felman, Clifford Fox and Robert
Fehrmann. The Clearance Officers are Donald A. Chiboucas, Marc S. Felman,
Anthony Rizza and Clifford G. Fox. The Compliance Officer is Marc Felman. The
Compliance Registrar is Beverly Lidstrom. No member of the Compliance Committee
may take part in a decision relating to a Security in which such person has or,
as part of the transaction in question, would acquire Beneficial Ownership.
QUESTIONS
Questions regarding this Code should be addressed to the Compliance
Officer. As of the effective date of this Code, the Compliance Officer to whom
such questions should be addressed is Marc Felman.
2
<PAGE> 3
FIDUCIARY DUTIES
GIFTS
You may not accept any investment opportunity, gift, gratuity or other
thing of more than nominal value, from any person or entity that does business,
or desires to do business, with Columbus Circle Investors directly or on behalf
of an Advisory Client. You may accept gifts from a single giver so long as their
aggregate annual value does not exceed $100, and you may attend business meals,
sporting events and other entertainment events at the expense of a giver, so
long as the expense is reasonable and both you and the giver are present.
SERVICE AS A DIRECTOR
You may not serve on the board of directors or other governing board of
a publicly traded company, unless you have received the prior written approval
of the Managing Directors of Columbus Circle Investors. Approval will be not be
given unless a determination is made that your service on the board would be
consistent with the interests of our Advisory Clients. If you are permitted to
serve on the board of a publicly traded company, you will be isolated from those
Portfolio Employees who make investment decisions with respect to the securities
of that company, through a "Chinese Wall" or other procedures.
PERSONAL SECURITIES TRANSACTIONS
TRADING IN GENERAL
You may not engage, and you may not permit any other person or entity
to engage, in any purchase or sale of a Security (other than an Exempt Security)
in which you have, or by reason of the transaction will acquire, Beneficial
Ownership, unless (i) the transaction is an Exempt Transaction or (ii) you have
complied with the procedures set forth below under Preclearance Procedures.
SECURITIES
The following are Securities:
Any note, stock, treasury stock, bond, debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing
agreement, collateral-trust certificate, pre-organization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option or privilege on
any security (including a certificate of deposit) or on any group or index of
securities (including any interest therein or based on the value thereof), or
any put, call, straddle, option or privilege entered into on a national
securities exchange relating to foreign currency, or, in general, any interest
or instrument commonly known as a security, or any certificate of interest or
participation in, temporary or
3
<PAGE> 4
interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any security.
The following are not Securities:
Commodities, futures and options traded on a commodities exchange,
including currency futures. However, futures and options on any group or index
of Securities are Securities.
EXEMPT SECURITIES
The following are Exempt Securities:
Securities issued by the Government of the United States.
Bankers' acceptances, bank certificates of deposit, commercial paper,
bank repurchase agreements and such other money market instruments as may be
designated from time to time by the Compliance Committee of Columbus Circle
Investors.
Shares of registered open-end investment companies.
BENEFICIAL OWNERSHIP
You are considered to have Beneficial Ownership of Securities if you
have or share a direct or indirect Pecuniary Interest in the Securities.
You have a Pecuniary Interest in Securities if you have the
opportunity, directly or indirectly, to profit or share in any profit derived
from a transaction in the Securities.
The following are examples of an indirect Pecuniary Interest in
Securities:
Securities held by members of your immediate family sharing the
same household; however, this presumption may be rebutted by
convincing evidence that profits derived from transactions in
these Securities will not provide you with any economic benefit.
Immediate family means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, and includes any adoptive relationship.
Your interest as a general partner in Securities held by a general
or limited partnership.
Your interest as a manager-member in the Securities held by a
limited liability company.
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<PAGE> 5
You do not have an indirect Pecuniary Interest in Securities held by a
corporation, partnership, limited liability company or other entity in which you
hold an equity interest, unless you are a controlling equity holder or you have
or share investment control over the Securities held by the entity.
The following circumstances constitute Beneficial Ownership by you of
Securities held by a trust:
Your ownership of Securities as a trustee where either you or
members of your immediate family have a vested interest in the
principal or income of the trust.
Your ownership of a vested beneficial interest in a trust.
Your status as a settlor of a trust, unless the consent of all of
the beneficiaries is required in order for you to revoke the
trust.
EXEMPT TRANSACTIONS
The following are Exempt Transactions:
Any transaction in Securities in an account over which you do not
have any direct or indirect influence or control. There is a
presumption that you can exert some measure of influence or
control over accounts held by members of your immediate family
sharing the same household, but this presumption may be rebutted
by convincing evidence.
Purchases of Securities under dividend reinvestment plans.
Purchases of Securities by exercise of rights issued to the
holders of a class of Securities pro rata, to the extent they are
issued with respect to Securities of which you have Beneficial
Ownership.
Acquisitions or dispositions of Securities as the result of a
stock dividend, stock split, reverse stock split, merger,
consolidation, spin-off or other similar corporate distribution or
reorganization applicable to all holders of a class of Securities
of which you have Beneficial Ownership.
Subject to the restrictions on participation in private placements
set forth below under Private Placements, acquisitions or
dispositions of Securities of a private issuer. A private issuer
is an issuer which has no outstanding publicly-traded Securities,
and no outstanding Securities which are convertible into or
exchangeable for, or represent the right to purchase or otherwise
acquire, publicly-traded Securities. However, you will have
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<PAGE> 6
Beneficial Ownership of any Securities held by a private issuer
whose Securities you hold, unless you are not a controlling equity
holder and do not have or share investment control over the
Securities held by the entity.
Transactions in Securities traded within the preceding seven days
by Columbus Circle Investors for an Advisory Client provided that
(i) the trading for the client has been completed and (ii) the
trade in which the Managing Director, officer or employee has or
acquires Beneficial Ownership is not contrary to the trade done
for the Advisory Client. These transactions require preclearance
but are exempt from the prohibition against trades during such
seven-day period.
Transactions in Securities proposed to be traded within the seven
succeeding days by Columbus Circle Investors for an Advisory
Client provided that (i) the trading for the client has not
commenced and (ii) the trade in which the Managing Director,
officer or employee has or acquires Beneficial Ownership is
contrary to the trade proposed for the Advisory Client. These
transactions require preclearance but are exempt from the
prohibition against trades during such seven-day period.
Purchases or sales of up to $1,000,000 in total notional open
interest per calendar month, per index, of exchange-traded options
on broadly-based indices. A broadly-based index is an index with
an average notional open interest during the preceding calendar
quarter in excess of $1 billion.
Any purchase or sale of shares of registered closed-end investment
companies.
Transactions in Securities issued or guaranteed by the State of
Connecticut, its agencies or instrumentalities.
Such other classes of transactions as may be exempted from time to
time by the Compliance Committee. The Compliance Committee may
exempt designated classes of transactions from any of the
provisions of this Code except the provisions set forth below
under Reporting. Any such exemption shall be based upon a
determination by the Compliance Committee that the class of
transaction does not involve any realistic possibility of a
violation of Rule 17j-1 under the Investment Company Act of 1940,
as amended. (So long as Columbus Circle Does not advise its
clients on fixed income securities, transactions in debt
instruments ????? are exempt.
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<PAGE> 7
Such other specific transactions as may be exempted from time to
time by the Compliance Committee or a Compliance Officer on a
case-by-case basis where the equities of the situation support
such an exemption and where the transaction does not involve any
realistic possibility of a violation of Rule 17j-1 under the
Investment Company Act of 1940, as amended. The Compliance
Committee or a Compliance Officer may exempt a specific
transaction from any of the provisions of this Code except the
provisions set forth below under Reporting.
PRECLEARANCE PROCEDURES
If a Securities transaction requires preclearance:
The Securities may not be purchased or sold on any day during
which there is a pending buy or sell order in the same Security on
behalf of an Advisory Client until that order is executed or
withdrawn.
Except as otherwise provided under Exempt Transactions, Securities
may not be purchased or sold during the period which begins seven
full days before and ends seven full days after the day on which a
portfolio Columbus Circle Investors manages trades in the same
Security.
The Securities may be purchased or sold only if you have asked a
Clearance Officer to preclear the purchase or sale, such Clearance
Officer has given you preclearance in writing or by e-mail, and
the purchase or sale is executed by the close of business on the
day preclearance is given. Preclearance will not be given unless a
determination is made that the purchase or sale complies with this
Code and the foregoing restrictions. All requests for preclearance
shall be sent by e-mail to a Clearance Officer and to the
Compliance Registrar.
A copy of all approved preclearance requests must be filed or sent
by the Clearance Officer to the Compliance Registrar.
Any trade for which preclearance is granted remains approved
notwithstanding a subsequent decision by Columbus Circle Investors to trade in
such security for client accounts.
INITIAL PUBLIC OFFERINGS
If you are a Portfolio Employee, you may not acquire Beneficial
Ownership of any Securities (other than Exempt Securities) in an initial public
offering.
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<PAGE> 8
PRIVATE PLACEMENTS
If you are a Portfolio Employee, you may not acquire Beneficial
Ownership of any Securities (other than Exempt Securities) in a private
placement, unless you have received the prior written approval of a majority of
the Compliance Committee of Columbus Circle Investors. Approval will be not be
given unless a determination is made that the investment opportunity has not
been offered to you by virtue of your position.
If you have acquired Beneficial Ownership in Securities in a private
placement, you must disclose your investment when you play a part in any
consideration of an investment by an Advisory Client in the issuer of the
Securities, and any decision to make such an investment must be independently
reviewed by a portfolio manager who does not have Beneficial Ownership of any
Securities of the issuer.
SHORT-TERM TRADING PROFITS
Because Columbus Circle Investors believes that investing and not
short-term trading is the appropriate investment approach, short-term (60 days
or shorter holding period) trading is discouraged. A pattern of short-term
trading will result in the Compliance Committee withholding clearance on future
trading requests.
You are considered to profit from a short-term trade if Securities of
which you have Beneficial Ownership are sold for more than their purchase price,
even though the Securities purchased and the Securities sold are held of record
or beneficially by different persons or entities.
This section does not apply to Exempt Transactions.
REPORTING
USE OF BROKER-DEALERS
You may not engage, and you may not permit any other person or entity
to engage, in any purchase or sale of a publicly traded Security (other than an
Exempt Security) of which you have, or by reason of the transaction will
acquire, Beneficial Ownership, except through a registered broker-dealer.
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<PAGE> 9
REPORTING OF TRANSACTIONS
You must cause each broker-dealer who maintains an account for
Securities of which you have Beneficial Ownership, to provide to the Compliance
Registrar, on a timely basis, duplicate copies of confirmations of all
transactions in the account and of periodic statements for the account and you
must report to the Compliance Officer, on a timely basis, all transactions
affected without the use of a broker in Securities (other than Exempt
Securities) of which you have Beneficial Ownership.
ANNUAL REPORTS
If you are a Portfolio Employee, you must disclose your holdings of all
Securities (other than Exempt Securities) of which you have Beneficial Ownership
upon commencement of your employment by Columbus Circle Investors or the
effective date of this Code, whichever occurs later, and annually thereafter.
The form for this purpose is attached to this Code as Appendix III.
COMPLIANCE
CERTIFICATE OF RECEIPT
You are required to acknowledge receipt of your copy of this Code. A
form for this purpose is attached to this Code as Appendix I.
CERTIFICATE OF COMPLIANCE
You are required to certify upon commencement of your employment or the
effective date of this Code, whichever occurs later, and annually thereafter,
that you have read and understand this Code and recognize that you are subject
to this Code. Each annual certificate will also state that you have complied
with the requirements of this Code during the prior year, and that you have
disclosed, reported, or caused to be reported all transactions during the prior
year in Securities of which you had or acquired Beneficial Ownership. A form for
this purpose is attached to this Code as Appendix II.
REMEDIAL ACTIONS
If you violate this Code, you are subject to remedial actions, to be
imposed by the Compliance Committee of Columbus Circle Investors, which may
include, but are not limited to, disgorgement of profits, imposition of a
substantial fine, demotion, suspension or termination.
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<PAGE> 10
Appendix I
COLUMBUS CIRCLE INVESTORS
CODE OF ETHICS
ACKNOWLEDGEMENT OF RECEIPT OF CODE OF ETHICS
I acknowledge that I have received a copy of the Columbus Circle
Investors Code of Ethics dated July 1, 1999.
Date:
- ---------------------------------- -----------------------------------
Signature
-----------------------------------
Print Name
10
<PAGE> 11
Appendix II
COLUMBUS CIRCLE INVESTORS
CODE OF ETHICS
ACKNOWLEDGEMENT OF CERTIFICATION
I hereby certify that I have read and understand the Code of Ethics
dated July 1, 1999. I recognize that I must disclose or report all personal
securities transactions required to be disclosed or reported thereunder and
comply in all other respects with the requirements of such Codes. I certify that
I have, to date, complied and agree to comply in the future with the Codes. I
also agree to cooperate fully with any investigation or inquiry as to whether a
possible violation of the foregoing Codes has occurred. I understand that any
failure to comply in all aspects with the foregoing and these Codes may lead to
sanctions, including dismissal.
Date:
- --------------------------------- ------------------------------------
Signature
------------------------------------
Print Name
11
<PAGE> 12
Appendix III
COLUMBUS CIRCLE INVESTORS
CODE OF ETHICS
PERSONAL SECURITIES HOLDINGS
In accordance with the Code of Ethics, please provide a list of all
Securities in which you or a Related Account has a Beneficial Interest and all
Securities in non-client accounts for which you make investment decisions. This
includes not only securities held by brokers, but also securities held at home,
in safe deposit boxes, or by any issuer.
<TABLE>
<S> <C> <C>
1 Name of Employee:
2 If different than #1, name of the person
in whose name the account is held:
3 Relationship of 2 to 1
4 Brokers(s) at which account is maintained:
5 Account Number(s)
6 Telephone number(s) of Broker
</TABLE>
7. For each account, attach your most recent account statement listing
securities in that account. If you own securities that are not listed in an
attached account statement, list them below.
<TABLE>
<CAPTION>
Name of Security Quantity Value Custodian
<S> <C> <C> <C>
</TABLE>
(Attach separate sheet if necessary.)
I certify that this form and the attached statement (if any) constitute
all of the Securities in my Employee Accounts and Related Accounts.
Date:
- -------------------------------- -------------------------------------
Signature
-------------------------------------
Print Name
12
<PAGE> 1
EXHIBIT (P)(9)
PIMCO CODE OF ETHICS
Effective as of March 31, 2000
INTRODUCTION
GENERAL PRINCIPLES
This Code of Ethics is based on the principle that you, as a director,
officer or other Advisory Employee of Pacific Investment Management Company
("PIMCO"), owe a fiduciary duty to, among others, the shareholders of the Funds
and other clients (together with the Funds, the "Advisory Clients") for which
PIMCO serves as an advisor or subadvisor. Accordingly, you must avoid
activities, interests and relationships that might interfere or appear to
interfere with making decisions in the best interests of our Advisory Clients.
At all times, you must observe the following GENERAL RULES:
1. YOU MUST PLACE THE INTERESTS OF OUR ADVISORY CLIENTS FIRST. In
other words, as a fiduciary you must scrupulously avoid
serving your own personal interests ahead of the interests of
our Advisory Clients. You must adhere to this general
fiduciary principle as well as comply with the Code's specific
provisions. Technical compliance with the Code's procedures
will not automatically insulate from scrutiny any trades that
indicate an abuse of your fiduciary duties or that create an
appearance of such abuse.
Your fiduciary obligation applies not only to your personal
trading activities but also to actions taken on behalf of
Advisory Clients. In particular, you may not cause an Advisory
Client to take action, or not to take action, for your
personal benefit rather than the benefit of the Advisory
Client. For example, you would violate this Code if you caused
an Advisory Client to purchase a Security or Futures Contract
you owned for the purpose of increasing the value of that
Security or Futures Contract. If you are a portfolio manager
or an employee who provides information or advice to a
portfolio manager or helps execute a portfolio manager's
decisions, you would also violate this Code if you made a
personal investment in a Security or Futures Contract that
might be an appropriate investment for an Advisory Client
without first considering the Security or Futures Contract as
an investment for the Advisory Client.
2. YOU MUST CONDUCT ALL OF YOUR PERSONAL INVESTMENT TRANSACTIONS
IN FULL COMPLIANCE WITH THIS CODE, THE PIMCO ADVISORS L.P.
INSIDER TRADING POLICY AND PROCEDURES (THE "INSIDER TRADING
POLICY"), AND THE PIMCO ADVISORS L.P. POLICY REGARDING SPECIAL
TRADING PROCEDURES FOR SECURITIES OF PIMCO
<PAGE> 2
ADVISORS L.P. (THE "SPECIAL TRADING PROCEDURES")(1) AND IN
SUCH A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF
INTEREST OR ANY ABUSE OF YOUR POSITION OF TRUST AND
RESPONSIBILITY. PIMCO encourages you and your family to
develop personal investment programs. However, those
investment programs must remain within boundaries reasonably
necessary to ensure that appropriate safeguards exist to
protect the interests of our Advisory Clients and to avoid
even the APPEARANCE of unfairness or impropriety. Accordingly,
YOU MUST COMPLY WITH THE POLICIES AND PROCEDURES SET FORTH IN
THIS CODE UNDER THE HEADING PERSONAL INVESTMENT TRANSACTIONS.
In addition, you must comply with the policies and procedures
set forth in the INSIDER TRADING POLICY AND SPECIAL TRADING
PROCEDURES, which are attached to this Code as Appendix II and
III, respectively. Doubtful situations should be resolved in
favor of our Advisory Clients and against your personal
trading.
3. YOU MUST NOT TAKE INAPPROPRIATE ADVANTAGE OF YOUR POSITION.
The receipt of investment opportunities, perquisites, gifts or
gratuities from persons seeking business with PIMCO directly
or on behalf of an Advisory Client could call into question
the independence of your business judgment. Accordingly, you
must comply with the policies and procedures set forth in this
Code under the heading GIFTS AND SERVICE AS A DIRECTOR.
Doubtful situations should be resolved against your personal
interest.
THE GENERAL SCOPE OF THE CODE'S
APPLICATIONS TO PERSONAL INVESTMENT ACTIVITIES
The Code reflects the fact that PIMCO specializes in the management of
fixed income portfolios. The vast majority of assets PIMCO purchases and sells
on behalf of its Advisory Clients consist of corporate debt Securities, U.S. and
foreign government obligations, asset-backed Securities, money market
instruments, foreign currencies, and futures contracts and options with respect
to those instruments. For its StocksPLUS Funds, PIMCO also purchases futures and
options on the S & P 500 index and, on rare occasions, may purchase or sell
baskets of the stocks represented in the S & P 500. For its Convertible Bond
Fund and other Advisory Clients, PIMCO purchases convertible securities that may
be converted or exchanged into underlying shares of common stock. Other PIMCO
Funds may also invest in convertible securities. The Convertible Bond Fund and
other Advisory Clients may also invest a portion of their assets in common
stocks.
Rule 17j-1 under the Investment Company Act of 1940 requires REPORTING
of all personal transactions in Securities (other than certain Exempt
Securities) by certain persons, whether or not they are Securities that might be
purchased or sold by PIMCO on behalf of its Advisory Clients. The Code
implements that reporting requirement.
- ----------
(1) PIMCO expects Allianz of America ("AZOA") to acquire a majority interest in
PIMCO Advisors L.P. ("PALP") in the second quarter of 2000. When that
acquisition is consummated, the Special Trading Procedures for PALP securities
will no longer apply since PALP securities will not be publicly owned or traded.
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<PAGE> 3
However, since the purpose of the Code is to avoid conflicts of
interest arising from personal trading activities in Securities and other
instruments that are held or might be acquired on behalf of our Advisory
Clients, this Code only places RESTRICTIONS on personal trading activities in
such investments. As a result, this Code does not place restrictions (beyond
reporting) on personal trading in most individual equity Securities. Except for
the small number of Portfolio Employees who are responsible for PIMCO's
Municipal Bond Fund, this Code also does not place restrictions (beyond
reporting) on personal trading in Tax-Exempt Municipal Bonds. Although equities
and Tax-Exempt Municipal Bonds are Securities, they are not purchased or sold by
PIMCO on behalf of the vast majority of PIMCO's Advisory Clients and PIMCO has
established special procedures to avoid conflicts of interest that might
otherwise arise from personal trading in those Securities. On the other hand,
this Code does require reporting and restrict trading in certain Futures
Contracts which, although they are not Securities, are instruments in which
PIMCO frequently trades for many of its Advisory Clients.
This Code applies to PIMCO's officers and directors as well as to all
of its Advisory Employees. The Code recognizes that portfolio managers and the
investment personnel who provide them with advice and who execute their
decisions occupy more sensitive positions than other Advisory Employees and that
it is appropriate to subject their personal investment activities to greater
restrictions.
THE ORGANIZATION OF THE CODE
The remainder of this Code is divided into three sections. The first
section concerns PERSONAL INVESTMENT TRANSACTIONS. The second section describes
the restrictions on GIFTS AND SERVICE AS A DIRECTOR. The third section
summarizes the methods for ensuring COMPLIANCE under the Code. In addition, the
following APPENDICES are also a part of this Code:
I. Definitions of Capitalized Terms.
II. The PIMCO Advisors L.P. Insider Trading Policy and Procedures.
III. The PIMCO Advisors L.P. Policy Regarding Special Trading Procedures for
Securities of PIMCO Advisors L.P.
IV. Form for Acknowledgment of Receipt of this Code.
V. Form for Annual Certification of Compliance with this Code.
VI. Form for Initial Report of Accounts.
VII. Form for Quarterly Report of Investment Transactions.
VIII. Form for Annual Holdings Report.
IX. Preclearance Request Form
X. List of PIMCO Compliance Officers.
QUESTIONS
Questions regarding this Code should be addressed to a Compliance
Officer listed on Appendix X. Those Compliance Officers compose the PIMCO
Compliance Committee.
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<PAGE> 4
PERSONAL INVESTMENT TRANSACTIONS
IN GENERAL
Subject to the limited exceptions described below, you are required to
report all Investment Transactions in SECURITIES AND FUTURES CONTRACTS made by
you, a member of your Immediate Family or a trust in which you have an interest,
or on behalf of any account in which you have an interest or which you direct.
In addition, you must PRECLEAR certain Investment Transactions in SECURITIES AND
FUTURES CONTRACTS THAT PIMCO HOLDS OR MAY ACQUIRE ON BEHALF OF AN ADVISORY
CLIENT, INCLUDING CERTAIN INVESTMENT TRANSACTIONS IN RELATED SECURITIES.
The details of these reporting and preclearance requirements are
described below. This Code uses a number of capitalized terms, e.g. Advisory
Employee, Beneficial Ownership, Designated Equity Security, Exempt Security,
Fixed Income Security, Fund, Futures Contract, Immediate Family, Initial Public
Offering, Investment Transaction, Personal Account, Portfolio Employee, Private
Placement, Qualified Foreign Government, Related Account, Related Security, and
Security. The definitions of these capitalized terms are set forth in Appendix
I. TO UNDERSTAND YOUR RESPONSIBILITIES UNDER THE CODE, IT IS IMPORTANT THAT YOU
REVIEW AND UNDERSTAND THE DEFINITIONS IN APPENDIX I.
REPORTING OBLIGATIONS
Notification Of Reporting Obligations
As an Advisory Employee, you are required to report accounts and
Investment Transactions in accordance with the requirements of this Code.
Use Of Broker-Dealers And Futures Commission Merchants
Unless you are an independent director, YOU MUST USE A REGISTERED
BROKER-DEALER OR REGISTERED FUTURES COMMISSION MERCHANT to engage in any
purchase or sale of a publicly-traded Security or Publicly-Traded Futures
Contract. This requirement also applies to any purchase or sale of a
publicly-traded Security or of a Publicly-Traded Futures Contract in which you
have, or by reason of the Investment Transaction will acquire, a Beneficial
Ownership interest. Thus, as a general matter, any Investment Transaction in
publicly-traded Securities or Publicly-Traded Futures Contracts by members of
your Immediate Family will need to be made through a registered broker-dealer or
futures commission merchant.
Initial Report
Within 10 days after commencing employment or within 10 days of any
event that causes you to become subject to this Code (e.g. promotion to a
position that makes you an Advisory Employee), you shall supply to a Compliance
Officer copies of the most recent statements for each and every Personal Account
and Related Account that holds or is likely to hold a Security or a Futures
Contract in which you have a Beneficial Ownership interest, as well as copies of
confirmations for any and all Investment Transactions subsequent to the
effective date of those
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<PAGE> 5
statements. These documents shall be supplied to the Compliance Officer by
attaching them to the form appended hereto as Appendix VI.
On that same form you shall supply the name of any broker, dealer, bank
or futures commission merchant and the number for any Personal Account and
Related Account that holds or is likely to hold a Security or a Futures Contract
in which you have a Beneficial Ownership interest for which you cannot supply
the most recent account statement. You shall also certify, where indicated on
the form, that the contents of the form and the documents attached thereto
disclose all such Personal Accounts and Related Accounts.
In addition, you shall also supply, where indicated on the form, the
following information for each Security or Futures Contract in which you have a
Beneficial Ownership interest, to the extent that this information is not
available from the statements attached to the form:
1. A description of the Security or Futures Contract, including
its name or title;
2. The quantity (e.g. in terms of numbers of shares, units or
contracts) and principal amount (in dollars) of the Security
or Futures Contract; and
3. The name of any broker, dealer, bank or futures commission
merchant with which you maintained an account in which the
Security or Futures Contract was held.
New Accounts
Immediately upon the opening of a NEW Personal Account or a Related
Account that holds or is likely to hold a Security or a Futures Contract, you
shall supply a Compliance Officer with the name of the broker, dealer, bank or
futures commission merchant for that account, the identifying number for that
Personal Account or Related Account, and the date the account was established.
Timely Reporting Of Investment Transactions
You must cause each broker, dealer, bank or futures commission merchant
that maintains a Personal Account or a Related Account that holds a Security or
a Futures Contract in which you have a Beneficial Ownership interest to provide
to a Compliance Officer, on a timely basis, duplicate copies of trade
confirmations of all Investment Transactions in that account and of periodic
statements for that account ("duplicate broker reports").
In addition, you must report to a Compliance Officer, on a timely
basis, any Investment Transaction in a Security or a Futures Contract in which
you have or acquired a Beneficial Ownership interest that was established
without the use of a broker, dealer, bank or futures commission merchant.
Quarterly Certifications And Reporting
At the end of the first, second and third calendar quarters, a
Compliance Officer will provide you with a list of all accounts that you have
previously identified to PIMCO as a Personal Account or a Related Account that
holds or is likely to hold a Security or Futures
5
<PAGE> 6
Contract. Within 10 days after the end of that calendar quarter, you shall make
any necessary additions, corrections or deletions to that list and return it to
a Compliance Officer with a certification that: (a) the list, as modified (if
necessary), represents a complete list of the Personal Accounts and Related
Accounts that hold Securities or Futures Contracts in which you have or had a
Beneficial Ownership interest and for which PIMCO should have received or will
receive timely duplicate broker reports for the calendar quarter just ended, and
(b) the broker, dealer, bank or futures commission merchant for each account on
the list has been instructed to send a Compliance Officer timely duplicate
broker reports for that account.
You shall provide, on a copy of the form attached hereto as Appendix
VII, the following information for each Investment Transaction during the
calendar quarter just ended, to the extent that the duplicate broker reports for
that calendar quarter did not supply this information to PIMCO:
1. The date of the Investment Transaction, the title, the
interest rate and maturity date (if applicable), the number of
shares or contracts, and the principal amount of each Security
or Futures Contract involved;
2. The nature of the Investment Transaction (i.e. purchase, sale
or any other type of acquisition or disposition);
3. The price of the Security or Futures Contract at which the
transaction was effected; and
4. The name of the broker, dealer, bank, or futures commission
merchant with or through which the transaction was effected.
You shall provide similar information for the fourth calendar quarter on a copy
of the form attached hereto as Appendix VIII, which form shall also be used for
the Annual Holdings Report described below.
Annual Holdings Reports
Beginning with calendar year 2000, a Compliance Officer will provide to
you, promptly after the end of the calendar year, a list of all accounts that
you have previously identified to PIMCO as a Personal Account or a Related
Account that held or was likely to hold a Security or Futures Contract during
that calendar year. Within 10 days after the end of that calendar year, you
shall make any necessary additions, corrections or deletions to that list and
return it to a Compliance Officer with a certification that: (a) the list, as
modified (if necessary), represents a complete list of the Personal Accounts and
Related Accounts that held Securities or Futures Contracts in which you had a
Beneficial Ownership interest as of the end of that calendar year and for which
PIMCO should have received or will receive an account statement of holdings as
of the end of that calendar year, and (b) the broker, dealer, bank or futures
commission merchant for each account on the list has been instructed to send a
Compliance Officer such an account statement.
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<PAGE> 7
You shall provide, on a copy of the form attached hereto as Appendix
VIII, the following information for each Security or Futures Contract in which
you had a Beneficial Ownership interest, as of the end of the previous calendar
year, to the extent that the previously referenced account statements have not
supplied or will not supply this information to PIMCO:
1. The title, quantity (e.g. in terms of numbers of shares, units
or contracts) and principal amount of each Security or Futures
Contract in which you had any Beneficial Ownership interest;
and
2. The name of any broker, dealer, bank or futures commission
merchant with which you maintain an account in which any such
Securities or Futures Contracts have been held or are held for
your benefit.
In addition, you shall also provide, on that same form, Investment Transaction
information for the fourth quarter of the calendar year just ended. This
information shall be of the type and in the form required for the quarterly
reports described above.
Related Accounts
The reporting and certification obligations described above also apply
to any Related Account (as defined in Appendix I) and to any Investment
Transaction in a Related Account.
It is important for you to recognize that the definitions of "Related
Account" and "Beneficial Ownership" in Appendix I may require you to provide, or
to arrange for the broker, dealer, bank or futures commission merchant to
furnish, copies of reports for any account used by or for a member of your
Immediate Family or a trust in which you or a member of your Immediate Family
has any vested interest, as well as for any other accounts in which you may have
the opportunity, directly or indirectly, to profit or share in the profit
derived from any Investment Transaction in that account.
Exemptions From Reporting
You need not report Investment Transactions in any account over which
neither you nor an Immediate Family Member has or had any direct or indirect
influence or control.
You also need not report Investment Transactions in Exempt Securities
(as defined in Appendix I) nor need you furnish, or require a broker, dealer,
bank or futures commission merchant to furnish, copies of confirmations or
periodic statements for accounts that hold only Exempt Securities. This includes
accounts that only hold U.S. Government Securities, money market interests, or
shares in open-end mutual funds. This exemption from reporting shall end
immediately, however, at such time as there is an Investment Transaction in that
account in a Futures Contract or in a Security that is not an Exempt Security.
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<PAGE> 8
PROHIBITED INVESTMENT TRANSACTIONS
Initial Public Offerings of Equity Securities
If you are a Portfolio Employee (as defined in Appendix I), you may not
acquire Beneficial Ownership of any equity Security in an Initial Public
Offering.
Private Placements and Initial Public Offering of Debt Securities
If you are a Portfolio Employee, you may not acquire a Beneficial
Ownership interest in any Security through a Private Placement (or subsequently
sell it), or acquire a Beneficial Ownership interest in any debt Security in an
Initial Public Offering unless you have received the prior written approval of
the Chief Executive Officer of PIMCO or of a Compliance Officer listed on
Appendix X. Approval will not be given unless a determination is made that the
investment opportunity should not be reserved for one or more Advisory Clients,
and that the opportunity to invest has not been offered to you by virtue of your
position with PIMCO.
If, after receiving the necessary approval, you have acquired a
Beneficial Ownership interest in Securities through a Private Placement, you
must DISCLOSE that investment when you play a part in any consideration of any
investment by an Advisory Client in the issuer of the Securities, and any
decision to make such an investment must be INDEPENDENTLY REVIEWED by a
portfolio manager who does not have a Beneficial Ownership interest in any
Securities of the issuer.
PIMCO Advisors L.P.
You may not engage in any Investment Transaction in interests in PIMCO
Advisors L.P. ("PALP"), except in compliance with the Special Trading Procedures
applicable to such transactions.(2)
PRECLEARANCE
All Investment Transactions in Securities and Futures Contracts in a
Personal Account or Related Account, or in which you otherwise have or will
acquire a Beneficial Ownership interest, must be precleared by a Compliance
Officer unless an Investment Transaction, Security or Futures Contract falls
into one of the following categories that are identified as "exempt from
preclearance."
Preclearance Procedure
Preclearance shall be requested by completing and submitting a copy of
the preclearance request form attached hereto as Appendix IX to a Compliance
Officer. No Investment Transaction subject to preclearance may be effected prior
to receipt of written authorization of the transaction by a Compliance Officer.
The authorization and the date of authorization will be
- ----------
(2) As indicated in note 1, above, those procedures will expire and no longer be
effective after AZOA completes its acquisition of a majority interest in PALP.
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<PAGE> 9
reflected on the preclearance request form. Unless otherwise specified, that
authorization shall be effective, unless revoked, until the earlier of: (a) the
close of business on the day the authorization is given, or (b) until you
discover that the information on the preclearance request form is no longer
accurate.
The Compliance Officer from whom authorization is sought may undertake
such investigation as he or she considers necessary to determine that the
Investment Transaction for which preclearance has been sought complies with the
terms of this Code and is consistent with the general principles described at
the beginning of the Code.
Before deciding whether to authorize an Investment Transaction in a
particular Security or Futures Contract, the Compliance Officer shall determine
and consider, based upon the information reported or known to that Compliance
Officer, whether within the most recent 15 days: (a) the Security, the Futures
Contract or any Related Security is or has been held by an Advisory Client, or
(b) is being or has been considered for purchase by an Advisory Client. The
Compliance Officer shall also determine whether there is a pending BUY or SELL
order in the same Security or Futures Contract, or in a Related Security, on
behalf of an Advisory Client. If such an order exists, authorization of the
personal Investment Transaction shall not be given until the Advisory Client's
order is executed or withdrawn. This prohibition may be waived by a Compliance
Officer if he or she is convinced that: (a) your personal Investment Transaction
is necessary, (b) your personal Investment Transaction will not adversely affect
the pending order of the Advisory Client, and (c) provision can be made for the
Advisory Client trade to take precedence (in terms of price) over your personal
Investment Transaction.
Exemptions From Preclearance
Preclearance shall NOT be required for the following Investment
Transactions, Securities and Futures Contracts. They are exempt only from the
Code's preclearance requirement, and, unless otherwise indicated, remain subject
to the Code's other requirements, including its reporting requirements.
Investment Transactions Exempt From Preclearance
Preclearance shall NOT be required for any of the following Investment
Transactions:
1. Any transaction in a Security or Futures Contract in an
account that is managed or held by a broker, dealer, bank,
futures commission merchant, investment adviser, commodity
trading advisor or trustee and over which you do not exercise
investment discretion, have notice of transactions prior to
execution, or otherwise have any direct or indirect influence
or control. There is a presumption that you can influence or
control accounts held by members of your Immediate Family
sharing the same household. This presumption may be rebutted
only by convincing evidence.
2. Purchases of Securities under dividend reinvestment plans.
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3. Purchases of Securities by exercise of rights issued to the
holders of a class of Securities pro rata, to the extent they
are issued with respect to Securities in which you have a
Beneficial Ownership interest.
4. Acquisitions or dispositions of Securities as the result of a
stock dividend, stock split, reverse stock split, merger,
consolidation, spin-off or other similar corporate
distribution or reorganization applicable to all holders of a
class of Securities in which you have a Beneficial Ownership
interest.
Securities Exempt From Preclearance
Regardless Of Transaction Size
Preclearance shall NOT be required for an Investment Transaction in the
following Securities or Related Securities, regardless of the size of that
transaction:
1. All "Exempt Securities" defined in Appendix I, i.e. U.S.
Government Securities, shares in open-end mutual funds, and
high quality short-term debt instruments.
2. All closed-end mutual funds (other than PIMCO Commercial
Mortgage Securities Trust, Inc.), and rights distributed to
shareholders in closed-end mutual funds.
3. All options on any index of equity Securities.
4. All Fixed Income Securities issued by agencies or
instrumentalities of, or unconditionally guaranteed by, the
Government of the United States.
5. All options on foreign currencies or baskets of foreign
currencies (whether or not traded on an exchange or board of
trade).
6. EXCEPT FOR DESIGNATED EQUITY SECURITIES (as defined in
Appendix I and discussed below), all equity Securities or
options, warrants or other rights to equity Securities.
Securities Exempt from Preclearance
Depending On Transaction Size
Preclearance shall NOT be required for an Investment Transaction in the
following Securities or Related Securities if they do not exceed the specified
transaction size thresholds (which thresholds may be increased or decreased by
PIMCO upon written notification to employees in the future depending on the
depth and liquidity of Fixed Income Securities or Tax-Exempt Municipal Bonds
market):
1. Purchases or sales of up to $1,000,000 (in market value or
face amount whichever is greater) per calendar month per
issuer of Fixed Income Securities issued by a Qualified
Foreign Government.
2. Purchases or sales of up to $100,000 (in market value or face
amount, whichever is greater) per calendar month per issuer of
corporate debt Securities, mortgage-
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backed and other asset-backed Securities, Tax-Exempt Municipal
Bonds, taxable state, local and municipal debt Securities,
structured notes and loan participations, and foreign
government debt Securities issued by non-qualified foreign
governments.
Preclearance of Designated Equity Securities
If a Compliance Officer receives notification from a Portfolio Employee
that an equity Security or an option, warrant or other right to an equity
Security is being considered for purchase or sale by PIMCO on behalf of one of
its Advisory Clients, the Compliance Officer will send you an e-mail message or
similar transmission notifying you that this equity Security or option, warrant
or other right to an equity Security is now a "Designated Equity Security." A
current list of Designated Equity Securities (if any) will also be available on
the PIMCO intranet site. You must preclear any Investment Transaction in a
Designated Equity Security or a Related Security during the period when that
designation is in effect.
Futures Contracts Exempt From Preclearance
Regardless Of Transaction Size
Preclearance shall NOT be required for an Investment Transaction in the
following Futures Contracts, regardless of the size of that transaction (as
indicated in Appendix I, for these purposes a "Futures Contract" includes a
futures option):
1. Currency Futures Contracts.
2. U.S. Treasury Futures Contracts.
3. Eurodollar Futures Contracts.
4. Futures Contracts an any index of equity Securities.
5. Futures Contracts on physical commodities or indices thereof
(e.g. contracts for future delivery of grain, livestock, fiber
or metals whether for physical delivery or cash).
6. Privately-Traded Contracts.
Futures Contracts Exempt From Preclearance
Depending On Transaction Size
Preclearance shall NOT be required for an Investment Transaction in the
following Futures Contracts if the total number of contracts purchased or sold
during a calendar month does not exceed the specified limitations:
1. Purchases or sales of up to 50 PUBLICLY-TRADED FUTURES
CONTRACTS to acquire Fixed Income Securities issued by a
particular Qualified Foreign Government.
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2. Purchases or sales of up to 10 OF EACH OTHER INDIVIDUAL
PUBLICLY-TRADED FUTURES CONTRACT if the open market interest
for such Futures Contract as reported in The Wall Street
Journal on the date of your Investment Transaction (for the
previous trading day) is at least 1,000 contracts. Examples of
Futures Contracts for which this exemption would be available
include a Futures Contract on a foreign government debt
Security issued by a non-qualified foreign government as well
as a 30-day federal funds Futures Contract.
For purposes of these limitations, a Futures Contract is defined by its
expiration month. For example, you need not obtain preclearance to purchase 50
December Futures Contracts on German Government Bonds and 50 March Futures
Contracts on German Government Bonds. Similarly, you may roll over 10 September
Fed Funds Futures Contracts by selling those 10 contracts and purchasing 10
October Fed Funds Futures Contracts since the contracts being sold and those
being purchased have different expiration months. On the other hand, you could
not purchase 10 January Fed Funds Future Contracts if the open interest for
those contracts was less than 1,000 contracts, even if the total open interest
for all Fed Funds Futures Contracts was greater than 1,000 contracts.
Additional Exemptions From Preclearance
The Compliance Committee may exempt other classes of Investment
Transactions, Securities or Futures Contracts from the Code's preclearance
requirement upon a determination that they do not involve a realistic
possibility of violating the general principles described at the beginning of
the Code.
Preclearance Required
Given the exemptions described above, preclearance shall be required
for Investment Transactions in:
1. Designated Equity Securities.
2. More than $100,000 per calendar month per issuer of corporate
debt Securities, mortgage-backed and other asset-backed
Securities, Tax-Exempt Municipal Bonds, taxable state, local
and municipal debt Securities, structured notes and loan
participations, and foreign government debt Securities issued
by non-qualified foreign governments.
3. More than $1,000,000 per calendar month in debt Securities of
a Qualified Foreign Government.
4. Related Securities that are exchangeable for or convertible
into one of the Securities requiring preclearance under (1),
(2), (3) or (4) above.
5. More than 50 Publicly-Traded Futures Contracts per calendar
month to acquire Fixed Income Securities issued by a
particular Qualified Foreign Government.
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6. More than 10 of any other individual Publicly-Traded Futures
Contract or any Publicly-Traded Futures Contract for which the
open market interest as reported in The Wall Street Journal on
the date of your Investment Transaction (for the previous
trading day) is less than 1,000 contracts, unless the Futures
Contract is exempt from preclearance regardless of transaction
size.
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7. Any other Security or Publicly-Traded Futures Contract that is
not within the "exempt" categories listed above.
8. PIMCO Commercial Mortgage Securities Trust, Inc.
SHORT-TERM TRADING PROFITS
You may not profit from the purchase and sale, or the sale and
purchase, within 60 calendar days, of FIXED INCOME SECURITIES, TAX-EXEMPT
MUNICIPAL BONDS OR RELATED SECURITIES. Portfolio Employees may not profit from
the purchase and sale, or the sale and purchase, within 60 calendar days, of
DESIGNATED EQUITY SECURITIES. Any such short-term trade must be unwound, or if
that is not practical, the profits must be contributed to a charitable
organization.
This ban does NOT apply to Investment Transactions in U.S. Government
Securities, most equity Securities, mutual fund shares, index options or Futures
Contracts. This ban also does not apply to a purchase or sale in connection with
one of the four categories of Investment Transactions Exempt From Preclearance
described on pages 9-10, above.
You are considered to profit from a short-term trade if Securities in
which you have a Beneficial Ownership interest are sold for more than their
purchase price, even though the Securities purchased and the Securities sold are
held of record or beneficially by different persons or entities.
BLACKOUT PERIODS
You MAY NOT purchase or sell a Security, a Related Security or a
Futures Contract at a time when you intend or know of another's intention to
purchase or sell that Security or Futures Contract on behalf of any Advisory
Client.
As noted previously in the description of the Preclearance Process, a
Compliance Officer may not preclear an Investment Transaction in a Security or a
Futures Contract at a time when there is a pending BUY OR SELL order in the same
Security or Futures Contract, or a Related Security, until that order is
executed or withdrawn.
These prohibitions do not apply to Investment Transactions in any
Futures Contracts that are exempt from preclearance regardless of transaction
size.
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GIFTS AND SERVICE AS A DIRECTOR
GIFTS
You MAY NOT accept any investment opportunity, gift, gratuity or other
thing of more than nominal value from any person or entity that does business,
or desires to do business, with PIMCO directly or on behalf of an Advisory
Client (a "Giver"). You MAY, however, accept gifts from a single Giver so long
as their aggregate annual value does not exceed $500, and you MAY attend
business meals, sporting events and other entertainment events at the expense of
a Giver (without regard to their aggregate annual value), so long as the expense
is reasonable and both you and the Giver are present.
SERVICE AS A DIRECTOR
If you are an Advisory Employee, you may not serve on the board of
directors or other governing board of a publicly traded entity, other than of a
Fund for which PIMCO is an advisor or subadvisor, unless you have received the
prior written approval of the Chief Executive Officer and the Chief Legal
Officer of PIMCO. Approval will not be given unless a determination is made that
your service on the board would be consistent with the interests of our Advisory
Clients. If you are permitted to serve on the board of a publicly traded entity,
you will be ISOLATED from those Advisory Employees who make investment decisions
with respect to the Securities of that entity, through a "Chinese Wall" or other
procedures.
COMPLIANCE
CERTIFICATIONS
Upon Receipt Of This Code
Upon commencement of your employment or the effective date of this
Code, whichever occurs later, you shall be required to acknowledge receipt of
your copy of this Code by completing and returning a copy of the form attached
hereto as Appendix IV. By that acknowledgment, you will also agree:
1. To read the Code, to make a reasonable effort to understand
its provisions, and to ask questions about those provisions
you find confusing or difficult to understand.
2. To comply with the Code, including its general principles, its
reporting requirements, its preclearance requirements, and its
provisions regarding gifts and service as a director.
3. To advise the members of your Immediate Family about the
existence of the Code, its applicability to their personal
trading activity, and your responsibility to assure that their
personal trading activity complies with the Code.
4. To cooperate fully with any investigation or inquiry by or on
behalf of a Compliance Officer to determine your compliance
with the provisions of the Code.
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In addition, your acknowledgment will recognize that any failure to comply with
the Code and to honor the commitments made by your acknowledgment may result in
disciplinary action, including dismissal.
Annual Certificate Of Compliance
You are required to certify on an annual basis, on a copy of the form
attached hereto as Appendix V, that you have complied with each provision of
your initial acknowledgment (see above). In particular, your annual
certification will require that you certify that you have read and that you
understand the Code, that you recognize you are subject to its provisions, that
you complied with the requirements of the Code during the year just ended and
that you have disclosed, reported, or caused to be reported all Investment
Transactions required to be disclosed or reported pursuant to the requirements
of the Code.
POST-TRADE MONITORING
The Compliance Officers will review the duplicate broker reports and
other information supplied to them concerning your personal Investment
Transactions so that they can detect and prevent potential violations of the
Code. The Compliance Officers will perform such investigation and make such
inquiries as they consider necessary to perform this function. You agree to
cooperate with any such investigation and to respond to any such inquiry. You
should expect that, as a matter of course, the Compliance Officers will make
inquiries regarding any personal Investment Transaction in a Security or Futures
Contract that occurs on the same day as a transaction in the same Security or
Futures Contract on behalf of an Advisory Client.
REMEDIAL ACTIONS
If you violate this Code, you are subject to remedial actions, which
may include, but are not limited to, disgorgement of profits, imposition of a
fine, censure, demotion, suspension or dismissal. As part of any sanction, you
may be required to reverse an Investment Transaction and to forfeit any profit
or to absorb any loss from the transaction.
The Compliance Committee shall have the ultimate authority to determine
whether you have violated the Code and, if so, the remedial actions it considers
appropriate. In making its determination, the Compliance Committee shall
consider, among other factors, the gravity of your violation, the frequency of
your violations, whether any violation caused harm or the potential of harm to
any Advisory Client, your efforts to cooperate with their investigation, and
your efforts to correct any conduct that led to a violation.
REPORTS TO DIRECTORS AND TRUSTEES
Reports Of Significant Remedial Actions
The General Counsel of PIMCO Advisors L.P. and the directors or
trustees of any affected Fund that is an Advisory Client will be informed on a
timely basis of each SIGNIFICANT REMEDIAL ACTION taken in response to a
violation of this Code. For this purpose, a significant remedial action will
include any action that has a significant financial effect on the violator.
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Reports of Material Changes To The Code
PIMCO will promptly advise the directors or trustees of any Fund that
is an Advisory Client if PIMCO makes any material change to this Code.
Annual Reports
PIMCO's management will furnish a written report annually to the
General Counsel of PIMCO Advisors L.P. and to the directors or trustees of each
Fund that is an Advisory Client. Each report, at a minimum, will:
1. Describe any significant issues arising under the Code, or
under procedures implemented by PIMCO to prevent violations of
the Code, since management's last report, including, but not
limited to, information about material violations of the Code
or those procedures and sanctions imposed in response to
material violations; and
2. Certify that PIMCO has adopted procedures reasonably necessary
to prevent Advisory Employees from violating the Code.
RECORDKEEPING
Beginning on the effective date of this Code, PIMCO will maintain, at
its principal place of business, the following records, which shall be available
to the Securities and Exchange Commission or any representative of the
Commission at any time and from time to time for reasonable periodic, special or
other examination:
1. PIMCO's Chief Compliance Officer shall maintain, in any easily
accessible place:
(a) a copy of PIMCO's current Code and of each
predecessor of that Code that was in effect at any
time within the previous five (5) years;
(b) a record of any violation of the Code, and of any
action taken as a result of the violation, for at
least five (5) years after the end of the fiscal year
in which the violation occurred;
(c) a copy of each report made by an Advisory Employee
pursuant to this Code, including any duplicate broker
report submitted on behalf of that Advisory Employee,
for at least two (2) years after the end of the
fiscal year in which that report was made or that
information was provided;
(d) a record of all persons, currently or within the past
five (5) years, who are or were required to make
reports pursuant to this Code or who are or were
responsible for reviewing such reports; and
(e) a copy of each report to the General Counsel of PIMCO
Advisors L.P. or to the directors or trustees of each
Fund that is an Advisory Client for at
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least two (2) years after the end of the fiscal year
in which that report was made.
2. PIMCO shall also maintain the following additional records:
(a) a copy of each report made by an Advisory Employee
pursuant to this Code, including any duplicate broker
report submitted on behalf of that Advisory Employee,
for at least five (5) years after the end of the
fiscal year in which that report was made or that
information was provided;
(b) a copy of each report to the General Counsel of PIMCO
Advisors L.P. or to the directors or trustees of each
Fund that is an Advisory Client for at least five (5)
years after the end of the fiscal year in which that
report was made; and
(c) a record of any decision, and the reasons supporting
the decision, to approve the acquisition by a
Portfolio Employee of a Beneficial Ownership interest
in any Security in an Initial Public Offering or in a
Private Placement for at least five (5) years after
the end of the fiscal year in which such approval was
granted.
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APPENDIX I
DEFINITIONS OF CAPITALIZED TERMS
The following definitions apply to the capitalized terms used in the
Code:
ADVISORY EMPLOYEE
The term "Advisory Employee" means: (1) a director, officer, general
partner or employee of PIMCO who, in connection with his or her regular
functions or duties, makes, participates in, or obtains information regarding
the purchase or sale of a Security or Futures Contract by PIMCO on behalf of an
Advisory Client, or whose functions relate to the making of any recommendations
with respect to such purchases or sales, or (2) or a natural person in a control
relationship to PIMCO, or an employee of any company in a control relationship
to PIMCO, who: (a) makes, participates in, or obtains information regarding the
purchase or sale of a Security by a Fund that is an Advisory Client, or whose
functions relate to the making of any recommendations with respect to such
purchases or sales, or (b) obtains information concerning recommendations to a
Fund with regard to the purchase or sale of a Security by the Fund.
BENEFICIAL OWNERSHIP
As a GENERAL MATTER, you are considered to have a "Beneficial
Ownership" interest in a Security or a Futures Contract if you have the
opportunity, directly or indirectly, to profit or share in any profit derived
from an Investment Transaction in that Security or Futures Contract. YOU ARE
PRESUMED TO HAVE A BENEFICIAL OWNERSHIP INTEREST IN ANY SECURITY OR FUTURES
CONTRACT HELD, INDIVIDUALLY OR JOINTLY, BY YOU OR A MEMBER OF YOUR IMMEDIATE
FAMILY (AS DEFINED BELOW). In addition, unless specifically excepted by a
Compliance Officer based on a showing that your interest in a Security or
Futures Contract is sufficiently attenuated to avoid the possibility of
conflict, you will be considered to have a Beneficial Ownership interest in a
Security or Futures Contract held by: (1) a JOINT ACCOUNT to which you are a
party, (2) a PARTNERSHIP in which you are a general partner, (3) a LIMITED
LIABILITY COMPANY in which you are a manager-member, or (4) a TRUST in which you
or a member of your Immediate Family has a vested interest.
As a TECHNICAL MATTER, the term "Beneficial Ownership" for purposes of
this Code shall be interpreted in the same manner as it would be under SEC Rule
16a-1(a)(2) (17 C.F.R. Section 240.16a-1(a)(2)) in determining whether a person
has a beneficial ownership interest in a Security for purposes of Section 16 of
the Securities Exchange Act of 1934 and the rules and regulations thereunder.
DESIGNATED EQUITY SECURITY
The term "Designated Equity Security" shall mean any equity Security,
option, warrant or other right to an equity Security designated as such by a
Compliance Officer, after receiving notification from a Portfolio Employee that
said Security is being considered for purchase or sale by PIMCO on behalf of one
of its Advisory Clients.
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EXEMPT SECURITY
The term "Exempt Security" shall mean any Security not included within
the definition of Covered Security in SEC Rule 17j-l(a)(4) (17 C.F.R. Section
17j-1(a)(4)), including:
1. Direct obligations of the Government of the United States;
2. Shares issued by open-end Funds; and
3. Bankers' acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments, including
repurchase agreements. For these purposes, a "high quality
short-term debt instrument" means any instrument having a
maturity at issuance of less than 366 days and that is rated
in one of the two highest rating categories by a Nationally
Recognized Statistical Rating Organization.
FIXED INCOME SECURITY
For purposes of this Code, the term "Fixed Income Security" shall mean
a fixed income Security issued by an agency or instrumentality of, or
unconditionally guaranteed by, the Government of the United States, a corporate
debt Security, a mortgage-backed or other asset-backed Security, a taxable fixed
income Security issued by a state or local government or a political subdivision
thereof, a structured note or loan participation, a foreign government debt
Security, or a debt Security of an international agency or a supranational
agency. For purposes of this Code, the term "Fixed Income Security" shall not be
interpreted to include a U.S. Government Security or any other Exempt Security
(as defined above) nor shall it be interpreted to include a Tax-Exempt Municipal
Bond (as defined below).
FUND
The term "Fund" means an investment company registered under the
Investment Company Act.
FUTURES CONTRACT
The term "Futures Contract" includes (a) a futures contract and an
option on a futures contract traded on a United States or foreign board of
trade, such as the Chicago Board of Trade, the Chicago Mercantile Exchange, the
London International Financial Futures Exchange or the New York Mercantile
Exchange (a "Publicly-Traded Futures Contract"), as well as (b) a forward
contract, a swap, a cap, a collar, a floor and an over-the-counter option (other
than an option on a foreign currency, an option on a basket of currencies, an
option on a Security or an option on an index of Securities) (a
"Privately-Traded Contract"). Consult with a Compliance Officer prior to
entering into a transaction in case of any doubt. For purposes of this
definition, a Publicly-Traded Futures Contract is defined by its expiration
month, i.e. a Publicly-Traded Futures Contract on a U.S. Treasury Bond that
expires in June is treated as a separate Publicly-Traded
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Futures Contract, when compared to a Publicly-Traded Futures Contract on a U.S.
Treasury Bond that expires in July.
IMMEDIATE FAMILY
The term "Immediate Family" means any of the following persons who
RESIDE IN YOUR HOUSEHOLD OR DEPEND ON YOU FOR BASIC LIVING SUPPORT: your spouse,
any child, stepchild, grandchild, parent, stepparent, grandparent, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including any adoptive relationships.
INITIAL PUBLIC OFFERING
The term "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933 (15 U.S.C. Section 77a), the issuer
of which, immediately before the registration, was not subject to the reporting
requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. Section 78m or Section 78o(d)).
INVESTMENT TRANSACTION
For purposes of this Code, the term "Investment Transaction" means any
transaction in a Security or Futures Contract in which you have, or by reason of
the transaction will acquire, a Beneficial Ownership interest, and includes,
among other things, the writing of an option to purchase or sell a Security.
PERSONAL ACCOUNT
The term "Personal Account" means the following accounts that hold or
are likely to hold a Security (as defined below) or a Futures Contract (as
defined above) in which you have a Beneficial Ownership interest: any account in
your individual name; any joint or tenant-in-common account in which you have an
interest or are a participant; any account for which you act as trustee,
executor, or custodian; any account over which you have investment discretion or
otherwise can exercise control (other than non-related clients' accounts over
which you have investment discretion), including the accounts of entities
controlled directly or indirectly by you; and any other account in which you
have a Beneficial Ownership interest (other than such accounts over which you
have no investment discretion and cannot otherwise exercise control).
PORTFOLIO EMPLOYEE
The term "Portfolio Employee" means: (1) a portfolio manager or any
employee of PIMCO (or of any company in a control relationship with PIMCO) who,
in connection with his or her regular functions or duties, makes or participates
in making recommendations regarding the purchase or sale of securities by a
Fund, or (2) any natural person who controls PIMCO and who obtains information
concerning recommendations made to a Fund that is an Advisory Client regarding
the purchase or sale of Securities by the Fund. For these purposes, "control"
has the same meaning as in Section 2(a)(9) of the Investment Advisers Act (15
U.S.C. Section 80a-2(a)(9)).
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PRIVATE PLACEMENT
The term "Private Placement" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) or
Section 4(6) (15 U.S.C. Section 77d(2) or Section 77d(6)) or pursuant to SEC
Rules 504, 505 or 506 (17 C.F.R. Sections 230.504, 230.505, or 230.506)
under the Securities Act of 1933.
QUALIFIED FOREIGN GOVERNMENT
The term "Qualified Foreign Government" means a national government of
a developed foreign country with outstanding Fixed Income Securities in excess
of fifty billion dollars. A list of Qualified Foreign Governments will be
prepared as of the last business day of each calendar quarter, will be available
from the Chief Compliance Officer, and will be effective for the following
calendar quarter.
RELATED ACCOUNT
The term "Related Account" means any account, other than a Personal
Account, that holds a Security or Futures Contract in which you have a
Beneficial Ownership interest.
RELATED SECURITY
The term "Related Security" shall mean any option to purchase or sell,
and any Security convertible into or exchangeable for, a Security that is or has
been held by PIMCO on behalf of one of its Advisory Clients or any Security that
is being or has been considered for purchase by PIMCO on behalf of one of its
Advisory Clients.
SECURITY
As a GENERAL MATTER, the term "Security" shall mean any stock, note,
bond, debenture or other evidence of indebtedness (including any loan
participation or assignment), limited partnership interest or investment
contract OTHER THAN AN EXEMPT SECURITY (as defined above). The term "Security"
includes an option on a Security, on an index of Securities, on a currency or on
a basket of currencies, including such an option traded on the Chicago Board of
Options Exchange or on the New York, American, Pacific or Philadelphia Stock
Exchanges, as well as such an option traded in the over-the-counter market. The
term "Security" shall not include a Futures Contract or a physical commodity
(such as foreign exchange or a precious metal).
As a TECHNICAL MATTER, the term "Security" shall have the meaning set
forth in Section 2(a)(36) of the Investment Company Act of 1940 (15 U.S.C.
Section 80a-2(a)(36)), which defines a Security to mean:
Any note, stock, treasury stock, bond debenture, evidence of
indebtedness, certificate of interest or participation in any profit-sharing
agreement, collateral-trust certificate, preorganization certificate of
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other
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mineral rights, any put, call, straddle, option, or privilege on any security
(including a certificate of deposit) or on any group or index of securities
(including any interest therein or based on the value thereof), or any put,
call, straddle, option, or privilege entered into on a national securities
exchange relating to foreign currency, or, in general, any interest or
instrument commonly known as a "security", or any certificate of interest or
instrument commonly known as a "security", or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of, warrant or right to subscribe to or purchase, any of the foregoing, except
that the term "Security" shall not include any Security that is an Exempt
Security (as defined above), a Futures Contract or a physical commodity (such as
foreign exchange or precious metal).
TAX-EXEMPT MUNICIPAL BOND
The term "Tax-Exempt Municipal Bond" shall mean any Fixed Income
Security exempt from federal income tax that is issued by a state or local
government or a political subdivision thereof.
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<PAGE> 1
Exhibit (P)(10)
CODE OF ETHICS
MERRILL LYNCH ASSET MANAGEMENT GROUP (MLAMG)
REGISTERED INVESTMENT COMPANIES
AND THEIR INVESTMENT ADVISERS
AND PRINCIPAL UNDERWRITER
SECTION 1 - BACKGROUND
This Code of Ethics is adopted under Rule 17j-1 under the Investment
Company Act of 1940 ("1940 Act") and Rule 204-2(a) under the Investment Advisers
Act of 1940 and has been approved by the Boards of Directors of each of the
MLAMG funds.(1) Except where noted, the Code applies to all MLAMG employees.
Section 17(j) under the Investment Company Act of 1940 makes it
unlawful for persons affiliated with investment companies, their principal
underwriters or their investment advisers to engage in fraudulent personal
securities transactions. Rule 17j-1 requires each Fund, investment adviser and
principal underwriter to adopt a Code of Ethics that contains provisions
reasonably necessary to prevent an employee from engaging in conduct prohibited
by the principles of the Rule. The Rule also requires that reasonable diligence
be used and procedures be instituted which are reasonably necessary to prevent
violations of the Code of Ethics.
On August 23, 1999, the SEC adopted amendments to Rule 17j-1 which
require greater board oversight of personal trading practices, more complete
reporting of employee securities trading and preclearance of employee purchases
of initial public offerings and private placements. The amendments require,
among other things, that MLAMG provide its fund boards annually a written report
that (i) describes issues that arose during the previous year under the Code,
including information about material code violations and sanctions imposed and
(ii) certifies to the board that MLAMG has adopted procedures reasonably
necessary to prevent access persons from violating the Code.
SECTION 2 - STATEMENT OF GENERAL FIDUCIARY PRINCIPLES
The Code of Ethics is based on the fundamental principle that MLAMG and
its employees must put client interests first. As an investment adviser, MLAMG
has fiduciary responsibilities to its clients, including the registered
investment companies
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(1) As applicable herein, MLAMG includes all AMG investment advisory affiliates
and the affiliated principal underwriter of investment companies registered
under the 1940 Act.
<PAGE> 2
(the "Funds") for which it serves as investment adviser. Among MLAMG's fiduciary
responsibilities is the responsibility to ensure that its employees conduct
their personal securities transactions in a manner which does not interfere or
appear to interfere with any Fund transactions or otherwise take unfair
advantage of their relationship to the Funds. All MLAMG employees must adhere to
this fundamental principle as well as comply with the specific provisions set
forth herein. It bears emphasis that technical compliance with these provisions
will not insulate from scrutiny transactions which show a pattern of compromise
or abuse of an employee's fiduciary responsibilities to the Funds. Accordingly,
all MLAMG employees must seek to avoid any actual or potential conflicts between
their personal interest and the interest of the Funds. In sum, all MLAMG
employees shall place the interest of the Funds before personal interests.
SECTION 3 - INSIDER TRADING POLICY
All MLAMG employees are subject to MLAMG's Insider Trading Policy,
which is considered an integral part of this Code of Ethics. MLAMG's Insider
Trading Policy, which is set forth in the MLAMG Code of Conduct, prohibits MLAMG
employees from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits MLAMG employees from communicating to third parties any material
nonpublic information about any security or issuer of securities. Additionally,
no MLAMG employee may use inside information about MLAMG activities or the
activities of any Merrill Lynch & Co., Inc. entity to benefit the Funds or to
gain personal benefit. Any violation of MLAMG's Insider Trading Policy may
result in sanctions, which could include termination of employment with MLAMG.
(See Section 10 -- Sanctions).
SECTION 4 - RESTRICTIONS RELATING TO SECURITIES TRANSACTIONS
A. GENERAL TRADING RESTRICTIONS FOR ALL EMPLOYEES
The following restrictions apply to all MLAMG employees:
1. ACCOUNTS. No employee, other than those employed by Mercury Asset
Management International Ltd. ("MAMI"), may engage in personal
securities transactions other than through an account maintained with
Merrill Lynch, Pierce, Fenner & Smith Incorporated or another Merrill
Lynch broker/dealer entity ("Merrill Lynch") unless written permission
is obtained from the Compliance Director. Similarly, no MAMI employee
may engage in personal securities transactions other than through an
account maintained with Merrill Lynch or The Bank of New York Europe
Limited ("BNYE") unless written permission is obtained from the
Compliance Director.
2. ACCOUNTS INCLUDE FAMILY MEMBERS AND OTHER ACCOUNTS. Accounts of
employees include the accounts of their spouses, dependent relatives,
trustee and
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custodial accounts or any other account in which the employee has a
financial interest or over which the employee has investment
discretion.
3. PRECLEARANCE. All employees must obtain approval from the Compliance
Director or preclearance delegatee prior to entering any securities
transaction (with the exception of exempted securities as listed in
Section 5) in all accounts. Approval of a transaction, once given, is
effective only for the business day on which approval was requested or
until the employee discovers that the information provided at the time
the transaction was approved is no longer accurate.
4. RESTRICTIONS ON PURCHASES. No employee may purchase any security which
at the time is being purchased, or to the employee's knowledge is being
considered for purchase, by any Fund managed by MLAMG. This
restriction, however, does not apply to personal trades of employees
which coincide with trades by any MLAMG index fund.
5. RESTRICTIONS ON SALES. No employee may sell any security which at the
time is actually being sold, or to the employee's knowledge is being
considered for sale, by any Fund managed by MLAMG. This restriction,
however, does not apply to personal trades of employees which coincide
with trades by any MLAMG index fund.
6. RESTRICTIONS ON RELATED SECURITIES. The restrictions and procedures
applicable to the transactions in securities by employees set forth in
this Code of Ethics shall similarly apply to securities that are issued
by the same issuer and whose value or return is related, in whole or in
part, to the value or return of the security purchased or sold or being
contemplated for purchase or sale during the relevant period by the
Fund. For example, options or warrants to purchase common stock, and
convertible debt and convertible preferred stock of a particular issuer
would be considered related to the underlying common stock of that
issuer for purposes of this policy. In sum, the related security would
be treated as if it were the underlying security for the purpose of the
pre-clearance procedures described herein.
7. PRIVATE PLACEMENTS. Employee purchases and sales of "private placement"
securities (including all private equity partnerships, hedge funds,
limited partnership or venture capital funds) must be precleared
directly with the Compliance Director or designee. No employee may
engage in any such transaction unless the Compliance Director or his
designee and the employee's senior manager have each previously
determined in writing that the contemplated investment does not involve
any potential for conflict with the investment activities of the Funds.
If, after receiving the required approval, an employee has any material
role in
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the subsequent consideration by any Fund of an investment in the same
or affiliated issuer, the employee must disclose his or her interest in
the private placement investment to the Compliance Director and the
employee's department head. The decision to purchase securities of the
issuer by a Fund must be independently reviewed and authorized by the
employee's department head.
8. INITIAL PUBLIC OFFERINGS. As set forth in Paragraph A.3. of this
Section 4, the purchase by an employee of securities offered in an
initial public offering must be precleared. As a matter of policy,
employees will not be allowed to participate in so-called "hot"
offerings as such term may be defined by Merrill Lynch or appropriate
regulators.
9. PROHIBITION ON SHORT-TERM PROFITS. Employees are prohibited from
profiting on any sale and subsequent purchase, or any purchase and
subsequent sale of the same (or equivalent) securities occurring within
60 calendars days ("short-term profit"). This holding period also
applies to all permitted options transactions; therefore, for example,
an employee may not purchase or write an option if the option will
expire in less than 60 days (unless the employee is buying or writing
an option on a security that the employee has held more than 60 days).
In determining short-term profits, all transactions within a 60-day
period in all accounts related to the employee shall be netted
regardless of an employee's intentions to do otherwise (e.g., tax or
other trading strategies). Should an employee fail to preclear a trade
that results in a short-term profit, the trade would be subject to
reversal with all costs and expenses related to the trade borne by the
employee, and the employee would be required to disgorge the profit.
Transactions not required to be precleared under Section 5 will not be
subject to this prohibition.
B. ADDITIONAL TRADING RESTRICTIONS FOR DECISION-MAKING EMPLOYEES
The following additional restrictions apply to decision-making employees
(i.e., employees who recommend or determine which securities transactions a Fund
undertakes). The Compliance Department will retain and keep current a list of
decision-making employees.
1. NOTIFICATION. A decision-making employee must notify the Compliance
Department or preclearance designee of any intended transactions in a
security for his or her own personal account which is owned or
contemplated for purchase or sale by a Fund for which the employee has
decision-making authority.
2. BLACKOUT PERIODS. A decision-making employee may not buy or sell a
security within 7 CALENDAR DAYS either before or after a purchase or
sale of the same or related security by a Fund or portfolio management
group for which the
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employee has decision-making authority. For example, if a Fund trades a
security on day 0, day 8 is the first day the manager, analyst or
portfolio management group member of that Fund may trade the security
for his or her own account.
3. ESTABLISHING POSITIONS COUNTER TO FUND POSITIONS. No decision-making
employee may establish a long position in a personal account in a
security if a Fund for which the employee is a decision-making employee
holds a put option on such security (aside from a put purchased for
hedging purposes where the fund holds the underlying security), has
written a call option on such security, or otherwise maintains a
position that would benefit from a decrease in the value of the
underlying security (e.g., a short sale other than a short sale
"against-the-box").
No decision-making employee may purchase a put option or write a call
option where a Fund for which such person has decision-making
responsibilities holds a long position in the underlying security.
No decision-making employee may short sell any security where a Fund
for which the employee has decision-making authority holds a long
position in the same security or where such Fund otherwise maintains a
position in respect of which the Fund would benefit from an increase in
the value of the security.
4. PURCHASING AN INVESTMENT FOR A FUND THAT IS A PERSONAL HOLDING. A
decision-making employee may not purchase an investment for a Fund that
is also a personal holding of the employee or any other account covered
by this Code of Ethics, or the value of which is materially linked to a
personal holding, unless the decision-making employee has obtained
prior approval from the employee's senior manager.
5. INDEX FUNDS. The restrictions of this Section 4.B. do not apply to
purchases and sales of securities by decision-making employees which
coincide with trades by any MLAMG index fund.
C. TRADING RESTRICTIONS FOR DISINTERESTED DIRECTORS OF THE MLAMG FUNDS
The following restrictions apply only to disinterested directors of the
MLAMG Funds (i.e., any director who is not an "interested person" of a MLAMG
fund within the meaning of Section 2(a)(10) of the 1940 Act):
1. RESTRICTIONS ON PURCHASES. No disinterested director may purchase any
security which, to the director's knowledge at the time, is being
purchased or is being considered for purchase by any Fund managed by
MLAMG.
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2. RESTRICTIONS ON SALES. No disinterested director may sell any security
which, to the director's knowledge at the time, is being sold or is
being considered for sale by any Fund managed by MLAMG.
3. RESTRICTIONS ON TRADES IN SECURITIES RELATED IN VALUE. The restrictions
applicable to the transactions in securities by disinterested directors
shall similarly apply to securities that are issued by the same issuer
and whose value or return is related, in whole or in part, to the value
or return of the security purchased or sold by the Fund (see Section
4.A.6.).
SECTION 5 - EXEMPTED TRANSACTIONS/SECURITIES
MLAMG has determined that the following securities transactions do not
present the opportunity for improper trading activities that Rule 17j-1 is
designed to prevent; therefore, the restrictions set forth in Section 4 of this
Code (including preclearance, prohibition on short-term profits and blackout
periods) shall not apply.
Exempted transactions/securities may not be executed/held in brokerage
accounts maintained outside of Merrill Lynch.
THE REPORTING REQUIREMENTS LISTED IN SECTION 6 OF THIS CODE, HOWEVER,
SHALL APPLY TO THE SECURITIES AND TRANSACTION TYPES SET FORTH IN PARAGRAPHS F-J
OF THIS SECTION.
A. Purchases or sales in an account over which the employee has no direct or
indirect influence or control (e.g., an account managed on a fully
discretionary basis by an investment adviser or trustee).
B. Purchases or sales of direct obligations of the U.S. Government.
C. Purchases or sales of open-end investment companies (including money
market funds), variable annuities and unit investment trusts. (However,
unit investment trusts traded on a stock exchange (e.g., MITS, SPDRS,
DIAMONDS, NASDAQ 100, etc.) must be precleared.)
D. Purchases or sales of bank certificates, bankers acceptances, commercial
paper and other high quality short-term debt instruments, including
repurchase agreements.
E. Merrill Lynch common stock which is purchased and sold within any Merrill
Lynch employee benefit plan and stock purchased and sold through similar
such employer-sponsored plans in which a spouse of a MLAMG employee may
participate.
F. Purchases or sales which are non-volitional on the part of the employee
(e.g., an in-the-money option that is automatically exercised by a broker;
a security that is
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called away as a result of an exercise of an option; or a security that is
sold by a broker, without employee consultation, to meet a margin call not
met by the employee).
G. Purchases which are made by reinvesting cash dividends pursuant to an
automatic dividend reinvestment plan.
H. Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extent such
rights were acquired from such issuer.
I. Purchases or sales of commodities, futures (including currency futures and
futures on broad-based indices), options on futures and options on
broad-based indices. (Currently, "broad-based indices" include only the
S&P 100, S&P 500, FTSE 100 and Nikkei 225.)
J. The receipt of a bona fide gift of securities. (Donations of securities,
however, require preclearance.)
SECTION 6 - REPORTING BY EMPLOYEES
The requirements of this Section 6 apply to all MLAMG employees. The
requirements will also apply to all transactions in the accounts of spouses,
dependent relatives and members of the same household, trustee and custodial
accounts or any other account in which the employee has a financial interest or
over which the employee has investment discretion. The requirements do not apply
to securities acquired for accounts over which the employee has no direct or
indirect control or influence. All employees whose accounts are maintained at
Merrill Lynch or BNYE are deemed to have automatically complied with the
requirements of this Section 6 B. and C. as to reporting executed transactions
and personal holdings. Transactions and holdings in such accounts are
automatically reported to the Compliance Department through automated systems.
Employees who have approved accounts outside of Merrill Lynch or BNYE
are deemed to have complied with the requirements of this Section 6 B. and C.
provided that the Compliance Department receives duplicate statements and
confirmations directly from their brokers.
Employees who effect reportable transactions outside of a brokerage
account (e.g., optional purchases or sales through an automatic investment
program directly with an issuer) will be deemed to have complied with this
requirement by preclearing transactions with the Compliance Department and by
reporting their holdings annually on the "Personal Securities Holdings" form, as
required by the Compliance Department.
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<PAGE> 8
A. INITIAL HOLDINGS REPORT. Each new MLAMG employee will be given a copy of
this Code of Ethics upon commencement of employment. All new employees
must disclose their personal securities holdings to the Compliance
Department within 10 days of commencement of employment with MLAMG.
(Similarly, securities holdings of all new related accounts must be
reported to the Compliance Department within 10 days of the date that such
account becomes related to the employee.) With respect to exempt
securities referred to in Section 5 which do not require
preclearance/reporting, employees must nonetheless initially report those
exempt securities defined in Section 5.F.-J. (This reporting requirement
does not apply to holdings that are the result of transactions in exempt
securities as defined in Section 5.A.-E.) Initial holdings reports must
identify the title, number of shares, and principal amount with respect to
each security holding. Within 10 days of commencement of employment, each
employee shall file an Acknowledgement stating that he or she has read and
understands the provisions of the Code.
B. RECORDS OF SECURITIES TRANSACTIONS. All employees must preclear each
securities transaction (with the exception of exempt transactions in
Section 5) with the Compliance Department or preclearance designee. At the
time of preclearance, the employee must provide a complete description of
the security and the nature of the transaction. As indicated above,
employees whose accounts are maintained at Merrill Lynch or BNYE or who
provide monthly statements directly from their brokers/dealers are deemed
to have automatically complied with the requirement to report executed
transactions.
C. ANNUAL HOLDINGS REPORT. All employees must submit an annual holdings
report reflecting holdings as of a date no more than 30 days before the
report is submitted. As indicated above, employees whose accounts are
maintained at Merrill Lynch or BNYE or who provide monthly statements
directly from their brokers/dealers are deemed to have automatically
complied with this requirement.
With respect to exempt securities referred to in Section 5 which do not
require preclearance/reporting, employees must nonetheless annually report
the holdings of those exempt securities that are defined in Section
5.F.-J. (This reporting requirement, however, does not apply to exempt
securities as defined in Section 5.A.-E.)
D. ANNUAL CERTIFICATION OF COMPLIANCE. All MLAMG employees must certify
annually to the Compliance Department that (1) they have read and
understand and agree to abide by this Code of Ethics; (2) they have
complied with all requirements of the Code of Ethics, except as otherwise
notified by the Compliance Department that they have not complied with
certain of such requirements; and (3) they have reported all transactions
required to be reported under the Code of Ethics.
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E. REVIEW OF TRANSACTIONS AND HOLDINGS REPORTS. All transactions reports and
holdings reports will be reviewed by appropriate management or compliance
personnel according to procedures established by the Compliance
Department.
SECTION 7 - REPORTING BY DISINTERESTED DIRECTORS OF MLAMG FUNDS
A disinterested director of a Fund need only report a transaction in a
security if the director, at the time of that transaction, knew or, in the
ordinary course of fulfilling the official duties of a director of such Fund,
should have known that, during the 15-day period immediately preceding the date
of the transaction by the director, the security was purchased or sold by the
Fund or was being considered for purchase or sale by the Fund. In reporting such
transactions, disinterested directors must provide: the date of the transaction,
a complete description of the security, number of shares, principal amount,
nature of the transaction, price, commission, and name of broker/dealer through
which the transaction was effected.
As indicated in Section 6.D. for MLAMG employees, disinterested
directors are similarly required to certify annually to the Compliance
Department that (1) they have read and understand and agree to abide by this
Code of Ethics; (2) they have complied with all requirements of the Code of
Ethics, except as otherwise reported to the Compliance Department that they have
not complied with certain of such requirements; and (3) they have reported all
transactions required to be reported under the Code of Ethics.
SECTION 8 - APPROVAL AND REVIEW BY BOARDS OF DIRECTORS
The Board of Directors of each MLAMG Fund, including a majority of
directors who are disinterested directors, must approve this Code of Ethics.
Additionally, any material changes to this Code must be approved by the Board of
Directors within six months after adoption of any material change. The Board of
Directors must base its approval of the Code and any material changes to the
Code on a determination that the Code contains provisions reasonably necessary
to prevent employees from engaging in any conduct prohibited by Rule 17j-1.
Prior to approving the Code or any material change to the Code, the Board of
Directors must receive a certification from the Fund, the Investment Adviser or
Principal Underwriter that it has adopted procedures reasonably necessary to
prevent employees from violating the Code of Ethics.
SECTION 9 - REVIEW OF MLAMG ANNUAL REPORT
At least annually, the Fund, the Investment Adviser and the Principal
Underwriter must furnish to the Fund's Board of Directors, and the Board of
Directors must consider, a written report that (1) describes any issues arising
under this Code of Ethics or procedures since the last report to the Board of
Directors, including, but not limited to, information about material violations
of the Code of Ethics or procedures
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and sanctions imposed in response to the material violations and (2) certifies
that the Fund, Investment Adviser and Principal Underwriter have adopted
procedures reasonably necessary to prevent employees from violating this Code of
Ethics.
SECTION 10 - SANCTIONS
Potential violations of the Code of Ethics must be brought to the
attention of the Compliance Director or his designee and are investigated. Upon
completion of the investigation, if necessary, the matter will be reviewed by
the Code of Ethics Review Committee and the employee's senior manager. The Code
of Ethics Review Committee will make a determination as to whether any sanction
should be imposed. Sanctions will include, but are not limited to, a letter of
caution or warning, reversal of a trade, fine or other monetary penalty,
disgorgement of a profit or absorption of costs associated with a trade,
suspension of personal trading privileges, suspension of employment (with or
without compensation), and termination of employment.
SECTION 11 - EXCEPTIONS
An exception to any of the policies, restrictions or requirements set
forth herein may be granted only upon a showing by the employee to the Code of
Ethics Review Committee that such employee would suffer extreme financial
hardship should an exception not be granted. Should the subject of the exception
request involve a transaction in a security, a change in the employee's
investment objectives, tax strategies, or special new investment opportunities
would not constitute acceptable reasons for a waiver.
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EXHIBIT (P)(11)
ROBERT FLEMING, INC.
CODE OF ETHICS
While affirming its confidence in the integrity and good faith of all
of its employees, officers and directors, Robert Fleming, Inc. ("RFI")
recognizes that certain of its personnel have or may have knowledge of present
or future portfolio transactions and, in certain instances, the power to
influence portfolio transactions made by or for investment companies registered
under the Investment Company Act of 1940, as amended (the "1940 Act") (each
registered investment company, a "Fund"), and that if such individuals engage in
personal transactions in Securities that are eligible for investment by a Fund,
these individuals could be in a position where their personal interests may
conflict with the interests of the Fund.
In view of the foregoing and of the provisions of Rule 17j-1 under the
1940 Act, RFI has determined to adopt this Code of Ethics ("Code") to specify
and prohibit certain types of transactions deemed to create actual conflicts of
interest, the potential for conflicts, or the appearance of conflicts, and to
establish reporting requirements and enforcement procedures. This Code applies
specifically to RFI's management of Funds and is intended to be generally
consistent with RFI's Investment Management Compliance Manual. Certain
provisions of this Code may, however, be more strict than the Manual. All
persons covered by this Code are expected to be familiar, and to comply, with
both the Code and the Manual in connection with the Funds. Any questions
concerning either document should be referred to the Compliance Officer.
I. STATEMENT OF GENERAL PRINCIPLES.
In recognition of the trust and confidence placed in RFI by Funds and
to give effect to RFI's belief that its operations should be directed to the
benefit of all of its investment advisory clients, including Funds, RFI hereby
adopts the following general principles to guide the actions of the officers and
employees who are employed in one of the following RFI departments: Fleming
Asset Management USA ("FAM USA") and Risk Arbitrage. These two departments are
collectively referred to in this Code as the Investment Management Group (or
"IMG"):
(1) The interests of RFI's investment advisory clients, including
Funds, are paramount. All of IMG's personnel must conduct
themselves and their operations to give maximum effect to this
tenet by assiduously placing the clients' interests before
their own.
(2) All personal transactions in Securities by IMG personnel must
be accomplished so as to avoid even the appearance of a
conflict of interest on the part of such personnel with the
interests of any investment advisory client.
(3) All IMG personnel must avoid actions or activities that allow
(or appear to allow) a person to profit or benefit from his or
her position with respect to a client, or that otherwise bring
into question the person's independence or judgment.
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(4) All IMG personnel must carefully avoid communicating
information concerning the investment decisions made for
clients, or the execution of such decisions, to officers and
employees of the RFI who work in departments other than IMG,
or to officers or employees of RFI's affiliates.
II. DEFINITIONS.
(1) "Access Person" shall mean any director, officer, or employee
of IMG who, in connection with the management of any Fund,
recommends investments to such Fund, participates in the
determination of which recommendations are to be made, or
whose principal functions or duties relate to such
determinations. The term "Access Person" also includes any
director, officer, or employee of IMG who, in connection with
his or her duties, obtains any information concerning
securities recommendations being made by IMG to a Fund. The
Compliance Officer and IMG Department Managers may determine
that additional persons, including persons not employed by
IMG, are to be treated as Access Persons based on their access
to information concerning IMG's investment recommendations to
a Fund.
(2) "Beneficial Ownership" of a Security is to be determined in
the same manner as it is for purposes of Section 16 of the
Securities Exchange Act of 1934. This means that a person
should generally consider himself or herself the beneficial
owner of any Securities in which he or she has a direct or
indirect pecuniary interest. In addition, a person should
consider himself or herself the beneficial owner of Securities
held by (i) his or her spouse or minor children, (ii) a
relative who shares his or her home, or (iii) other persons by
reason of any contract, arrangement, understanding, or
relationship that provides him or her with sole or shared
voting or investment power over the Securities held by such
person.
(3) The "Compliance Officer" is Larry A. Kimmel.
(4) "Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the 1940 Act. Section 2(a)(9) provides that
"control" means the power to exercise a controlling influence
over the management or policies of a company, unless such
power is solely the result of an official position with such
company. Ownership of 25% or more of a company's outstanding
voting securities is presumed to give the holder of such
Securities control over the company. This is a rebuttable
presumption, and it may be countered by the facts and
circumstances of a given situation.
(5) "Fund" means any investment company registered under the 1940
Act for which RFI acts as investment adviser or sub-adviser.
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(6) The "IMG Department Managers" are Jonathan Simon (FAM USA
Large Cap), Christopher Jones (FAM USA Small Cap), and Arthur
Levy (Arbitrage).
(7) "Investment Personnel" means all Access Persons who, with
respect to a Fund, occupy the position of portfolio manager
(or who serve on an investment committee that carries out the
investment management function), all Access Persons who
provide or supply information and/or advice to any such
manager (or committee), or who execute or help execute any
such manager's (or committee's) decisions, and all Access
Persons who, in connection with their regular functions,
obtain contemporaneous information regarding the purchase or
sale of a Security by or for a Fund.
(8) An Access Person's "Personal Account" means any Securities
Account in which such Access Person has direct or indirect
Beneficial Ownership.
(9) "Purchase or sale of a Security" includes, among other things,
the writing of an option to purchase or sell a Security.
(10) "Security" shall have the same meaning as that set forth in
Section 2(a)(36) of the 1940 Act, except that it shall not
include securities issued by the Government of the United
States or an agency thereof, bankers' acceptances, bank
certificates of deposit, commercial paper, and shares of
registered open-end mutual funds.
(11) A "Security held or to be acquired" by a Fund means any
Security which, within the most recent 15 days, (i) is or has
been held by a Fund or (ii) is being or has been considered by
the Adviser for purchase by a Fund.
(12) A Security is "being purchased or sold" by a Fund from the
time when a recommendation has been communicated to the person
who places the buy and sell orders for a Fund until the time
when such program has been fully completed or terminated.
III. PROHIBITED PURCHASES AND SALES OF SECURITIES.
(1) No Access Person shall, in connection with the purchase or
sale, directly or indirectly, by such person of a Security
held or to be acquired by any Fund:
(A) employ any device, scheme, or artifice to defraud
such Fund;
(B) make to such Fund any untrue statement of a material
fact or omit to state to such Fund a material fact
necessary in order to make the statements made, in
light of the circumstances under which they are made,
not misleading;
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(C) engage in any act, practice or course of business
that would operate as a fraud or deceit upon such
Fund; or
(D) engage in any manipulative practice with respect to
such Fund.
(2) Subject to Sections IV(3) and IV(4) of this Code, no Access
Person may purchase or sell, directly or indirectly, any
Security in which he or she had or by reason of such
transaction acquired any Beneficial Ownership, within 24 hours
(7 days, in the case of Investment Personnel) before or after
the time that the same (or a related) Security is being
purchased or sold by any Fund. Any profits realized on trades
within these proscribed periods will be disgorged.
(A) Exceptions to item #2 above are permitted under the
following circumstances:
1) If the Fund activity in a particular
Security is due to a Fund-directed inflow
and/or withdrawal of funds and there is no
change of weighting in the subject security
in the Fund.
2) If an Investment Personnel has liquidated a
particular security from the Fund, then the
Investment Personnel may also sell that
security on the next business day after the
liquidation has been completed.
3) If approved by the Compliance Officer or his
designee, an exception may be granted on a
case by case basis when no abuse is involved
and the equities of the situation strongly
support an exception to the rule.
(3) No Investment Personnel may acquire Securities that are
publicly traded in the United States as part of an initial
public offering. Securities traded publicly outside the United
States may be acquired in an initial public offering with
prior written approval as provided in Section IV(1). However,
such approval generally will not be granted if the Security in
question is eligible for investment by any Fund.
(4) No Access Person shall purchase a Security offered in a
private placement without the specific, prior written approval
as provided in Section IV(1). Such approval generally will not
be granted if the Security in question is eligible for
investment by any Fund.
(5) An Access Person is required to hold all investments purchased
for at least sixty (60) calendar days before selling. For
example, an Access Person who purchases an option may not
exercise the option until at least thirty calendar days have
passed. Profit due to any such short-term trades will be
disgorged. Exceptions to this policy are permitted only with
the approval of the Compliance Officer and the individual's
Department Manager, and then only in the case of emergency or
extraordinary circumstances.
4
<PAGE> 5
IV. PRE-CLEARANCE OF TRANSACTIONS.
(1) Except as provided in Section IV(3), each Access Person must
obtain approval for each proposed transaction in advance. Each
Access Person should seek approval first from the person
listed below as his or her primary supervisor. If that person
is unavailable, the Access Person then must obtain approval
from one of the supervisor's alternates. No transaction in
Securities shall be effected without the prior written
approval of the primary or alternate supervisor. In
determining whether to grant such clearance, the primary and
alternate supervisors shall refer to Section IV(4), below.
<TABLE>
<CAPTION>
Primary Supervisor Alternate Supervisors Access Persons
- ------------------ --------------------- --------------
<S> <C> <C>
Jonathan Simon Christopher Jones FAM USA Large Cap managers and analysts
Arthur Levy
Christopher Jones Jonathan Simon FAM USA Small Cap managers, analysts and
Arthur Levy marketing staff
Arthur Levy Larry Kimmel All other IMG staff, including Jonathan
Simon and Christopher Jones
Jonathan Simon or Larry Kimmel Arthur Levy
Christopher Jones
</TABLE>
(2) In determining whether to grant approval for the purchase of a
Security offered in a private placement, the primary or
alternate supervisor shall take into account, among other
factors, whether the investment opportunity should be reserved
for a Fund or another investment advisory client, and whether
the opportunity is being offered to the Access Person by
virtue of his or her position with RFI.
(3) The pre-clearance requirements of Section IV(1) shall not
apply to the following transactions:
(A) Purchases or sales over which the Access Person has
no direct or indirect influence or control.
(B) Purchases or sales that are non-volitional on the
part of the Access Person, including purchases or
sales upon exercise of puts or calls written by the
Access Person and sales from a margin account
pursuant to a bona fide margin call.
(C) Purchases that are part of an automatic dividend
reinvestment plan.
5
<PAGE> 6
(D) Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of
its Securities, to the extent such rights were
acquired from such issuer, and sales of such rights
so acquired.
(4) The following transactions shall be entitled to clearance by
the Compliance Officer:
(A) Transactions which appear upon reasonable inquiry and
investigation to present no reasonable likelihood of
harm to any investment advisory client, including any
Fund, and which are otherwise in accordance with Rule
l7j-l. Such transactions would normally include
purchases or sales of up to 1,000 shares of a
Security that is being considered for purchase or
sale by a Fund or other client (but not then being
purchased or sold) if the issuer has a market
capitalization of over $1 billion.
(B) Purchases or sales of Securities that are not
eligible for purchase or sale by any investment
advisory client, including any Fund, as determined by
reference to the 1940 Act, other applicable laws,
rules or regulations, the investment objectives and
policies and investment restrictions of the Fund or
other client and any undertakings made to regulatory
authorities.
(C) Transactions that the officers of the IMG, as a group
and after consideration of all the facts and
circumstances, determine to be in accordance with
Section III and to present no reasonable likelihood
of harm to a Fund or other client.
V. ADDITIONAL RESTRICTIONS AND REQUIREMENTS.
(1) No Access Person shall accept or receive any gift of more than
$100 in value from any person or entity that does business
with or on behalf of the Adviser or a Fund. All Access Persons
must record all gifts received or given on their respective
Departmental log.
(2) No Investment Personnel shall accept a position as a director,
trustee or general partner of a publicly-traded company or
partnership unless the acceptance of such position has been
approved by the Compliance Officer and Department Managers
consistent with the interests of the Firm and all clients,
including Funds.
VI. REPORTING OBLIGATIONS.
(1) The Compliance Officer shall create and thereafter maintain a
list of all Access Persons.
6
<PAGE> 7
(2) Each Access Person must maintain his or her personal
Securities accounts at Bear Stearns (for accounts in the
United States) or an affiliate of RFI (for accounts outside
the United States). Exceptions to this policy may be granted
by the Compliance Officer for special situations (i.e. managed
account). Each Access Person must direct each such brokerage
firm or other financial institution to promptly send duplicate
copies of each account statement and brokerage confirmation to
the Compliance Officer.
(3) Every newly hired Access Person must provide to the Compliance
Officer a complete listing of all Securities owned by such
person within ten (10) days of beginning their employment.
(4) Every Access Person shall report to the Compliance Officer the
name of any publicly-traded company (or any company
anticipating a public offering of its equity Securities) and
the total number of its shares beneficially owned by him or
her if such total ownership is more than 5% of the company's
outstanding shares.
(5) Every Access Person who owns Securities acquired in a private
placement shall disclose such ownership to the Compliance
Officer if such person is involved in any subsequent
consideration of an investment in the issuer of those
Securities by a Fund. The Adviser's decision to recommend the
purchase of such issuer's Securities to any Fund will be
subject to independent review by Investment Personnel with no
personal interest in the issuer.
(6) Every Access Person shall certify annually that he or she:
(A) has read and understands this Code;
(B) recognizes that he or she is subject to the Code;
(C) has complied with the Code; and
(D) has disclosed and reported all personal Securities
transactions required to be disclosed or reported.
VII. REVIEW AND ENFORCEMENT.
(1) The Compliance Officer shall compare all confirmations,
account statements and other reports received with a list of
Securities being considered for purchase or sale by the
Adviser at the time to determine whether a violation of this
Code may have occurred. Before making any determination that a
violation has been committed by any person, the Compliance
Officer shall give such person an opportunity to supply
additional explanatory material.
7
<PAGE> 8
(2) If the Compliance Officer determines that a violation of this
Code may have occurred, he shall submit his written
determination, together with any confirmations, account
statements or other reports and any additional explanatory
material provided by the Access Person, to the Access Person's
primary supervisor, as indicated at Section IV(1), who shall
make an independent determination as to whether a violation
has occurred. If the primary supervisor is unavailable or is
unable to review the transaction, the alternate supervisor
shall act in all respects in the manner prescribed herein for
the primary supervisor.
(3) If the primary or alternate supervisor finds that a violation
has occurred, the supervisor shall impose upon the individual
such sanctions as he deems appropriate.
VIII. RECORDS.
RFI shall maintain records in the manner and to the extent set forth
below, which records shall be available for examination by representatives of
the Securities and Exchange Commission.
(1) A copy of this Code and any other code which is, or at any
time within the past five years has been, in effect shall be
preserved in an easily accessible place;
(2) A record of any violation of this Code, and of any action
taken as a result of such violation, shall be preserved in an
easily accessible place for a period of not less than five
years following the end of the fiscal year in which the
violation occurs;
(3) A copy of each confirmation, account statement, or other
report made by an Access Person pursuant to this Code shall be
preserved for a period of not less than five years from the
end of the fiscal year in which it is made, the first two
years in an easily accessible place; and
(4) A list of all persons who are, or within the past five years
have been, required to make reports pursuant to this Code
shall be maintained in an easily accessible place.
IX. MISCELLANEOUS.
(1) All confirmations and reports of Securities transactions, and
any other information filed with RFI pursuant to this Code,
shall be treated as confidential.
(2) RFI may from time to time adopt such interpretations of this
Code as it deems appropriate.
8
<PAGE> 9
(3) The Compliance Officer shall report to the Department Managers
at least annually as to the operation of this Code and shall
address in any such report the need (if any) for further
changes or modifications to this Code. The Compliance Officer,
or the Department Managers responsible for such Funds, shall
report to any Fund's Board of Directors or Trustees on the
operation of this Code as requested.
Amended this 27th day
of July, 1999.
9
<PAGE> 1
EXHIBIT (P)(12)
Oak Associates, ltd.
POLICIES AND GUIDELINES PROHIBITING THE MISUSE OF MATERIAL, NON
PUBLIC INFORMATION AND PERSONAL SECURITIES TRANSACTIONS UNDER
RULE 204-2(a) OF THE IN VESTMENT ADVISORS ACT OF 1940.
INTRODUCTION
The securities laws of the United States impose important restrictions
on Oak Associates, ltd. and its employees with respect to sales, purchases,
exercises of options or other similar transactions involving securities. This
document reviews these restrictions and policies concerning securities
transactions by Oak Associates, ltd. and its employees. It is important to note
that the securities laws are both far-reaching and frequently changing.
Therefore, while the following review provides a useful overview, it is not a
comprehensive attempt to deal with all potential restrictions. In general, it
will help you identify potential problems and be aware of areas where caution is
warranted and advice should be sought.
This document also establishes specific procedures, designed to ensure
compliance with the securities laws, to be followed by Oak Associates, ltd. and
its employees engaging in transactions in securities.
Investing in securities held and traded for a client's managed account
is not necessarily to be avoided. At the same time, Oak Associates, ltd. expects
that if you own such securities it is only for investment over the long term,
not for short term, in-and-out trading.
If you encounter a problem or have any doubts about your transactions
in securities, you should consult with the compliance officer, so that the
proper advice can be given and the proper actions taken to ensure that both you
and Oak Associates, ltd. carry out the letter and spirit of the law, avoiding
any appearance of impropriety.
GENERAL RESTRICTIONS AND POLICIES
Insider Trading
General Prohibition. It is unlawful for an "insider" to trade in
securities on the basis of material information known to that individual but not
to the public, or to transmit such information to any other person who may trade
on the basis of such information. Violation of this prohibition is a serious
federal offense and the penalties can include a prison term and disgorgement of
any profits. The fact that the insider did not intend to defraud anyone may not
insulate the insider from liability. It is Oak Associates, ltd. policy that it
and each employee comply with this prohibition.
1
<PAGE> 2
Who is an Insider? An insider is any person who has access to material
inside information. Insiders include all individuals who have access to such
information, including, among others, legal and financial personnel,
secretaries, administrative assistants, file personnel and any person (a
"tippee") to whom they relate such insider information. The immediate families
of all such persons may also be deemed to be insiders.
What is Material Information? It is only trading on the basis of
"material inside information" that is forbidden. This term is subject to many
interpretations, but for your purposes, you should assume that it includes any
information which a reasonable investor is likely to consider important in
determining whether to buy, sell or hold securities. Moreover, the fact that an
insider (or a tippee of an insider) has traded on the basis of particular
information which has not been made public may itself be regarded as evidence
that the information is material. This nonpublic information often concerns the
earnings and/or financial condition of a company, its strategic plans, takeover
matters and other important imminent events or matters that could effect the
market price of the company's securities.
Whenever you have any doubt as to the materiality of any insider
information known to you, you should consult with the compliance officer before
trading in such securities. The process of consultation and clearance in advance
should serve to avoid potential liability or other serious consequences (i.e.,
exposure to costly investigations or litigation).
When is Information Deemed Public? Securities transactions by insiders
in possession of material information, provided they are otherwise consistent
with the procedures set forth in this policy, should be made only when the
insider is certain that such information has been sufficiently publicized by
official announcements. Information is not public merely because it is reflected
by rumors or other unofficial statements in the marketplace. Moreover, the
insider may not attempt to "beat the market" by trading simultaneously with, or
shortly after, the official release of such information. Depending on the
circumstances then, information normally should not be regarded as public until
at least 24 hours after it has been disseminated through a national news medium.
Speculation Discouraged; Sale of Option Stock
To promote compliance with federal securities laws and the policies of
Oak Associates, ltd. employees should view all their transactions in securities
as involving investment decisions and not speculation. In-and-out trading or
holding of securities for brief periods is therefore discouraged.
COMPLIANCE PROCEDURES
Compliance with federal securities laws is a high priority for Oak
Associates, ltd. and, in order to ensure that Oak Associates, ltd. does comply
with the letter and spirit of the law, a number of specific procedures have been
established. These procedures, which are outlined
2
<PAGE> 3
below, are to be followed by Oak Associates, ltd. and each employee of Oak
Associates, ltd.
Oak Associates, ltd. and each employee shall not purchase or
sell any securities when the purchaser or seller knows of
material nonpublic information about the company.
2. Assuming that the purchaser or seller knows of no material
nonpublic information about the company, if the transactions
in the company's securities are more than $10,000 in a
12-month period, the following procedures must be followed
prior to engaging in the purchase or sale of any publicly
traded security:
1. The employee should contact the compliance officer
who will ascertain whether the employee or Oak
Associates, ltd. possesses any material nonpublic
information about the company.
2. Upon completing these procedures, the compliance
officer will advise the requesting employee whether
or not the proposed trade may proceed.
3. If the response is negative, the requesting person
may not proceed with the proposed transaction. If the
response is affirmative, the requesting person may
complete the proposed transaction on the same day
approval has been given. If the transaction is not
completed within this period, the procedure must be
repeated.
3. In accordance with Rule 204-2 (a) (12) of the Investment
Advisers Act of 1940, the compliance officer shall keep
"Personal Securities Transactions Records" for every
transaction in a security in which all access persons has, or
by such transaction acquires, direct or indirectly, beneficial
ownership of a security. These Personal Securities
Transactions Records shall state:
(i) the title and the amount of the security
involved;
(ii) the date and nature of the transaction
(i.e.,purchase, sale or other acquisition or
disposition);
(iii) the price at which the transaction was
effected; and
(iv) the name of the broker, dealer or bank with
or through whom the transaction was
effected.
Each such transaction shall be recorded not later than 10 days after
the end of the quarter in which the transaction was effected. A copy of each
Personal Securities Transactions Record for all access persons shall be
maintained in a central file and reviewed on a monthly basis by the
3
<PAGE> 4
compliance officer for compliance with these internal policies and federal
securities laws.
CONCLUSION
This policy has been developed to provide Oak Associates, ltd. and its
employees with an overview of federal securities laws and a mechanism to ensure
compliance. The processes of consultation and advance clearance may be
time-consuming, and at times seem burdensome, but they should serve to avoid
embarrassment, as well as potentially serious liability. If you have any
questions concerning federal securities laws or Oak Associates', ltd. policies
and procedures regarding these laws, you should consult the firm's compliance
officer.
4
<PAGE> 5
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees of Oak
Advised or Subadvised investment company accounts in accordance with Rule 17j-1
(b) under the Investment Company Act of 1940 (the Act) and in accordance with
the following general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF
SHAREHOLDERS FIRST.
Investment company personnel should scrupulously
avoid serving their own personal interests ahead of
shareholders' interests in any decision relating to their
personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES
TRANSACTIONS BE CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH
A MANNER AS TO AVOID ANY ACTUAL OR POTENTIAL CONFLICT OF
INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S POSITION OF TRUST AND
RESPONSIBILITY.
Investment company personnel must not only seek to
achieve technical compliance with the Code but should strive
to abide by its spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY
PERSONNEL SHOULD NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR
POSITIONS.
Investment company personnel must avoid any situation
that might compromise, or call into question, their exercise
of fully independent judgment in the interest of shareholders,
including, but not limited to the receipt of unusual
investment opportunities, perquisites, or gifts of more than a
de minimis value from persons doing or seeking business with
the Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to purchases or sales of securities held or
to be acquired by investment companies, if effected by associated persons of
such companies.
The purpose of the Code is to establish procedures consistent with the
Act and Rule 17j-1 to give effect to the following general prohibitions as set
forth in rule 17j-1:
(a) It shall be unlawful for any affiliated person of or
principal underwriter for a registered investment company, or
any affiliated person of an investment adviser of or principal
underwriter for a registered investment company in connection
with the purchase or sale, directly or indirectly, by such
person of a security held or to be acquired, as defined in
this section, by such registered investment company.
(1) To employ any device, scheme or artifice to
defraud such registered investment company;
<PAGE> 6
(2) To make to such registered investment
company any untrue statement of a material fact or
omit to state to such registered investment company a
material fact necessary in order to make the
statements made, in light of the circumstances under
which they are made, not misleading;
(3) To engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any such registered investment
company; or
(4) To engage in any manipulative practice with
respect to such registered investment company.
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer,
general partner or Advisory Person (including any Investment
Personnel, as that term is defined herein) of the Fund, the
Manager or the Adviser/Subadviser; provided, however, that
"Access Person" shall not include any director/trustee,
officer, general partner or Advisory Person of Pacific
Investment Management Company (PIMCO) or Columbus Circle
investors (Columbus Circle) who shall be subject to the
provisions of the code of ethics adopted by PIMCO and Columbus
Circle, respectively.
(b) "Adviser/Subadviser" means the Adviser or Subadviser
of the Fund or both as the context may require.
(c) "Advisory Person" means:
(i) any employee of the Fund, Manager or
Adviser/Subadviser (or of any company in a control
relationship to the Fund, Manager or
Adviser/Subadviser) who, in connection with his or
her regular functions or duties, makes, participates
in, or obtains information regarding the purchase or
sale of a security by the Fund, or whose functions
relate to the making of any recommendations with
respect to such purchases or sales; and
(ii) any natural person in a control relationship
to the Fund who obtains information concerning
recommendations made to the Fund with regard to the
purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the
same manner as it would be in determining which security
holdings of a person are subject to the reporting and
short-swing profit provisions of Section 16 of the Securities
Exchange Act of 1934 and the rules and regulations thereunder,
except that the determination of direct or indirect beneficial
ownership will apply to all securities which an Access Person
has or acquires (Exhibit A).
<PAGE> 7
(e) "Complex" means the group of registered investment
companies for which Prudential Mutual Fund Management, Inc.
serves as Manager; provided, however, that with respect to
Access Persons of the Subadviser (including any unit or
subdivision thereof), "Complex" means the group of registered
investment companies in the Complex advised by the Subadviser,
or unit, or subdivision thereof.
(f) "Compliance Officer" means the person designated by
the Manager or the Adviser/Subadviser (including his or her
designee) as having responsibility for compliance with the
requirements of the Code.
(g) "Control" will have the same meaning as that set
forth in Section 2 (a) (9) of the Act.
(h) "Disinterested Director/Trustee" means a
Director/Trustee of the Fund who is not an "interested person"
of the Fund within the meaning of Section 2 (a) (19) of the
Act.
(i) "Investment Personnel" means Portfolio Managers and
other Advisory Persons who provide investment information
and/or advice to the Portfolio Manager(s) and/or help execute
the Portfolio Manager's (s') investment decisions, including
securities analysts and traders.
(j) "Manager" means Prudential Mutual Fund Management,
Inc.
(k) "Portfolio Manager" means any Advisory Person who has
the direct responsibility and authority to make investment
decisions for the Fund.
(l) "Purchase or sale of a Security" includes, inter
alia, the writing of an option to purchase or sell a security.
(m) "Security" will have the meaning set forth in Section
2 (a) (36) of the Act, except that it will not include shares
of registered open-end investment companies, securities issued
by the United States Government, short-term debt securities
which are "government securities" within the meaning of
Section 2 (a) (16) of the Act, bankers' acceptances, bank
certificates of deposit, commercial paper and such other money
market instruments as are designated by the Compliance
Officer. For purposes of the Code, an "equivalent Security" is
one that has a substantial economic relationship to another
Security. This would include, among other things,
(1) a Security that is convertible into another
Security,
(2) with respect to an equity Security, a
Security having the same issuer (including a private
issue by the same issuer) and any derivative, option
or warrant relating to that Security and
(3) with respect to a fixed-income Security, a
Security having the same issuer, maturity, coupon and
rating.
<PAGE> 8
3. APPLICABILITY
The prohibitions described below will only apply to a transaction in a
Security in which the designated Access Person has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in
an initial public offering.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a
private placement without express prior approval.
(i) Prior approval must be obtained in accordance with
the preclearance procedure described in Section 6 below. Such
approval will take into account, among other factors, whether
the investment opportunity should be reserved for the Fund and
its shareholders and whether the opportunity is being offered
to the Investment Personnel by virtue of his or her position
with the Fund.
(ii) Investment Personnel who have been authorized to
acquire Securities in a private placement must disclose that
investment to the chief investment officer (including his or
her designee) of the Adviser/Subadviser (or of any unit or
subdivision thereof) or the Compliance Officer when they play
a part in any subsequent consideration of an investment by the
Fund in the issuer. In such circumstances, the Fund's decision
to purchase Securities of the issuer will be subject to an
independent review by appropriate personnel with no personal
interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons
are prohibited from executing a Securities transaction on a
day during which any investment company in the Complex has a
pending "buy" or "sell" order in the same or an equivalent
Security and until such time as that order is executed or
withdrawn; provided, however, that this prohibition shall not
apply to Disinterested Directors/Trustees except if they have
actual knowledge of trading by any fund in the Complex and, in
any event, only with respect to those funds on whose boards
they sit.
This prohibition shall also not apply to Access
Persons of the Manager who do not, in the ordinary course of
fulfilling his or her official duties, have access to
information regarding the purchase and sale of Securities for
the Fund; provided that Securities investments effected by
such Access Persons during the Proscribed period are not
effected with knowledge of the purchase or sale of the same or
equivalent Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a
decision to purchase or sell a Security
<PAGE> 9
has been made and communicated.
(ii) Portfolio Managers are prohibited from buying or
selling a Security within seven calendar days before or after
the Fund trades in the same or an equivalent Security.
(iii) If trades are effected during the periods proscribed
in (i) or (ii) above, except as provided in (iv) below with
respect to (i) above, any profits realized on such trades will
be immediately required to be disgorged to the Fund.
(iv) A transaction by Access Persons (other than
Investment Personnel) inadvertently effected during the period
proscribed in (i) above will not be considered a violation of
the Code an disgorgement will not be required so long as the
transaction was effected in accordance with the preclearance
procedures described in Section 6 below and without prior
knowledge of trading by any fund in the Complex in the same or
an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel
are prohibited from profiting from a purchase and sale, or
sale and purchase, of the same or an equivalent Security
within any 60 Calendar day period. If trades are effected
during the proscribed period, any profits realized on such
trades will be immediately required to be disgorged to the
Fund.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below
with respect to subitems (b), (e), (f), (g), (h) and (i) hereof, the
prohibitions of Sections 4 (C) and 4 (D) will not apply to the
following:
(a) Purchases or sales of Securities effected in
any account over which the Access Person has no
direct or indirect influence or control or in any
account of the Access Person which is managed on a
discretionary basis by a person other than such
Access Person and with respect to which such Access
Person does not in fact influence or control such
transactions.
(b) Purchases or sales of Securities (or their
equivalents) which are not eligible for purchase or
sale by any fund in the Complex.
(c) Purchases or sales of Securities which are
non-volitional on the part of either the Access
Person or any fund in the Complex.
(d) Purchases of Securities which are part of an
automatic dividend reinvestment plan.
(e) Purchases effected upon the exercise of
rights issued by an issuer pro rata to all holders of
a class of its Securities, to the extent such rights
were acquired from such
<PAGE> 10
issuer, and sales of such rights so acquired.
(f) Any equity Securities transaction, or series
of related transactions effected over a 30 calendar
day period, involving 500 shares or less in the
aggregate, if:
(i) the Access person has no prior
knowledge of activity in such security by
any fund in the Complex and
(ii) the issuer is listed on The New
York Stock Exchange or has a market
capitalization (outstanding shares
multiplied by the current price per share)
greater than $1 billion (or a corresponding
market capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or
series of related transactions effected over a 30
calendar day period, involving 100 units ($100,000
principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions
in such Securities by any fund in the Complex.
(h) Any transaction in index options effected on
a broad-based index if the Access Person has no prior
knowledge of activity in such index by any fund in
the Complex.
(i) Purchases or sales of Securities which
receive the prior approval of the Compliance Officer
(such person having no personal interest in such
purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales
are not likely to have any economic impact on any
fund in the Complex or on its ability to purchase or
sell Securities of the same class or other Securities
of the same issuer.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c) and (d) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed by the close of
business on the day preclearance is granted; provided, however, that approved
orders for Securities traded in foreign markets may be executed within two (2)
business days from the date preclearance is granted. If any order is not timely
executed, a request for preclearance must be resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary
of the Fund or the Compliance Officer the information described in
Section 7 (b) hereof with respect to transactions in any Security in
which such Disinterested Director/Trustee has, or by reason of such
transaction acquires, any direct or indirect Beneficial Ownership in
the Security only if such Disinterested Director/Trustee, at the time
of that transaction knew or, in the ordinary course of fulfilling his
or her official duties as a
<PAGE> 11
Director/Trustee of the Fund, should have known that, during the 15-day
period immediately preceding or subsequent to the date of the
transaction in a Security by such Director/Trustee, such Security is or
was purchased or sold by the Fund or was being considered for purchase
or sale by the Fund, the Manager or Adviser/Subadviser; provided,
however, that a Disinterested Director/Trustee is not required to make
a report with respect to transactions effected in any account over
which such Director/Trustee does not have any direct or indirect
influence or control or in any account of the Disinterested
Director/Trustee which is managed on a discretionary basis by a person
other than such Director/Trustee and with respect to which such
Director/Trustee does not in fact influence or control such
transactions. The Secretary of the Fund or the Compliance Officer shall
maintain such reports and such other records to the extent required by
Rule 17j-1 under the Act.
(b) Every report required by Section 7 (a) hereof shall be made
not later than ten days after the end of the calendar quarter in which
the transaction to which the report relates was effected, and shall
contain the following information:
(i) The date of the transaction, the title and the number
of shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition);
(iii) The price at which the transaction was effected; and
(iv) The name of the broker, dealer or bank with or
through whom the transaction was effected.
(c) Any such report may contain a statement that the report shall
not be construed as an admission by the person making such report that
he or she has any direct or indirect Beneficial Ownership in the
Security to which the report relates.
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Compliance with this
Code requirement will be deemed to satisfy the reporting requirements imposed on
Access Persons under Rule 17j-1(c).
The Compliance Officer will periodically review the personal investment
activity of all Access Persons (including Disinterested Directors/Trustees with
respect to Securities transactions reported pursuant to Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
<PAGE> 12
Upon commencement of employment and thereafter on an annual basis,
Access Persons (other than Disinterested Directors/Trustees) must disclose all
personal Securities holdings.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated form those making
investment decisions affecting transactions in Securities issued by any publicly
traded company on whose board such Investment Personnel serves as a director
through the use of "Chinese Wall" or other procedures designed to address the
potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to the
requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) summarizes existing procedures concerning personal investing
and any changes in the procedures made during the preceding year;
(ii) identifies any violations requiring significant remedial
action during the preceding year; and
<PAGE> 13
(iii) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving
industry practices, or developments in applicable laws and regulations.
<PAGE> 14
EXPLANATORY NOTES TO CODE
1. The information on personal employee Securities transactions
received and recorded by the Manager and by the Adviser/Subadviser, in
conformity with Rule 204-2(a) (12) under the Investment Advisers Act of
1940, under their respective current policy statements regarding
personal securities transactions of employees will be deemed to satisfy
the reporting requirements imposed on Access Persons of the Manager and
of the Adviser/Subadviser under Rule 17j-1(c).
2. No comparable code requirements have been imposed upon
Prudential Mutual Fund Services, Inc., the Fund's transfer agent, or
Prudential Securities Incorporated, which acts as the Fund's
distributor, or those of their directors or officers who are not
Directors/Trustees or Officers of the Fund since they are deemed not to
constitute Access Persons or Advisory Persons as defined in paragraphs
(e) (1) and (2) of Rule 17j-1.
Dated: April 1, 1995, as amended on June 1, 1995.
<PAGE> 15
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit.
Whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
<PAGE> 16
OAK ASSOCIATES, LTD.
SUMMARY OF CODE OF ETHICS
PERSONAL ACCOUNT TRADING AND INSIDER INFORMATION
This is a summary of Oak Associates', ltd. policy regarding personal account
trading and the use of insider information. Since the actual policies are both
lengthy and complex, the major points are summarized for you below.
If you have a brokerage account and make personal securities transactions, you
are required to follow these rules under the Investment Company and Investment
Advisor Acts of 1940. The only non-trading related issue in the Code relates to
the receipt of gifts from those with which Oak Associates, ltd. do brokerage
business. You are not permitted to accept gifts of greater than $100. This does
not apply to occasional business dinners and entertainment events (sports etc.).
If you have any questions about these guidelines, don't hesitate to ask Geoffrey
Moore, Sandra Noll, Tom Hipp or Doug MacKay.
DEFINITIONS
Access persons include all employees. Please do not discuss any investment
company account transactions with outsiders of Oak Associates, ltd., including
brokers and clients. Such information, if timely, could cause such outsiders to
become access persons subject to the Code.
Investment personnel would include Jim Oelschlager, Donna Barton, Margaret
Ballinger, Tom Hipp, Jeff Travis, Brandi Knotts, Doug MacKay, Heather Berg,
Candy Usner, and Jessica Kardos subject to changing roles. The portfolio
managers are Jim Oelschlager, Doug MacKay.
Investment company clients at this point include White Oak, Pin Oak, and Red
Oak, Mutual of America (both accounts), and the Prudential Target Fund. While
the attached Rule 17j-1 Code of Ethics references the Prudential Target Fund,
these rules apply to all investment company accounts Oak Associates, ltd.
currently manages or will manage in the future.
A personal transaction/account is defined as any account/transaction in which an
access person has a beneficial interest or where such person enjoys benefits
substantially equivalent to ownership. Under this rule, additional access person
accounts would include those owned by family members living in your home as well
as the Oak Associates Profit Sharing Plan.
Geoffrey Moore will serve as the primary compliance officer. Doug MacKay, Sandra
Noll and Tom Hipp will be Geoffrey Moore's backups.
GENERAL GUIDELINES
1
<PAGE> 17
INITIAL PUBLIC OFFERINGS: No investment personnel may acquire any securities in
an initial public offering.
PRIVATE PLACEMENTS: No investment personnel may acquire any securities in a
private placement without first obtaining pre-clearance and approval from the
compliance officer and/or an independent review board.
PRE-CLEARANCE: All access persons must receive pre-clearance from the compliance
officer for all personal securities transactions. Doug MacKay, Sandra Noll and
Tom Hipp will serve as the compliance officer for Geoffrey Moore's personal
trades. A copy of the current preclearance trade request form is in this packet
and additional ones are available from the compliance officer.
BLACKOUT PERIODS:
No access person shall execute a transaction within twenty-four hours in which
an investment company client has a pending buy or sell order outstanding in the
same or an equivalent security. The prohibition does not apply to access persons
who do not, in the ordinary course of fulfilling his or her official duties,
have access to information regarding the purchase and sale of securities of an
investment company account, as long as they are not effected with such knowledge
in their specific transaction.
No portfolio manager shall execute any transaction within seven calendar days
before or after an investment company client traded in the same or an equivalent
security.
If trades are effected during the periods proscribed above, any profits realized
on such trades will be disgorged immediately on a pro-rata basis to all of our
investment company accounts, or another suitable arrangement will be made.
Disgorgement will not be required of access persons as long as pre-clearance
procedures were followed and prior knowledge of trading in the same or an
equivalent security was absent.
SHORT-TERM TRADING: Investment personnel are prohibited from profiting from the
purchase and sale of the same or an equivalent security within any sixty-day
calendar period. The short-term trading ban applies to all securities that could
be purchased or were purchased for investment company accounts. For purposes of
this rule, securities that "could be purchased" include all securities or
equivalent securities that are not specifically prohibited by mutual fund
prospectus or subadvisor guidelines. Any profits so realized must immediately be
disgorged to the investment company accounts on a pro-rata basis.
REPORTING: All access persons must instruct their broker or personally provide
the compliance person with duplicate confirmations of all trades and monthly
account statements for any and all personal accounts. Geoffrey Moore will
maintain files on all employees that will include annual certifications,
brokerage statements, preapproval authorizations and trading confirmations. All
of the Oelschlager related brokerage statements are kept in Joyce and Steve
Strasser's office. Their trade confirms with the
2
<PAGE> 18
trading files are kept up by Joanne Copley and their preapproval forms are kept
in Geoffrey Moore's office.
GIFTS: No access person may receive any gift or other thing of more than $100 in
value from any person or entity that does business with or on behalf of an
investment company account. Occasional business entertainment expenses are
permitted as long as they are not excessive in cost or frequency.
BOARD POSITIONS: No investment personnel are permitted to accept a position on
the Board of Directors of a publicly traded company without prior authorization
of the compliance person.
DISCLOSURE OF HOLDINGS: Upon commencement of employment and thereafter on an
annual basis, access persons must disclose all personal securities holdings for
all personal accounts. As long as the compliance person is receiving monthly
brokerage statements that include all personal holdings, this requirement will
be met.
CERTIFICATION OF COMPLIANCE WITH THE CODE: Access persons must certify on an
annual basis that they have read and understand the code, that they recognized
they are subject to it, that they have complied with its requirements, and that
they have disclosed or reported all personal securities transactions required to
be disclosed or reported by the Code. A copy of the annual certification form is
attached.
EXEMPT TRANSACTIONS: Please refer to the entire code for specific exemptions
from blackout periods, short-term trading bans, and pre-clearance procedures
afforded access and investment personnel.
Perhaps the most relevant is an exemption providing that the blackout period and
short-term trading rules do not apply for any equity securities transaction, or
series of related transactions effected over a 30 calendar day period, involving
500 shares or less in the aggregate, if (i) the Access Person has no prior
knowledge of activity in such security by any investment company account and
(ii) the issuer is listed on the New York Stock Exchange or has a market
capitalization of at least one billion dollars.
BAN ON THE USE OF INSIDE INFORMATION: Employees are prohibited from purchasing
or selling securities on the basis of material, non-public information. If in
doubt about whether or not the information you possess is material and
non-public, you must discuss it with Jim Oelschlager and/or the compliance
officer before getting preapproval.
COMPLIANCE CHECKLIST
Geoffrey Moore is required to submit a compliance checklist to a number of our
investment company accounts representing our full compliance with the Code on a
monthly basis. As a result, Oak Associates, ltd. will need all records from you,
particularly your brokerage statements, as soon as possible after month-end.
If you have any questions at all, please don't hesitate to ask Geoffrey Moore,
Sandra Noll, Tom Hipp or Doug MacKay.
3
<PAGE> 19
OAK ASSOCIATES LTD., CODE OF ETHICS
ANNUAL CERTIFICATION FORM
I, , certify that I have read and understand Oak
Associates', ltd. Code of Ethics. I recognize that I am subject to the Code and
that I will have to comply with its requirements on an ongoing basis as long as
I am an employee and access person of Oak Associates. I understand that I must
disclose and report all personal securities transactions required to be
disclosed or reported pursuant to the requirements of the Code.
-------------------------------
Employee Name
-------------------------------
Date
4
<PAGE> 20
PERSONAL SECURITIES TRANSACTION REQUEST FORM
Please use this form to request preclearance for your personal securities
transactions. If Geoffrey Moore is not available, submit the request to Doug
MacKay, Sandra Noll or Tom Hipp. We will make every effort to get your
investment precleared as soon as possible.
All approved trades must be completed within twenty-four hours of approval.
Otherwise, you must seek preclearance again. By submitting this trade request,
you acknowledge that you are not in the possession of material, non-public
information about the company's stock that you desire to purchase or sell.
Your Name: _______________________________________
Security to be Precleared: ________________________
Number of Shares: _________________________________
Today's Date: _____________________________________
****************************************************
Approved By: ______________________________________
Denied By: ________________________________________
Date: _____________________________________________
5
<PAGE> 1
Exhibit (P)(13)
M E M O R A N D U M
APRIL 3, 2000
TO: ALL DLJ ASSET MANAGEMENT GROUP, INC. EMPLOYEES ("DLJAM")
FROM: MARTIN JAFFE, CHIEF OPERATING OFFICER
CHARLES E. HUGHES, DIRECTOR OF COMPLIANCE
RE: [] DLJ ASSET MANAGEMENT GROUP, INC.
CODE OF ETHICS DATED APRIL 3, 2000
[] EMPLOYEE TRADING POLICIES
- --------------------------------------------------------------------------------
Please review the attached documents.
It is necessary that you are familiar with and agree to abide by these policies.
REMINDER: ALL EMPLOYEES MUST SUBMIT A REQUEST FOR APPROVAL OF TRANSACTION BEFORE
EXECUTING ANY TRANSACTIONS FOR THEIR PERSONAL ACCOUNTS.
Please sign, date and return the last page of the Employee Trading Policies
memorandum to Charles E. Hughes (277 Park Ave. - 24th Fl.) to indicate your
understanding and agreement to abide by these policies.
YOU MUST RETURN THIS AGREEMENT BY FRIDAY, APRIL 14, 1999.
Please be sure to contact one of us if you have any questions.
<PAGE> 2
DLJ ASSET MANAGEMENT GROUP
Code of Ethics
Dated as of April 3, 2000
Pursuant to
Rule 17j-1(b) Under the Investment
Company Act of 1940, as amended
-----------------------------
1. Purpose and Standards of Conduct
This Code of Ethics has been adopted by the Board of Directors
of DLJ Asset Management Group, Inc., ("DLJAM") which includes Winthrop Trust
Company ("WTC") and WSW Capital, Inc. ("WSWC") in accordance with Rule 17j-1(b)
under the Investment Company Act of 1940, as amended (the "Act"). Rule 17j-1(b)
generally proscribes fraudulent or manipulative practices with respect to
purchases or sales of securities held or to be acquired by investment companies
registered under the Act, if effected by associated persons of such investment
companies. The purpose of this Code of Ethics is to provide DLJAM with
regulations and procedures, with respect to the registered investment companies
in which they act as investment adviser (the "Funds"), designed to comply with
the Act and, in particular, Rule 17j-1(a) which states:
(a) It shall be unlawful for any affiliated person or principal
underwriter for a registered investment company, or any
affiliated person of an investment adviser or principal
underwriter for a registered investment company in connection
with the purchase or sale, directly or indirectly, by such
person of a security held or to be acquired, as defined in
this section by such registered investment company --
1. To employ any device, scheme or artifice to defraud
such registered investment company;
2. To make to such registered investment company any
untrue statement of a material fact or omit to state
to such registered investment company material facts
necessary in order to make the statements made, in
light of the circumstances under which they are made,
not misleading;
3. To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any such registered investment company; or
<PAGE> 3
4. To engage in any manipulative practice with respect
to such registered investment company.
This Code of Ethics also proscribes securities transactions
involving insider trading (as described below) as well as possible conflicts of
interest.
2. Application
(a) This Code of Ethics applies to the "access persons" of a
Fund (as such term is defined in Section 3 below). Each access person must read,
acknowledge receipt of and retain this Code of Ethics.
(b) DLJAM will maintain a list of all its access persons and
will provide each access person with a copy of this Code of Ethics.
3. Definitions
For the purposes of this Code of Ethics, the following
definitions shall apply:
(a) "Investment Adviser" means DLJAM, Winthrop Trust Company
and WSW Capital, Inc.
(b) "Access person" means any trustee or director, officer or
"advisory person" (as defined below in subparagraph (c)) of a Fund or a Fund's
Investment Advisor.
(c) "Advisory person" of a Fund or a Fund's Investment Advisor
means (i) any employee of DLJAM or a Fund or of any company in a control
relationship to a Fund who, in connection with his or her regular functions or
duties, makes, participates in, or obtains information regarding the purchase or
sale of a security (as defined below in subparagraph (d)) by a Fund, or whose
functions related to the making of any recommendations with respect to such
purchases or sales; and (ii) any natural person, if any, in a control
relationship to a Fund who obtains information concerning recommendations made
to a Fund with regard to the purchase or sale of a security.
(d) A security is "being considered for purchase or sale" when
a recommendation to purchase or sell a security has been made and communicated
or, with respect to the person making the recommendation, when such person
seriously considers making such a recommendation.
(e) "Beneficial ownership" shall be interpreted in the same
manner as the definition of "beneficial owner" set forth in Rule 16a-1(a)(2)
under the Securities Exchange Act of 1934, as amended, and shall refer to a
direct or indirect pecuniary interest in securities, the benefits of which are
enjoyed, directly or indirectly by any person by reason of any contract,
arrangement, understanding, relationship (such as, for example,
<PAGE> 4
that person's spouse, children or other close familial relationship), agreement
or otherwise a direct or indirect pecuniary interest, and by reason of which
such person should be regarded as the true owner, although such securities may
not be registered or standing on the books of the issuer in the name of such
person. Thus, for example, securities held for a person's benefit in the names
of others, such as nominees, trustees and other fiduciaries, securities held by
any partnership of which a person is a partner, and securities held by any
corporation which is controlled by a person (directly or through
intermediaries), would be deemed to be beneficially owned by said person.
Similarly, a person ordinarily obtains benefits equivalent to ownership from,
and thus is generally regarded as the "beneficial owner" of, securities held in
the name of a spouse, a minor child, or a relative of the person or a spouse.
Other illustrations of benefits substantially equivalent to those of ownership
include application of the income derived from securities to maintain a common
home and application of the income derived from securities to meet expenses
which the person otherwise would meet from other sources. Such interests which
confer beneficial ownership of a security include having or sharing with
another: (1) Voting power including the power to vote, or to direct the voting
of, the security; and/or (2) Investment power, including the power to dispose,
or to direct the disposition, of such security. A person is also deemed to be
the beneficial owner of securities which such person has the right to acquire
beneficial ownership of such securities: (i) through the exercise option,
warrant or right (including options traded on options exchanges) exercisable
within 60 days; (ii) through the conversion of securities which are immediately
convertible or will become convertible within 60 days; or (iii) pursuant to a
power to revoke within 60 days; or pursuant to the automatic termination within
60 days of, a trust, discretionary account or similar arrangement. In addition,
beneficial ownership is conferred if voting or investment power is shared with
one or more other persons and, therefore, the same shares of stock may be deemed
beneficially owned by a number of persons. The Securities and Exchange
Commission regards securities held in trust for others as beneficially owned by
the trustee if he or she has or shares voting or investment power with respect
to such securities.
(f) "Control" means the power to exercise a controlling
influence over the management or policies of a company, unless such power is
solely the result of an official position with such company.
(g) "Investment Personnel" means portfolio managers or other
employees of DLJAM who participate in making investment recommendations to
investment companies DLJAM advises, as well as persons in a control relationship
to such investment companies who obtain information about investment
recommendations.
(h) "Independent trustee" or "independent director", means a
trustee or director of a Fund who is not an "interested person" of a Fund within
the meaning of Section 2(a)(19) of the Act. A trustee is not deemed an
interested person of a Fund solely by reason of such person being a member of
the Board of Trustees or Director or an owner of shares of any Fund as of any
series thereof.
<PAGE> 5
(i) "Purchaser or sale of a security" includes, among other
things, the writing of an option to purchase or sell a security (as defined
below in subparagraph (i)).
(j) "Security" shall have the meaning set forth in Section
2(a)(36) of the Act. In general, the term includes any interest or instrument
commonly known as a security, except that it shall not include securities issued
by the United States which are government securities within the meaning of
Section 2(a)(16) of the Act, bankers acceptances, bank certificates of deposit,
commercial paper or shares of registered open-end investment companies and such
other money market instruments as designated by the Board of Trustees or
Directors of a Fund.
(k) "Insider trading" shall mean the trading of any security
while in the possession of material non-public information as to which the
access person (1) has a duty to keep confidential or (2) knows or should have
known was improperly obtained. "Material information" means information which is
substantially likely to be considered important in making an investment decision
by a reasonable investor, or information which is reasonably certain to have a
substantial effect on the price of an issuer's securities. Information is
non-public until it has been effectively communicated or made available to the
market price.
4. Exempted Transactions
The prohibitions of Section 5(a)-(d) of this Code of Ethics
shall not apply to:
(a) Purchases or sales effected in any account over which the
access person has no direct or indirect influence or control or in any account
of the access person which is managed on a discretionary basis by a person other
than such access person and with respect to which such access person does not in
fact influence or control such transactions.
(b) Purchases or sales of securities which are not eligible
for purchase or sale by a Fund.
(c) Purchases or sales which are nonvolitional on the part of
either the access person or the Fund.
(d) Purchases which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by
an issuer, pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights so
acquired.
<PAGE> 6
(f) Purchases or sales of securities which receive the prior
approval of a Managing Director, President, Senior Vice President or any Vice
President of DLJAM (or their designees) (such approving officer having no
personal interest in such purchases or sales) because such purchases or sales
are not likely to have any economic impact on a Fund or on its ability to
purchase or sell securities of the same class or other securities of the same
issuer.
(g) Any equity securities transaction, or series of related
transactions, involving 500 shares or less in the aggregate, if the issuer has a
market capitalization (outstanding shares multiplied by the current price per
share) greater than $1 billion.
(h) Purchases or sales which are only remotely potentially
harmful to a Fund because they would be very unlikely to affect a highly
institutional market, or because they clearly are not related economically to
the securities to be purchased, sold or held by a Fund.
5. Prohibited Purchases and Sales
(a) No access person shall purchase or sell, directly or
indirectly, any security in which such person has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership and which to
such person's actual knowledge at the time of such purchase or sale:
(i) is being considered for purchase or sale by
a Fund; or
(ii) is being purchased or sold by a Fund.
(b) No access person shall reveal to any other person (except
in the normal course of his or her duties on behalf of a Fund) any information
regarding securities transactions by a Fund or consideration by a Fund or DLJAM
of any securities transaction.
(c) No access person shall make recommendations concerning the
purchase or sale of securities by any Fund or any series thereof without
disclosing any interest such access person has in the securities or issuer
thereof, including, without limitation:
(i) any direct or indirect beneficial ownership
of any securities of such issuer;
(ii) any contemplated transaction by such person
in such securities;
(iii) any position with such issuer or its
affiliates; and
<PAGE> 7
(iv) any present or proposed business
relationship with such issuer or its
affiliates on the one hand, and such person
or any party in which such person has a
significant interest, on the other;
provided, however, that in the event the
interest of such access person in such
securities or issuer is not material to his
or her personal net worth and any
contemplated transaction by such person in
such securities cannot reasonably be
expected to have a material adverse effect
on any such transaction by the Fund or any
series thereof or on the market for the
securities generally, such access person
shall not be required to disclose his or her
interest in the securities or issuer thereof
in connection with any such recommendation.
(d) No access person of a Fund shall participate in any
securities transactions on a joint basis with a Fund in violation of applicable
law.
(e) No access person shall engage in "insider trading" whether
for his or her own benefit or the benefit of a Fund, DLJAM or others.
(f) No investment personnel shall be permitted to trade in
Initial Public Offerings of securities. No investment personnel shall
participate in a private placement of securities unless Charles Hughes reviews
and approves such participation. Approval will only be granted if Charles Hughes
determines the investment does not cause a conflict of interest between the
Investment Personnel, DLJAMG and the investment companies they advise. Charles
Hughes's decision, and the rationale supporting his decision, will be retained
in the records of DLJAM.
6. Reporting
(a) Every access person, subject to the exception (b) below
for independent trustees or directors, shall report to the appropriate officer
of DLJAM the information described in Section 6(c) of this Code with respect to
(i) transactions in any security in which such access person has, or by reason
of such transaction acquires, any direct or indirect beneficial ownership in the
security and (ii) holding of all securities, on an initial and annual basis, in
which such access person has direct or indirect beneficial ownership; provided,
however, that an access person shall not be required to make a report with
respect to transactions effected in any account over which such person does not
have any direct or indirect influence or control or in any account which is
managed on a discretionary basis by a person other than such access person and
with respect to which such access does not in fact influence or control such
transactions. Such appropriate officer of DLJAM shall maintain such reports and
such other records as are required by Rule 17j-1 under the Act.
<PAGE> 8
(b) An independent trustee or director of a Fund need only
report to the appropriate officer of a Fund a transaction if such trustee or
director at the time of that transaction, knew or, in the ordinary course of
fulfilling his or her official duties as a trustee or director of a Fund, should
have known that during the 15-day period immediately preceding or after the date
of the transaction by the trustees or directors, such security is or was
purchased or sold by the Fund or any series thereof or such purchase or sale was
being considered for purchase or sale by a Fund, or DLJAM.
(c) Every report shall be in writing and shall be delivered
not later than (i) 10 days after (A) the end of the calendar quarter in which a
transaction to which the report relates was effected (B) the day the individual
becomes an access person and (ii) within 30 days after the end of DLJAM's fiscal
period and shall contain the following information:
(i) The date of the transaction and current
holdings, the title and the number of shares
and the principal amount of each security
involved;
(ii) The nature of all transactions (i.e.,
purchase, sale or other type of acquisition
or disposition);
(iii) The price at which transactions were
effected; and
(iv) The name of the broker, dealer or bank with
or through which the transactions were
effected.
(v) With respect to any account established by
an access person during the quarter in which
any securities were held during the quarter
for the direct or indirect benefit of the
access person:
1. name of the broker, dealer or bank;
2. date account was established; and
3. date that report is submitted to
the Fund.
(d) In lieu of the required report, so long as the information
in the report required by 6(c) above is provided, an access person may instruct
every brokerage firm at which such access person has an account to send
duplicate confirmations of all securities transactions and monthly brokerage
statements to the appropriate officer of DLJAM.
<PAGE> 9
(e) Any such report may contain a statement that the report
shall not be construed as an admission by the person making such report that
such person has any direct or indirect beneficial ownership in the security to
which the report relates.
(f) The information on securities transactions received and
recorded by DLJAM under Rule 204-2(a)(12) of the Investment Advisors Act of 1940
shall be deemed to satisfy the reporting requirements imposed on access persons
of a Fund who are officers or employees of DLJAM when to require information
under this Code of Ethics would be duplicative of that already recorded by
DLJAM.
(g) All reports furnished pursuant to this Section will be
reviewed by Charles Hughes for compliance with these procedures. These reports
will be kept confidential, subject to the rights of inspection by the Board of
Directors of DLJAM and by the Securities and Exchange Commission.
7. Sanctions
Upon discovering a violation of this Code, the Board of
Directors of DLJAM may impose such sanctions as it deems appropriate, including,
among other things, a letter of censure or suspension or termination of the
employment of the violator.
<PAGE> 10
M E M O R A N D U M
APRIL 3, 2000
TO: ALL DLJ ASSET MANAGEMENT GROUP, INC. ("DLJAM") EMPLOYEES
FROM: MOFFETT COCHRAN, CHAIRMAN
MARTIN JAFFE, CHIEF OPERATING OFFICER
RE: EMPLOYEE TRADING POLICIES
DLJ Asset Management Group, Inc. ("DLJAM"), Winthrop Trust Company
("WTC"), and WSW Capital, Inc. ("WSWC") owe to its clients a duty of undivided
loyalty when performing investment services. In order to avoid even the
appearance of impropriety DLJAM has adopted below certain restrictions on
trading in securities by DLJAM employees and their immediate families.*
These restrictions are designed to cover situations which generally
occur but they are not exhaustive. It is your responsibility to obtain
permission for any securities transaction which, in light of the facts
surrounding the transaction, could give rise to a real or apparent conflict of
interest with DLJAM, WTC and WSWC clients.
- ---------
* Immediate family includes your spouse, minor children, any relative who
lives with you or whom you support. References to employees will be
deemed to include these persons.
<PAGE> 11
I. Trading in Focus List Stocks
A. General Rule. No Employee will be permitted to engage in
any transaction (including a transaction in any derivative product) in a Focus
List Stock while that security is the subject of a Buy or Sell program at DLJAM.
A security is the subject of a Buy (or Sell) program when the
investment group has determined to add to (or trim back) account position in
that security.
Exceptions. No employee orders will be executed during the
first 7 days the program is in effect. Once the program has been in effect for 7
days, employee orders will be executed once the Trader has determined, in his
sole discretion, that no client orders are contemplated for that day. Upon such
determination, employee orders will be executed as of the close of the business
day that such order was requested. If the program is in effect for less than
seven days, employee orders will be executed following the termination of such
program.
NOTE: In the event that an employee and a client each have an
order executed in the same security on the same day, the employee will receive
the highest price of the trades for that day (in case of a buy order) and the
lowest price of the trades for that day (in case of a sell order), regardless of
the initiation or timing of such transaction.
II. Stocks Under Consideration for Focus List
General Rule: No employee will be permitted to engage in any
transaction in any security being considered for inclusion on the Focus List.
A security is being considered for inclusion in the Focus List
at the time the Research Department has completed its write-up of the security,
unless the Director of
<PAGE> 12
Equity Research determines that transactions in the security should be
prohibited at some time prior to the completion of the write-up. If this is the
case, the Director of Equity Research will notify the Trader to verify that this
is a security being considered for inclusion on the Focus List and no
transactions will be permitted as of that date.
Exceptions: None
III. Non-Focus List Securities
1. General Rule: Subject to the caveat on conflicts of interest,
trading in securities which are not on the Focus List is permitted.
IV. Initial Public Offerings and Private Placements
1. General Rule: Trading in Initial Public Offerings of securities is
not permitted. Trading in Private Placement of securities is permitted only if a
Request Form or e-mail equivalent is submitted in advance to Charles Hughes and
he approves such transaction. Charles Hughes will generally not approve these
transactions if the investment could cause a conflict of interest between the
employee and DLJAM.
2. Exceptions - None
V. Short Selling
A. Focus List Securities
1. General Rule. No short selling of Focus List securities is
permitted.
2. Exceptions - None
B. Securities appearing on Cross Reference List (securities owned by
one or more customers).
1. General Rule. These transactions must be approved on a case by case
basis.
<PAGE> 13
Charles Hughes must initial the order ticket to signify his approval of the
transaction. No transaction request will be approved unless it is accompanied by
a fully completed Request Form (a sample is attached and copies may be obtained
from Charles Hughes) or e-mail equivalent.
2. Exceptions: None
C. Non-Focus List Securities
1. General Rule: These transactions must be approved on a case by case
basis. Charles Hughes must initial the order ticket to signify his approval of
the transaction. No transaction request will be approved unless it is
accompanied by a fully completed Request Form or e-mail equivalent.
2. Exceptions: None
VI. Puts and Calls, Futures
A. Focus List Securities
1. General Rule: No transaction will be permitted in derivative
products on securities on the Focus List in circumstances where an employee
would be prohibited from trading the underlying securities.
2. Exceptions: No naked options are ever permitted. Covered options are
permitted with the approval of Charles Hughes. The same procedure outlined under
Section IV B.1 should be followed.
B. Non-Focus List Securities
1. General Rule: Subject to the caveat on conflicts of interest,
trading in derivative products of securities which are not on the Focus List is
permitted.
<PAGE> 14
VII. Indices
A. Focus List and Non-Focus List Securities.
1. General Rule: Trading in indices which contain Focus List
securities is permitted.
Exceptions: If the Director of Equity Research determines that
trading in a particular index should be prohibited, he will notify the Trader
and no transactions will be permitted as of that date.
VII. Special Prohibitions Applicable to Research Department Employees.
1. General Rule: No Research Department Employee will be permitted to
effect transactions in any security which is being followed by the Department.
Exceptions: Transactions may be approved on a case by case basis
utilizing the procedure outlined in Section IV B.l.
* * * *
Each DLJAM employee should be aware that his trading activities may be
curtailed at any time that DLJAM believes it is in the best interest of clients
to do so. Therefore, employees should refrain from effecting any transaction
where they would suffer financial hardship by their inability to liquidate or
otherwise sell such a position.
<PAGE> 15
REQUEST FOR APPROVAL OF TRANSACTION
NAME: _______________________________________
DATE: _______________________________________
SECURITY: _______________________________________
QUANTITY: _______________________________________
CURRENT PRICE: _______________________________________
TYPE OF TRANSACTION: _______________________________________
BRIEFLY STATE YOUR REASONS FOR THIS TRANSACTION:
APPROVED: ___________________
KINDLY FORWARD THIS FORM TO CHARLES E. HUGHES UPON COMPLETION.
<PAGE> 16
AMENDMENT TO THE DLJAM EMPLOYEE TRADING POLICY
I. SHORT-TERM TRADING PROFITS
Advisory Persons* are prohibited from profiting from a purchase and
sale or sale and purchase, of the same or an equivalent Security** within any 60
calendar day period. If trades are effected during the proscribed period, any
profits realized on such trades WILL BE IMMEDIATELY REQUIRED TO BE DISGORGED.
II. EXEMPTED TRANSACTIONS
SUBJECT TO PRECLEARANCE in accordance with section III below with
respect to sub items (b), (e), (f), (g), (h), & (i) hereof, THE PROHIBITIONS OF
SECTION I WILL NOT APPLY TO THE FOLLOWING:
(a) Purchases or sales of Securities effected in any account over which
the Advisory Person has no direct or indirect influence or control or
in any account of the Advisory Person which is managed on a
discretionary basis by a person other than such Advisory Person and
with respect to which such Advisory Person does not in fact influence
or control such transactions.
(b) Purchases or sales of Securities (or their equivalents) which are
not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are nonvolitional on the
part of either the Advisory Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic dividend
reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Securities, to the extent
such rights were acquired from such issuer, and sales of such rights so
acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Advisory Person has no
prior knowledge of activity in such security by any fund in the Complex
and (ii) the issuer is listed on the New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of related
transactions
<PAGE> 17
effected over a 30 calendar day period, involving 100 units ($100,000
principal amount) or less in the aggregate, if the Advisory Person has
no prior knowledge of transactions in such Securities by any fund in
the Complex.
(h) Any transaction in index options effected on a broad-based index if
the Advisory Person has no prior knowledge of activity in such index by
any fund in the Complex.
(i) Purchases or sales of Securities which receive the prior approval
of the Compliance Officer, Charles E. Hughes, (such person having no
personal interest in such purchases or sales), based on a determination
that no abuse is involved and that such purchases and sales are not
likely to have any economic impact on any fund in the Complex or on its
ability to purchase or sell Securities of the same class or other
Securities of the same issuer.
III. PRECLEARANCE
Advisory Persons (other than Disinterested Directors/Trustees) MUST
PRECLEAR all personal securities investments with the exception of those
identified in subparts (a), (c) and (d) of Section II above.
All requests for preclearance must be submitted to Charles E. Hughes
for approval. All approved orders must be executed by the close of business on
the day preclearance is granted; provided, however, that approved orders for
Securities traded in foreign markets may be executed with two (2) business days
from the date preclearance is granted. If any order is not timely executed, a
request for preclearance must be resubmitted.
* "Advisory Persons" means (i) any employee of the Fund, Manager or
Advisor/Subadvisor (or of any company in a control relationship to the Fund,
Manager or Advisor/Subadvisor) who, in connection with his or her regular
functions or duties, makes, participates in, or obtains information regarding
the purchase or sale of a security by the Fund, or whose functions relate to the
making of any recommendations with respect to such purchases or sales; and (ii)
any natural person in a control relationship to the Fund who obtains information
concerning recommendations made to the Fund with regard to the purchase or sale
of a security.
** "Security," in general, the term includes any interest or instrument commonly
known as a security, except that it shall not include securities issued by the
United States, banking acceptances, bank certificates of deposit, commercial
paper or shares of registered open-end investment companies and money market
instruments.
As an employee of DLJAM, WTC and/or WSWC, I understand and agree to abide by the
<PAGE> 18
policies set forth in the following documents:
1. CODE OF ETHICS DATED APRIL 3, 2000
2. EMPLOYEE TRADING POLICIES
SIGNATURE: _________________________________________
PRINT NAME: _________________________________________
DATE: _________________________________________
