FILED PURSUANT TO RULE 497(c)
FILE No. 2-64625
PRUDENTIAL TAX-FREE MONEY FUND
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Prospectus dated May 2, 1994
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Prudential-Bache Tax-Free Money Fund, Inc., doing business as Prudential
Tax-Free Money Fund (the Fund), is an open-end diversified management invest-
ment company whose investment objective is to attain for investors the highest
level of current income that is exempt from federal income taxes, consistent
with liquidity and the preservation of capital. The Fund will invest in
short-term tax-exempt debt securities of state and local governments. See "How
the Fund Invests--Investment Objective and Policies." The Fund's address is
One Seaport Plaza, New York, New York 10292, and its telephone number is
(800) 225-1852.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Fund will be able to
maintain a stable net asset value of $1.00 per share. See "How the Fund Values
its Shares."
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated May 2, 1994, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
What Is Prudential Tax-Free Money Fund?
Prudential Tax-Free Money Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.
What Is the Fund's Investment Objective?
The investment objective of the Fund is to attain for investors the
highest level of current income that is exempt from federal income taxes,
consistent with liquidity and the preservation of capital. The Fund will seek
to achieve its investment objective by investing in a diversified portfolio of
short-term debt obligations issued by states, territories and possessions of
the United States and by the District of Columbia, and their political
subdivisions, duly constituted authorities and corporations, the interest from
which is wholly exempt from federal income tax in the opinion of bond counsel
to the issuer. See "How the Fund Invests--Investment Objective and Policies"
at page 6.
What are the Fund's Special Characteristics and Risks?
It is anticipated that the Fund's net asset value will remain constant at
$1.00 per share, although this cannot be assured. In order to maintain such
constant net asset value, the Fund will value its portfolio securities at
amortized cost. While this method provides certainty in valuation, it may
result in periods during which the value of a security in its portfolio, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold such instruments. See "How the Fund Values its Shares"
atpage 10.
Who Manages the Fund?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Fund's average daily net assets up to $750 million, .425 of
1% of the Fund's average daily net assets between $750 million and $1.5
billion and .375 of 1% in excess of $1.5 billion. As of March 31, 1994, PMF
served as manager or administrator to 66 investment companies, including 37
mutual funds, with aggregate assets of approximately $49 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes investment
advisory services in connection with the management of the Fund under a
Subadvisory Agreement with PMF. See "How the Fund is Managed--Manager" at
page 9.
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Who Distributes the Fund's Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD or the Distributor) acts
as the Distributor of the Fund's shares. The Fund reimburses PMFD for expenses
related to the distribution of the Fund's shares at an annual rate of up to
.125 of 1% of the average daily net assets of the Fund's shares. See "How the
Fund is Managed-- Distributor" at page 9.
What Is the Minimum Investment?
The minimum initial investment is $1,000. The subsequent minimum
investment is $100. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How
to Buy Shares of the Fund" at page 12 and "Shareholder Guide--Shareholder
Services" at page 17.
How Do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent) at the net asset value per share (NAV) next determined after receipt of
your purchase order by the Transfer Agent or Prudential Securities. See "How
the Fund Values its Shares" at page 10 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 12.
How Do I Sell My Shares?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 15.
How Are Dividends and Distributions Paid?
The Fund expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any, and make distributions
annually of any net long-term capital gains. Dividends and distributions will
be automatically reinvested in additional shares of the Fund at NAV unless you
request that they be paid to you in cash. See "Taxes, Dividends and
Distributions" at page 10.
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FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases. . . . . . . . . . . . None
Maximum Sales Load Imposed on Reinvested Dividends . . . . . . None
Deferred Sales Load. . . . . . . . . . . . . . . . . . . . . . None
Redemption Fees. . . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fee . . . . . . . . . . . . . . . . . . . . . . . . . None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees. . . . . . . . . . . . . . . . . . . . . . . . 0.500%
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 0.125%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.115%
Total Fund Operating Expenses. . . . . . . . . . . . . . . . . 0.740%
Example 1 Year 3 Years 5 Years 10 Years
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You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and (2)
redemption at the end of each time
period: $8 $24 $41 $92
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The above example is based on data for the Fund's fiscal year ended
December 31, 1993. The example should not be considered a representation of
past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" include operat-
ing expenses of the Fund, such as directors' and professional fees, registra-
tion fees, reports to shareholders, transfer agency and custodian fees.
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FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the years indicated)
The following financial highlights with respect to each of the five years
in the period ended December 31, 1993, have been audited by Price Waterhouse,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for each of the periods indicated. The information is based
on data contained in the financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
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1993 1992 1991 1990 1989 1988* 1987 1986 1985 1984
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of year. . . . . . . . . . .$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and
realized gains . . . . . . . .018 .026 .041 .053 .056 .047 .040 .044 .048 .054
Dividends and distributions to
shareholders . . . . . . . . (.018) (.026) (.041) (.053) (.056) (.047) (.040) (.044) (.048) (.054)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of year.$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN:+. . . . . . . . 1.86% 2.63% 4.22% 5.42% 5.74% 4.83% 4.11% 4.50% 4.94% 5.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000) . . . . . . . . . . .$601,622 $614,333 $616,867 $700,859 $653,268 $628,034 $630,822 $772,877 $363,186 $196,551
Average net assets (000) . .$726,571 $669,588 $725,844 $701,869 $644,820 $705,161 $719,244 $671,626 $336,501 $155,715
Ratios to average net assets:
Expenses, including
distribution fee. . . . . . .74% .74% .75% .74% .78% .77% .77% .68% .79% .84%
Expenses, excluding
distribution fee. . . . . . .62% .62% .63% .61% .66% .64% .64% .56% .66% .81%
Net investment income. . . . 1.84% 2.60% 4.15% 5.30% 5.65% 4.79% 4.08% 4.22% 4.88% 5.47%
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</TABLE>
* On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as manager of the Fund. See "Manager" in the Statement of
Additional Information.
+ Includes reinvestment of dividends and distributions.
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CALCULATION OF YIELD
The Fund calculates its "current yield" based on the net change,
exclusive of realized and unrealized gains or losses, in the value of a
hypothetical account over a seven calendar day base period. The Fund also
calculates its "effective annual yield" assuming weekly compounding and its
"tax-equivalent yield." Tax-equivalent yield shows the taxable yield an
investor would have to earn from a fully taxable investment in order to equal
an after-tax equivalent to the Fund's tax-free yield and is calculated by
dividing the Fund's current or effective yield by the result of one minus the
maximum federal tax rate. The following are examples of the current yield,
effective annual yield and tax equivalent yield calculations as of December
31, 1993:
Value of hypothetical account at end of period. . . . . . . . $1.000423
Value of hypothetical account at beginning of period. . . . . 1.000000
---------
Base period return. . . . . . . . . . . . . . . . . . . . . . $0.000423
=========
Current yield (.0.000423 x (365/7)) . . . . . . . . . . . . . 2.21%
Effective annual yield, assuming weekly compounding . . . . . 2.23%
Tax equivalent yield (2.21% [DIVIDE SIGN] (1-.396)) . . . . . 3.66%
The yield will fluctuate from time to time and is not necessarily
representative of future income or dividends.
The weighted average life to maturity of the Fund's portfolio on December
31, 1993 was 63 days.
Yield is computed in accordance with a standardized formula described in
the Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Fund's shares, including data from Lipper Analytical Services, Inc.,
Donoghue's Money Fund Report, The Bank Rate Monitor, other industry publica-
tions, business periodicals, rating services and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to attain for investors the
highest level of current income that is exempt from federal income taxes,
consistent with liquidity and the preservation of capital. The achievement of
the Fund's investment objective will depend on market conditions generally and
on the analytical and portfolio management skills of the Fund's investment
adviser. There is no assurance that the Fund's investment objective will be
achieved.
The Fund's investment objective is a fundamental policy and, therefore,
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the Investment Company Act). Policies that are not
fundamental may be modified by the Board of Directors.
The Fund will seek to achieve its investment objective by investing in a
diversified portfolio of short-term debt obligations issued by states,
territories and possessions of the United States and by the District of
Columbia, and their political subdivisions, duly constituted authorities and
corporations, the interest from which is wholly exempt from federal income tax
in the opinion of bond counsel to the issuer. Such securities are generally
known as "Municipal Bonds" or "Municipal Notes." Interest on certain Municipal
Bonds and Municipal Notes may be a preference item for purposes of the federal
alternative minimum tax. The investment adviser presently intends to avoid, to
the extent possible, purchasing Municipal Bonds
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and Municipal Notes for the Fund's portfolio the interest on which would be a
preference item for purposes of the federal alternative minimum tax. See
"Taxes, Dividends and Distributions." The Fund will maintain a dollar-weighted
average maturity of its portfolio of 90 days or less.
The Fund will invest in high quality Municipal Bonds and Notes with
short-term maturities, as follows:
1. Municipal Bonds with remaining maturities of one year or less which
have been rated, at the time of purchase, Aaa or Aa by Moody's Investors
Service, Inc. ("Moody's") or AAA or AA by Standard & Poor's Ratings Group
("S&P"), or, if not rated, are of comparable quality in the judgment of the
investment adviser under the direction of the Board of Directors; or
2. Municipal Notes with remaining maturities of one year or less which
have been rated, at the time of purchase, MIG-1 or MIG-2 by Moody's; P-1 or
P-2 by Moody's; SP-1 or SP-1 + by S&P; A-1 or A-2 by S&P; or, if not rated,
have been issued by an issuer having outstanding debt securities rated not
lower than Aa by Moody's or AA by S&P or by an issuer of comparable quality in
the judgment of the investment adviser under the direction of the Board of
Directors; or
3. Municipal Bonds or Notes with remaining maturities of one year or less
which depend directly or indirectly on the credit of the United States
Government.
The Fund utilizes the amortized cost method of valuation in accordance
with regulations issued by the Securities and Exchange Commission (SEC). See
"How the Fund Values its Shares." Accordingly, the Fund will limit its
portfolio investments to those instruments which present minimal credit risks
and which are of "eligible quality" as determined by the Fund's investment
adviser under the supervision of the Board of Directors in accordance with
regulations of the SEC, as they may from time to time be amended. "Eligible
quality" for this purpose means a security (i) rated in one of the two highest
rating categories (a) by at least two nationally recognized statistical rating
organizations assigning a rating to the security or issuer or, (b) if only one
rating organization assigned a rating, by that rating organization or (ii) if
unrated, of comparable quality as determined by the Board of Directors.
See Appendix A in the Statement of Additional Information for a
description of tax-exempt security ratings.
In addition to considering ratings assigned by the rating services in its
selection of portfolio securities for the Fund, the investment adviser will
consider, among other things, information concerning the financial history and
condition of the issuer, its revenue and expense prospects and, in the case of
revenue bonds, the financial history and condition of the source of revenue to
service the bonds. In the event that a Municipal Bond or Note held by the Fund
is assigned a lower rating or ceases to be rated, the investment adviser,
under the supervision of the Board of Directors, will promptly reassess
whether such security presents minimal credit risks and whether the Fund
should continue to hold the security in its portfolio. If a portfolio security
no longer presents minimal credit risks or is in default, the Fund will
dispose of the security as soon as reasonably practicable unless the Board of
Directors determines that to do so is not in the best interests of the Fund.
Variable Rate and Floating Rate Securities
The Fund may invest in Municipal Bonds and Notes which are "variable
rate" and "floating rate" obligations. The interest rates on such obligations
fluctuate generally with changes in market interest rates and the Fund is
typically able to demand repayment of the principal amount of such obligations
at par plus accrued interest either, in some cases, at specified intervals of
less than one year, or, in other cases, upon not less than seven days' notice.
For additional information concerning variable rate and floating rate obliga-
tions, see "Investment Objective and Policies" in the Statement of Additional
Information.
Puts
The Fund may also purchase Municipal Bonds or Notes together with the
right to resell such Bonds or Notes at an agreed-upon price or yield within a
specified period prior to the maturity date of the Bonds or Notes. Such a
right to resell is commonly known as a "put" or a "tender option," and the
aggregate price which the Fund pays for Municipal Bonds or Notes with puts or
tender options is higher than the price which would otherwise be paid for the
Bonds or Notes. For a more detailed description of Municipal Bonds and Notes,
and puts thereon, see "Investment Objective and Policies" in the Statement of
Additional Information.
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When-Issued and Delayed Delivery Securities
The Fund may purchase municipal obligations on a when-issued or delayed
delivery basis, in each case without limit. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for such securities take place at a later date. During the period
between purchase and settlement, no interest accrues to the purchaser. In the
case of purchases of such securities by the Fund, the price that the Fund is
required to pay on the settlement date may be in excess of the market value of
the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Fund intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will
record the transaction and reflect the value of the obligation, each day, in
determining its net asset value. This value may fluctuate from day to day in
the same manner as values of municipal obligations otherwise held by the Fund.
If the seller defaults on the sale, the Fund could fail to realize the
appreciation, if any, that had occurred. The Fund will establish a segregated
account with its Custodian in which it will maintain cash and liquid,
high-grade debt obligations equal in value to its commitments for when-issued
or delayed delivery securities.
OTHER INVESTMENTS AND POLICIES
The Fund intends to hold portfolio securities to maturity; however, it
may sell any security at any time in order to meet redemption requests or if
such action, in the judgment of the investment adviser, is appropriate based
on the investment adviser's evaluation of the issuer or of market conditions.
The Fund anticipates being as fully invested as practicable in Municipal
Bonds and Notes; however, because the Fund does not intend to invest in
taxable obligations, there may be occasions when, as a result of maturities of
portfolio securities or sales of Fund shares or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income. In
addition, there may be occasions when, in order to raise cash to meet redemp-
tions, the Fund might be required to sell securities at a loss.
The Fund does not presently intend to borrow money except to the extent
that the entry into reverse repurchase agreements may be considered borrowing.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal bonds and notes and for providing state and local
governments with federal credit assistance. Reevaluation of the Fund's
investment objective and structure might be necessary in the future due to
market conditions which may result from future changes in the tax laws.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's officers conduct and
supervise the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the year ended December 31, 1993, total expenses of the Fund as a
percentage of average net assets were .74%. See "Financial Highlights."
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MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Fund and is compensated
for its services at an annual rate of .50 of 1% of the Fund's average daily
net assets up to $750 million, .425 of 1% of the Fund's average daily net
assets between $750 million and $1.5 billion and .375 of 1% in excess of $1.5
billion. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended December 31, 1993, the Fund paid manage-
ment fees to PMF of .50% of the average net assets of the Fund. See "Manager"
in the Statement of Additional Information.
As of March 31, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies with aggregate assets of
approximately $49 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), a wholly-owned subsidiary of Prudential,
PIC furnishes investment advisory services in connection with the management
of the Fund and is reimbursed by PMF for its reasonable costs and expenses
incurred in providing such services. Under the Management Agreement, PMF
continues to have responsibility for all investment advisory services and
supervises PIC's performance of such services.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD or the Distributor), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the Fund's Distributor. It is a
wholly-owned subsidiary of PMF.
Under a Distribution and Service Plan (the Plan) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution and
service agreement (the Distribution Agreement), the Distributor incurs the
expenses of distributing shares of the Fund. These expenses include account
servicing fees paid to, or on account of, financial advisers of Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities
Corporation (Prusec), affiliated broker-dealers, account servicing fees paid
to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to
potential investors and indirect and overhead costs of Prudential Securities
and Prusec associated with the sale of the Fund's shares, including lease,
utility, communications and sales promotion expenses. There are no carry
forward amounts under the Plan and interest expenses are not included under
the Plan. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are regis-
tered there as broker-dealers.
Under the Plan, the Fund reimburses the Distributor for its
distribution-related expenses at an annual rate of up to .125 of 1% of the
Fund's average daily net assets. Account servicing fees are paid based on the
average balance of the Fund's shares held in the accounts of customers of
financial advisers. The entire distribution fee may be used to pay account
servicing fees.
The Plan provides that it shall continue in effect from year to year,
provided that each such continuance is approved annually by a majority vote of
the Board of Directors of the Fund, including a majority of the directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the operation of the Plan or any agreements related to
the Plan. The Board of Directors is provided with and reviews quarterly
reports of expenditures under the Plan.
For the fiscal year ended December 31, 1993, PMFD incurred distribution
expenses in the aggregate of $908,214, all of which were recovered through the
distribution fees paid by the Fund to PMFD. The Fund records all payments made
under the Plan as expenses in the calculation of its net investment income.
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In addition to distribution and service fees paid by the Fund under the
Plan, the Manager (or one of its affiliates) may make payments to dealers and
other persons which distribute shares of the Fund. Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable.
See "Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company (State Street or the Custodian), One
Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the
Fund's portfolio securities and cash and, in that capacity, maintains certain
financial and accounting books and records pursuant to an agreement with the
Fund. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent),
Raritan Plaza One, Edison, New Jersey 08837, serves as Transfer and Dividend
Disbursing Agent, and in those capacities maintains certain books and records
for the Fund. PMFS is a wholly-owned subsidiary of PMF. Its mailing address is
P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
The Fund's net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. The Board of Directors has fixed the specific
time of day for the computation of the NAV to be as of 4:30 p.m., New York
time, immediately after the declaration of dividends.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem Fund shares have been received or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund determines the value of its portfolio securities by the
amortized cost method. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instru-
ment. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfo-
lio securities to the market each day. For example, during periods of declin-
ing interest rates, if the use of the amortized cost method resulted in lower
value of the Fund's portfolio on a given day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Board of Directors has established
procedures designed to stabilize, to the extent reasonably possible, the
Fund's NAV at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Taxation of the Fund
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Fund will not be subject to federal income taxes on its net investment
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income and capital gains, if any, that it distributes to shareholders. In
addition, the Fund intends to invest its assets so that dividends payable from
net tax-exempt interest earned from Municipal Bonds and Notes will qualify as
exempt-interest dividends and thus be excluded from a shareholder's gross
income under the Internal Revenue Code. See "Taxes, Dividends and Distribu-
tions" in the Statement of Additional Information.
Taxation of Shareholders
Distributions of net tax-exempt interest earned on Municipal Bonds and
Municipal Notes will be excluded from a shareholder's gross income under the
Internal Revenue Code. Distributions of net investment income (excluding such
exempt-interest dividends) and realized net short-term capital gains in excess
of net long-term capital losses of the Fund are taxable to shareholders of the
Fund as ordinary income, whether such distributions are received in cash or
reinvested in additional shares.
Interest on certain "private activity" tax-exempt obligations (as defined
in the Internal Revenue Code) issued on or after August 8, 1986 is a
preference item for purposes of the alternative minimum tax. The portion of an
exempt-interest dividend of a Fund that is allocable to such municipal
obligations will be treated as a preference item for purposes of the alterna-
tive minimum tax. In addition, a portion of the tax-exempt dividend interest
received by corporate shareholders with respect to tax-exempt obligations,
whether or not private activity bonds, will be taken into account in computing
the alternative minimum tax. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
Distributions of net long-term capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses) are taxable to
shareholders as long-term capital gains regardless of how long a shareholder
has held shares in the Fund. The Fund does not expect to realize long-term
capital gains or losses. In determining the amount of capital gains to be
distributed, any capital loss carryovers from prior years will be offset
against capital gains.
Neither distributions of net investment income nor distributions of
capital gains, if any, will be eligible for the 70% dividends received
deduction allowed to corporate shareholders. The maximum long-term capital
gains rate for individuals is currently 28%. The maximum long-term capital
gains rate for corporate shareholders is currently the same as the maximum tax
rate for ordinary income.
Distributions may be subject to state and local taxes. Shareholders are
advised to consult their own tax advisers regarding specific questions as to
federal, state or local taxes. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
Withholding Taxes
Under the Internal Revenue Code, the Fund is generally required to
withhold and remit to the U.S. Treasury 31% of taxable dividends and capital
gain distributions payable to individuals and certain noncorporate
shareholders who fail to furnish correct tax identification numbers on IRS
Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders) or who
are otherwise subject to backup withholding. Dividends from taxable net
investment income and short-term capital gains paid to a foreign shareholder
will generally be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate).
Dividends and Distributions
The Fund expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any, and make
distributions annually of any net long-term capital gains. A shareholder
begins to earn dividends on the first business day after the settlement date
of his or her order and continues to earn dividends through the day on which
his or her shares are redeemed.
Dividends and distributions will be paid in additional shares of the Fund
based on the net asset value of the Fund's shares on the payment date, unless
the shareholder elects in writing not less than five business days prior to
the payment date to receive such dividends and distributions in cash. Such
election should be submitted to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. If you hold your shares through Prudential Securities, you should
contact your financial adviser to elect to receive dividends and distributions
in cash. The Fund will notify each shareholder after the close of the Fund's
taxable year both of the dollar amount and taxable status of that year's
dividends and distributions on a per share basis.
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GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on March 22, 1979, and its
authorized capital stock consists of three billion shares of common stock of
$.01 par value. Shares of the Fund, when issued, are fully paid,
nonassessable, fully transferable and redeemable at the option of the
shareholder. Shares are also redeemable at the option of the Fund. See
"Shareholder Guide--How to Sell Your Shares." All shares are equal as to
earnings, assets and voting privileges. There are no conversion, pre-emptive
or other subscription rights. In the event of liquidation, each share of
common stock of the Fund is entitled to its portion of all of the Fund's
assets after all debts and expenses have been paid. The shares of the Fund do
not have cumulative voting rights for the election of directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold annual
meetings of shareholders unless, for example, the election of directors 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% of the Fund's outstanding shares for the purpose of voting on the
removal of one or more Directors or to transact any other business.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the
information set forth in the Registration Statement filed by the Fund with the
SEC under the Securities Act of 1933. Copies of the Registration Statement may
be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities or
Prusec or directly through its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Investment Services, P.O. Box 15020, New Brunswick,
New Jersey 08906-5020. The minimum initial investment is $1,000. The minimum
subsequent investment is $100. All minimum investment requirements are waived
for certain retirement and employee savings plans and for custodial accounts
for the benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Services" below.
An investment in the Fund may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
Shares of the Fund are sold, without a sales charge, at the NAV next
determined after receipt and acceptance by PMFS of a purchase order and
payment in proper form [i.e., a check or Federal Funds wired to State Street
Bank & Trust Company (State Street)]. See "How the Fund Values its Shares."
When payment is received by PMFS prior to 4:30 P.M., New York time, in proper
form, a share purchase order will be entered at the price determined as of
4:30 P.M., New York time, on that day, and dividends on the shares purchased
will begin on the business day following such investment. See "Taxes,
Dividends and Distributions."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive stock
certificates. Shareholders cannot utilize Expedited Redemption or Check
Redemption or have a Systematic Withdrawal Plan if they have been issued share
certificates.
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The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the fifth business day following the
investment.
Transactions in shares of the Fund may be subject to postage and other
charges imposed by your dealer.
Purchase through Prudential Securities
If you have an account with Prudential Securities (or open such an
account), you may ask Prudential Securities to purchase shares of the Fund on
your behalf. On the business day following confirmation that a free credit
balance (i.e., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Fund in an amount up
to the balance at the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to State Street by Prudential Securities and begin earning dividends
the second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Fund purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Fund through
Prudential Securities may not redeem shares of the Fund by check, Prudential
Securities may provide its clients with alternative forms of immediate access
to monies invested in shares of the Fund.
Prudential Securities clients wishing additional information concerning
investment in Fund shares made through Prudential Securities should call their
Prudential Securities financial adviser.
Automatic Investment. Prudential Securities has advised the Fund that it
has instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of
free credit balances of $1,000 or more (Eligible Credit Balances) held in such
client's account in shares of the Fund (Autosweep). To effect the automatic
investment of Eligible Credit Balances representing the proceeds from the sale
of securities, Prudential Securities will enter orders for the purchase of
Fund shares at the opening of business on the day following the settlement of
such securities transactions; to effect the automatic investment of Eligible
Credit Balances representing non-trade related credits, Prudential Securities
will enter orders for the purchase of Fund shares at the opening of business
semi-monthly. All shares purchased pursuant to such procedures will be issued
at the net asset value of such shares determined on the date the order is
entered and will receive the next dividend declared after such shares are
issued.
Self-directed Investment. Prudential Securities clients not electing the
automatic investment of Eligible Credit Balances may continue to place orders
for the purchase of Fund shares through Prudential Securities, subject to
minimum initial and subsequent investment requirements as described above.
A Prudential Securities client who has not elected Autosweep (see
"Automatic Investment" above) and who does not place a purchase order promptly
after funds are credited to his or her Prudential Securities account will have
a free credit balance with Prudential Securities and will not begin earning
dividends on shares of the Fund until the second business day after receipt of
the order by Prudential Securities. Accordingly, Prudential Securities may
have the use of such free credit balances during this period.
Purchase through Prusec
You may purchase shares of the Fund by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of
such shares and, in the case of a new account, a completed application form.
You should also submit an IRS Form W-9. The Prusec registered representative
will then forward these items to PMFS. See "Purchase by Mail" below.
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<PAGE>
Purchase by Wire
For an initial purchase of shares of the Fund by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identifica-
tion number, dividend distribution election, amount being wired and wiring
bank. Instructions should then be given by you to your bank to transfer funds
by wire to State Street Bank and Trust Company, Boston, Massachusetts, Custody
and Shareholder Services Division, Attention: Prudential Tax-Free Money Fund,
specifying on the wire the account number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase Fund shares as of
that day and receive dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State
Street directly, and should be sure that the wire specifies Prudential
Tax-Free Money Fund and your name and individual account number. It is not
necessary to call PMFS to make subsequent purchase orders by wire. The minimum
amount which may be invested by wire is $1,000.
Purchase by Mail
Purchase orders for which remittance is to be made by check or money
order may be submitted directly by mail to Prudential Mutual Fund Services,
Inc., Attention: Investment Services, P.O. Box 15020, New Brunswick, NJ
08906-5020, together with payment for the purchase price of such shares and,
in the case of a new account, a completed application form. You should also
submit an IRS Form W-9. If PMFS receives an order to purchase shares of the
Fund prior to 4:30 P.M., New York time, and payment by check, the purchase
order will be effective that day and you will be entitled to dividends the
following business day. See "Taxes, Dividends and Distributions." Checks
should be made payable to Prudential Tax-Free Money Fund. Certified checks are
not necessary, but checks must be drawn on a bank located in the United
States. There are restrictions on the redemption of shares purchased by check
while funds are being collected. See "How to Sell Your Shares."
Purchase by Holders of Prudential Securities Unit Trusts
Holders of Prudential sponsored Unit Trusts may elect to have monthly
distributions paid by such Unit Trusts reinvested in shares of the Fund
without compliance with the investment minimums described under "How to Buy
Shares of the Fund."
The Prudential Advantage Account Program
Shares of the Fund are offered to participants in the Prudential
Advantage Account Program (the Advantage Account Program), a financial
services program available to clients of Pruco Securities Corporation.
Investors participating in the Advantage Account Program may select the Fund
as their primary investment vehicle. Such investors will have the free credit
cash balances in their Securities Account (a component of the Advantage
Account Program carried through Prudential Securities) automatically invested
in shares of the Fund. For free credit cash balances of $1,000 or more, an
order to purchase shares of the Fund will be placed on the business day
following confirmation that a free credit cash balance exists. For free credit
cash balances of less than $1,000 an order will be placed on Monday of each
week or on the next business day if Monday is a holiday. Prudential Securities
will have the use of such free credit cash balances during this period.
Participation in the Advantage Account Program will allow you to utilize
checkwriting and VISA debit card privileges. Redemptions will be automatically
effected to satisfy debit balances arising under the Advantage Account
Program, such as those incurred by use of the VISA Account, i.e., VISA card
charges, or checks. Each Advantage Account Program Securities Account will be
automatically scanned for debits each business day, as of the close of
business, and a sufficient number of shares of the Fund (if selected as the
primary fund) will be redeemed as of that day to satisfy such debits. Advan-
tage Account participants will not be entitled to dividends declared on the
date of redemption.
Advantage Account Program charges and expenses are not reflected in the
Table of Fund Expenses. See "Fund Expenses."
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For information on participation in the Advantage Account Program, you
should telephone (800) 235-7637 (toll-free).
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at the NAV next
determined after the redemption request is received in proper form by the
Transfer Agent or Prudential Securities. See "How the Fund Values its Shares."
Shares for which a redemption request is received by PMFS prior to 4:30
P.M., New York time, are entitled to a dividend on the day on which the
request is received. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next bank business day following the date of receipt of the
redemption instructions. Should you redeem all of your shares, you will
receive the amount of all dividends declared for the month-to-date on those
shares. See "Taxes, Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid
to a person other than the record owner, (c) are to be sent to an address
other than the address on the Transfer Agent's records or (d) are to be paid
to a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services offices.
Normally, the Fund makes payment on the next business day for all shares
redeemed, but in any event, payment is made within seven days after receipt by
PMFS of stock certificates and/or of a redemption request in proper form.
However, the Fund may suspend the right of redemption or postpone the date of
payment (a) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend or holiday closings), (b) for any periods
when trading in the markets which the Fund normally utilizes is closed or
restricted or an emergency exists as determined by the SEC so that disposal of
the Fund's investments or determination of its NAV is not reasonably practica-
ble or (c) for such other periods as the SEC may permit for protection of the
Fund's shareholders; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions in (b) or (c) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has
been honored, up to 10 calendar days from the time of receipt of the purchase
check by the Transfer Agent. Such delay may be avoided by purchasing shares by
wire or by certified or official bank check.
Redemption of Shares Purchased Through Prudential Securities
Prudential Securities clients for whom Prudential Securities has
purchased shares of the Fund may have these shares redeemed only by
instructing their Prudential Securities financial adviser orally or in
writing.
Prudential Securities has advised the Fund that it has established
procedures pursuant to which shares of the Fund held by a Prudential
Securities client having a deficiency in his or her Prudential Securities
account will be redeemed automatically to the extent of that deficiency to the
nearest highest dollar, unless the client notifies Prudential Securities to
the contrary. The amount of the redemption will be the lesser of (a) the total
NAV of Fund shares held in the client's Prudential Securities account or (b)
the deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client utilizing this automatic redemption procedure and who wishes
to pay for a securities transaction or meet any market action related
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<PAGE>
deficiency in his or her account other than through such automatic redemption
procedure must do so not later than the day of settlement for such securities
transaction or the date such market action related deficiency is incurred.
Prudential Securities clients who have elected to utilize Autosweep will not
be entitled to dividends declared on the date of redemption.
Redemption of Shares Purchased Through PMFS
If you purchase shares of the Fund through PMFS, you may use Check
Redemption, Expedited Redemption or Regular Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
Regular Redemption. You may redeem your shares by sending a written
request, accompanied by duly endorsed share certificates, if issued, to PMFS,
Attention: Redemption Services, P.O. Box 15010, New Brunswick, NJ 08906-5010.
In this case, all share certificates must be endorsed by you with signature
guaranteed, as described above. PMFS may request further documentation from
corporations, executors, administrators, trustees or guardians. Regular
redemption is made by check sent to the shareholder's address.
Expedited Redemption. By pre-authorizing Expedited Redemption, you may
arrange to have payment for redeemed shares made in Federal Funds wired to the
shareholder's bank, normally on the next business day following redemption. In
order to use Expedited Redemption, you may so designate at the time the
initial application form is filed or at a later date. Once the Expedited
Redemption authorization form has been completed, the signature on the
authorization form guaranteed as set forth below and the form returned to
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O.
Box 15010, New Brunswick, NJ 08906-5010, requests for redemption may be made
by telegraph, letter or telephone. To request Expedited Redemption by tele-
phone, a shareholder should call PMFS at (800) 225-1852. Calls must be
received by PMFS before 4:30 P.M., New York time to permit redemption as of
such date. Requests by letter should be addressed to Prudential Mutual Fund
Services, Inc., at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemp-
tion privilege may be used only to redeem shares in an amount of $200 or more,
except that, if an account for which Expedited Redemption is requested has a
net asset value of less than $200, the entire account must be redeemed. The
proceeds of redeemed shares in the amount of $1,000 or more are transmitted by
wire to your account at a domestic commercial bank which is a member of the
Federal Reserve System. Proceeds of less than $1,000 are forwarded by check to
your designated bank account.
During periods of severe market or economic conditions, Expedited
Redemption may be difficult to implement, and you should redeem shares by mail
as described above.
Check Redemption. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Fund in your
account to cover the amount of the check. If insufficient shares are in the
account, or if the purchase was made by check within 10 days, the check will
be returned marked "insufficient funds." Checks in an amount less than $500
will not be honored. Shares for which certificates have been issued cannot be
redeemed by check. PMFS reserves the right to impose a service charge to
establish a checking account and order checks.
Involuntary Redemption
Because of the relatively high cost of maintaining an account, the Fund
reserves the right to redeem, upon 60 days' written notice, an account which
is reduced by a shareholder to an NAV of $500 or less due to redemption. You
may avoid such redemption by increasing the NAV of your account to an amount
in excess of $500.
30-Day Repurchase Privilege
If you redeem your shares and have not previously exercised the
repurchase privilege, you may reinvest any portion or all of the proceeds of
such redemption in shares of the Fund at the NAV next determined after the
order is received, which must be within 30 days
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after the date of the redemption. Exercise of the repurchase privilege will
not affect the federal income tax treatment of any gain realized upon the
redemption. If the redemption resulted in a loss, some or all of the loss,
depending on the amount reinvested, will generally not be allowed for federal
income tax purposes.
Class B Purchase Privilege
You may direct that the proceeds of a redemption of Fund shares be
invested in Class B shares of any Prudential Mutual Fund by calling your
Prudential Securities financial adviser or the Transfer Agent at (800)
225-1852. The transaction will be effected on the basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Fund, you may exchange your shares for shares of
certain other Prudential Mutual Funds, including money market funds and funds
sold with an initial sales charge, subject to the minimum investment require-
ments of such funds on the basis of relative NAV. You may exchange your shares
for Class A shares of the Prudential Mutual Funds on the basis of the relative
NAV plus the applicable sales charge. No additional sales charge is imposed in
connection with subsequent exchanges. You may not exchange your shares for
Class B shares of the Prudential Mutual Funds, except that shares acquired
prior to January 22, 1990 subject to a contingent deferred sales charge can be
exchanged for Class B shares. See "How to Sell Your Shares--Class B Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in
the Statement of Additional Information. An exchange will be treated as a
redemption and purchase for tax purposes.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written consent to the
Transfer Agent and hold shares in non-certificate form. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares,
weekdays, except holidays, between the hours of 8:00 a.m. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. Neither the Fund nor its agents will be liable for any loss,
liability or cost which results from acting upon instructions reasonably
believed to be genuine under the foregoing procedures. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order. The Exchange Privilege is available
only in states where the exchange may legally be made.
If you hold shares of the Fund through Prudential Securities, you must
exchange your shares by contacting your Prudential Securities financial
adviser. If you hold certificates, the certificates, signed in the name(s)
shown on the face of the certificates, must be returned in order for the
shares to be exchanged. See "How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions, the telephone
exchange of shares of the Fund may be difficult to implement and you should
make exchanges by mail by writing to Prudential Mutual Fund Services, Inc., at
the address noted above.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
. Automatic Reinvestment of Dividends and/or Distributions. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund at NAV. You may direct the Transfer
Agent in writing not less than 5 full
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business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
. Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make
regular purchases of Fund shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (not including a
Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec registered
representative or the Transfer Agent directly.
. Systematic Withdrawal Plan. A systematic withdrawal plan is available
for shareholders having shares of the Fund which provides for monthly or
quarterly checks. If you hold your shares through Prudential Securities, you
should contact your financial adviser.
. Multiple Accounts. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may
open a single master account by filing an Application Form with Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), [Attention: Customer
Service, P.O. Box 15005, New Brunswick, New Jersey 08906,] signed by personnel
authorized to act for the institution. Individual sub-accounts may be opened
at the time the master account is opened by listing them, or they may be added
at a later date by written advice or by filing forms supplied by the Fund.
Procedures are available to identify sub-accounts by name and number within
the master account name. The investment minimums set forth above are applica-
ble to the aggregate amounts invested by a group and not to the amount
credited to each sub-account.
. Reports to Shareholders. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses the Fund will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies
of such reports by calling (800) 225-1852 or by writing to the Fund at One
Seaport Plaza, New York, New York 10292.
. Shareholder Inquiries. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges
described above, see "Shareholder Investment Account" in the Statement of
Additional Information.
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THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the invest-
ment options available through our family of funds. For more information on
the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec registered representative or
telephone the Fund at (800) 225-1852 for a free prospectus. Read the prospec-
tus carefully before you invest or send money.
Taxable Bond Funds Equity Funds
Prudential Adjustable Rate Securities Prudential Equity Fund, Inc.
Fund, Inc. Prudential Equity Income Fund
Prudential GNMA Fund Prudential FlexiFund
Prudential Government Plus Fund Conservatively Managed Portfolio
Prudential Government Securities Strategy Portfolio
Trust Intermediate Term Series Prudential Growth Fund, Inc.
Prudential High Yield Fund Prudential Growth Opportunity Fund
Prudential Structured Maturity Fund Prudential IncomeVertible(R) Fund,
Income Portfolio Inc.
Prudential U.S. Government Fund Prudential Multi-Sector Fund, Inc.
The BlackRock Government Income Trust Prudential Utility Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity
Tax-Exempt Bond Funds Fund
Prudential California Municipal Fund
California Series Money Market Funds
California Income Series
Prudential Municipal Bond Fund . Taxable Money Market Funds
High Yield Series Prudential Government Securities
Insured Series Trust
Modified Term Series Money Market Series
Prudential Municipal Series Fund U.S. Treasury Money Market Series
Arizona Series Prudential Special Money Market
Florida Series Fund
Georgia Series Money Market Series
Maryland Series Prudential MoneyMart Assets
Massachusetts Series . Tax-Free Money Market Funds
Michigan Series Prudential Tax-Free Money Fund
Minnesota Series Prudential California Municipal
New Jersey Series Fund
New York Series California Money Market Series
North Carolina Series Prudential Municipal Series Fund
Ohio Series Connecticut Money Market Series
Pennsylvania Series Massachusetts Money Market Series
Prudential National Municipals Fund New Jersey Money Market Series
New York Money Market Series
. Command Funds
Global Funds Command Money Fund
Command Government Fund
Prudential Global Fund, Inc. Command Tax-Free Fund
Prudential Global Genesis Fund . Institutional Money Market Funds
Prudential Global Natural Resources Prudential Institutional Liquidity
Fund Portfolio, Inc.
Prudential Intermediate Global Income Institutional Money Market Series
Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income
Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
A-1
<PAGE>
No dealer, sales representative or any other person has been
authorized to give any information or to make any
representations, other than those contained in this Prospectus,
in connection with the offer contained herein, and, if given or
made, such other information or representations must not be
relied upon as having been authorized by the Fund or the Dis-
tributor. This Prospectus does not constitute an offer by the
Fund or by the Distributor to sell or a solicitation of any
offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction.
================================================================
TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . 2
FUND EXPENSES . . . . . . . . . . . . . . . . . . . . . . 4
FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . . . . 5
CALCULATION OF YIELD. . . . . . . . . . . . . . . . . . . 6
HOW THE FUND INVESTS. . . . . . . . . . . . . . . . . . . 6
Investment Objective and Policies. . . . . . . . . . . . 6
Other Investments and Policies . . . . . . . . . . . . . 8
Investment Restrictions. . . . . . . . . . . . . . . . . 8
HOW THE FUND IS MANAGED . . . . . . . . . . . . . . . . . 8
Manager. . . . . . . . . . . . . . . . . . . . . . . . . 9
Distributor. . . . . . . . . . . . . . . . . . . . . . . 9
Portfolio Transactions . . . . . . . . . . . . . . . . . 10
Custodian and Transfer and
Dividend Disbursing Agent . . . . . . . . . . . . . . . 10
HOW THE FUND VALUES ITS SHARES. . . . . . . . . . . . . . 10
TAXES, DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . 10
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . 12
Description of Common Stock. . . . . . . . . . . . . . . 12
Additional Information . . . . . . . . . . . . . . . . . 12
SHAREHOLDER GUIDE . . . . . . . . . . . . . . . . . . . . 12
How to Buy Shares of the Fund. . . . . . . . . . . . . . 12
How to Sell Your Shares. . . . . . . . . . . . . . . . . 15
How to Exchange Your Shares. . . . . . . . . . . . . . . 17
Shareholder Services . . . . . . . . . . . . . . . . . . 17
THE PRUDENTIAL MUTUAL FUND FAMILY . . . . . . . . . . . . A-1
================================================================
103A 444030H
****************************************************************
* CUSIP No. 74436P-10-3 *
****************************************************************
PRUDENTIAL
TAX-FREE MONEY
FUND
-----------------------------------------
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE
ON OUR STRENGTH
-----------------------------------------------
/ P R O S P E C T U S MAY 2, 1994 /
-----------------------------------------------
<PAGE>
FILED PURSUANT TO RULE 497(c)
FILE No. 2-64625
PRUDENTIAL TAX-FREE MONEY FUND
Statement of Additional Information
dated May 2, 1994
Prudential-Bache Tax-Free Money Fund, Inc., doing business as Prudential
Tax-Free Money Fund (the Fund), is an open-end diversified management investment
company whose investment objective is to attain for investors the highest level
of current income that is exempt from federal income taxes, consistent with
liquidity and the preservation of capital. The Fund will invest in short-term
tax-exempt debt securities of state and local governments. See "Investment
Objective and Policies." The Fund's address is One Seaport Plaza, New York, New
York 10292, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus. It is
intended to be read in conjunction with the Fund's Prospectus, dated May 2,
1994. A copy of the Prospectus may be obtained from the Fund at the address or
telephone number noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
---- ---------------
<S> <C> <C>
General Information.......................................................... B-2 12
Investment Objective and Policies............................................ B-2 6
Investment Restrictions...................................................... B-4 8
Directors and Officers....................................................... B-5 8
Manager...................................................................... B-6 9
Distributor.................................................................. B-8 9
Portfolio Transactions and Brokerage......................................... B-9 10
Purchase and Redemption of Fund Shares....................................... B-9 12
Shareholder Investment Account............................................... B-11 17
Net Asset Value.............................................................. B-12 10
Calculation of Yield......................................................... B-13 6
Taxes, Dividends and Distributions........................................... B-13 10
Custodian and Transfer and Dividend Disbursing Agent, and Independent
Accountants.................................................................. B-14 10
Financial Statements......................................................... B-15 --
Report of Independent Accountants............................................ B-26 --
Appendix A--Description of Tax-Exempt Security Ratings....................... A-1 --
</TABLE>
- --------------------------------------------------------------------------------
103B 4440076
<PAGE>
GENERAL INFORMATION
On February 28, 1991, the Board of Directors approved an amendment to the
Fund's Articles of Incorporation to change the Fund's name to Prudential
Tax-Free Money Fund, Inc. and authorized the Fund to do business under the name
Prudential Tax-Free Money Fund until the next annual or special meeting of
shareholders at which time the amendment will be submitted to shareholders for
their approval.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to attain for investors the highest
level of current income that is exempt from federal income taxes, consistent
with liquidity and the preservation of capital. The Fund will seek to achieve
its investment objective by investing in a diversified portfolio of short-term
debt obligations issued by states, territories and possessions of the United
States and by the District of Columbia, and their political subdivisions, duly
constituted authorities and corporations, the interest from which is
wholly-exempt from federal income tax in the opinion of bond counsel to the
issuer. Such securities are generally known as "Municipal Bonds" or
"Municipal Notes." Interest on certain Municipal Bonds and Municipal Notes may
be a preference item for purposes of the federal alternative minimum tax. See
"Taxes, Dividends & Distributions."
The investment objective and policies of the Fund other than those
described under "Investment Restrictions" may be changed by the Board of
Directors of the Fund without shareholder approval. Such changes may result in
the Fund having investment objectives different from the objectives which the
shareholders considered appropriate at the time of investment in the Fund.
Municipal Bonds and Notes
Municipal Bonds. Municipal Bonds are generally issued to obtain funds for
various public purposes, including construction of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. They may also be issued to refund outstanding
obligations, to meet general operating expenses or to obtain funds to lend to
other public institutions and facilities. Municipal Bonds also include bonds
issued by or on behalf of public authorities in order to obtain funds with which
to provide privately operated housing facilities, sports facilities, pollution
control facilities, convention or trade show facilities, industrial, port or
parking facilities and facilities for water supply, gas, electricity or waste
disposal. These bonds typically are revenue bonds and generally do not carry the
pledge of the issuer's credit.
Municipal Bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenues derived from a particular facility or class of
facilities or from the proceeds of a special excise tax or other specific
revenue source but not from the general taxing power.
Municipal Notes. Municipal Notes are short-term obligations generally with
a maturity, at the time of issuance, ranging from six months to three years. The
principal types of Municipal Notes include tax anticipation notes, bond
anticipation notes and revenue anticipation notes. Municipal Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues,
are usually general obligations of the issuing municipality or agency.
Municipal Notes also include tax-exempt or municipal commercial paper,
which is likely to be issued to meet seasonal working capital needs of a
municipality or interim construction financing and to be paid from general
revenues of the municipality or refinanced with long-term debt. In most cases
municipal commercial paper is backed by letters of credit, lending agreements,
note repurchase agreements or other credit facility agreements offered by banks
or other institutions.
Variable Rate and Floating Rate Securities. The interest rates payable on
certain Municipal Bonds and Municipal Notes are not fixed and may fluctuate
based upon changes in market rates. Municipal Bonds and Notes of this type are
called "variable rate" or "floating rate" obligations. The interest rate
payable on a variable rate obligation is adjusted at predesignated intervals and
that payable on a floating rate obligation is adjusted whenever there is a
change in the market rate of interest on which the interest rate payable is
based. Other features of these obligations typically include the right of the
Fund to demand, in some cases, at specified intervals of less than one year or,
in other cases, upon not less than seven days' notice, prepayment of the
principal amount of the obligation prior to its stated maturity (a demand
feature). In addition, the issuer may have the right, at similar intervals or
upon similar notice, to prepay the principal amount prior to maturity. The
principal benefit of variable and floating rate obligations is that the interest
rate adjustment minimizes changes in the market value of the obligations. As a
result, the purchase of such obligations should enhance the ability of the Fund
to maintain a stable net asset value per share (see Net Asset Value) and to sell
an obligation prior to maturity at a price approximating the full principal
amount of the obligation. The payment of principal and interest by issuers of
certain Municipal Bonds and Notes purchased by the Fund may be guaranteed by
letters of credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
Municipal Bond or Note meets the Fund's investment quality requirements.
B-2
<PAGE>
Puts. The Fund may purchase Municipal Bonds or Notes together with the
right to resell the Municipal Bonds or Notes to the seller at an agreed-upon
price or yield within a specified period prior to the maturity date of the Bonds
or Notes. Such a right to resell is commonly known as a "put" or "tender
option," and the aggregate price which the Fund pays for Municipal Bonds or
Notes with puts or tender options is higher than the price which otherwise would
be paid for the Bonds or Notes. Consistent with the Fund's investment objective
and subject to the supervision of the Board of Directors, the primary purpose of
this practice is to permit the Fund to be fully invested in securities the
interest on which is exempt from federal income taxes while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions and to purchase, at a later date, securities other
than those subject to the put. The Fund's policy is generally to exercise the
puts or tender options on their expiration date when the exercise price is
higher than the current market price for related Municipal Bonds or Notes. Puts
or tender options may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet such
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in the event the
Fund's investment adviser revises its evaluation of the creditworthiness of the
issuer of the underlying security. In determining whether to exercise puts or
tender options prior to their expiration date and in selecting which puts or
tender options to exercise in such circumstances, the investment adviser
considers, among other things, the amount of cash available to the Fund, the
expiration dates of the available puts or tender options, any future commitments
for securities purchases, the yield, quality and maturity dates of the
underlying securities, alternative investment opportunities and the desirability
of retaining the underlying securities in the Fund's portfolio.
The Fund values Municipal Bonds and Notes which are subject to puts or
tender options at amortized cost; no value is assigned to the put or tender
option. The cost of the put or tender option is carried as an unrealized loss
from the time of purchase until it is exercised or expires. The value of the put
or tender option is dependent on the ability of the put writer to meet its
obligation of repurchase, and it is the Fund's general policy to enter into put
or tender option transactions only with such brokers, dealers or other financial
institutions which present minimal credit risks. There is a credit risk
associated with the purchase of puts or tender options in that the broker,
dealer or financial institution might default on its obligation to repurchase an
underlying security. The Fund has received a ruling of the Internal Revenue
Service to the effect that the Fund will be considered the owner of the
Municipal Bonds or Notes subject to the puts or tender options so that the
interest on the Bonds or Notes will be tax-exempt income to the Fund.
When-Issued and Delayed Delivery Securities. Municipal Bonds and Notes are
frequently offered on a when-issued or delayed delivery basis. When so offered,
the price and coupon rate are fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one week of the purchase
of Municipal Notes and within one month of the purchase of Municipal Bonds. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The securities so purchased are subject to market fluctuation
and, during the period between purchase and settlement, no interest accrues to
the purchaser. While securities may be sold prior to the settlement date, the
Fund intends to purchase such securities with the purpose of actually acquiring
them unless a sale would be desirable for investment reasons. At the time the
Fund makes the commitment to purchase a Municipal Bond or Note on a when-issued
or delayed delivery basis, it will record the transaction and reflect the value
of the Bond or Note in determining its net asset value. The Fund will also
establish a segregated account with its custodian bank in which it will maintain
cash and other Municipal Bonds or Notes equal in value to commitments for
when-issued or delayed delivery securities. Such Municipal Bonds or Notes will
either mature on or about the settlement date or will be Bonds or Notes as to
which the Fund has a put exercisable on or about the settlement date. If the
Fund chooses to dispose of the right to acquire a when-issued or delayed
delivery security prior to the settlement date, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. The Fund does not believe that its net asset value or net
investment income will be adversely affected by its purchase of Municipal Bonds
or Notes on a when-issued or delayed delivery basis. The Fund may invest in
when-issued or delayed delivery securities without other limitation.
Other Matters. For purposes of diversification under the Investment Company
Act of 1940, as amended (the Investment Company Act), the identification of the
issuer of Municipal Bonds or Notes depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision, and the obligation is backed only by the assets and
revenues of the subdivision, such subdivision would be regarded as the sole
issuer. Similarly, in the case of a private activity revenue bond or pollution
control revenue bond, if the bond is backed only by the assets and revenues of
the nongovernmental user, the nongovernmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be regarded as a separate security and
treated as an issue of such government or entity.
Portfolio Turnover
Portfolio turnover rate is defined as the lesser of the amount of the
securities purchased or securities sold, excluding all securities whose maturity
or expiration date at the time of acquisition was one year or less, divided by
the average monthly value of such securities
B-3
<PAGE>
owned during the year. Because the Fund's portfolio will contain only securities
maturing within one year, the Fund does not expect to have a turnover rate as so
defined. However, because of the short-term nature of the Fund's portfolio, it
expects to have substantial amounts of portfolio transactions. The Fund does not
expect to pay any material amounts of brokerage commissions, but transaction
costs exist in the form of spreads between bid and asked price.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Fund as
fundamental policies. Under the Investment Company Act, a fundamental policy
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities which means the lesser of (1) 67% of the
Fund's 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 Fund's outstanding shares. Any investment restrictions which involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by an acquisition or encumbrance of securities or assets of, or
borrowings by, the Fund.
The Fund may not:
(1) Invest in securities other than Municipal Bonds and Notes as described
under "Investment Objective and Policies."
(2) Invest more than 5% of the market or other fair value of its total
assets in the securities of any one issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities
or secured by such obligations). See "Municipal Bonds and Notes" under
"Investment Objective and Policies" for definition of an issuer.
(3) Make short sales of securities.
(4) Purchase securities on margin, except for such short-term credits as
are necessary for the clearance of purchases and sales of portfolio securities.
(5) Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding 5% of the market or other fair value (taken at the lower
of cost or current value) of its total assets (not including the amount
borrowed). Any such borrowings will be made only from banks. Secured temporary
borrowings may take the form of reverse repurchase agreements, pursuant to which
the Fund would sell portfolio securities for cash and simultaneously agree to
repurchase them at a specified date for the same amount of cash plus an interest
component. The Fund would maintain, in a segregated account with its custodian,
liquid assets equal in value to the amount owed.
(6) Pledge its assets or assign or otherwise encumber them in excess of 10%
of its assets (taken at market or other fair value at the time of pledging) and
then only to secure borrowings effected within the limitations set forth in
restriction (5).
(7) Engage in the underwriting of securities.
(8) Purchase or sell real estate mortgage loans, although it may purchase
Municipal Bonds or Notes secured by interests in real estate.
(9) Make loans of money or securities. The purchase of a portion of an
issue of publicly distributed debt securities is not considered the making of a
loan.
(10) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
(11) Invest for the purpose of exercising control or management of another
company.
(12) Write, purchase or sell puts, calls, or combinations thereof, except
that it may obtain rights to resell Municipal Bonds and Notes as set forth under
"Investment Objective and Policies."
(13) Purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Fund assets would be invested in industrial revenue bonds
where payment of principal and interest are the responsibility of companies with
less than three years of operating history.
(14) Purchase or retain the securities of any issuer if officers or
directors of the Fund or officers or directors of the Manager responsible for
investment decisions concerning the Fund beneficially owning individually more
than 1/2 of 1% of securities of such issuer together beneficially own more than
5% of the securities of such issuer.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
B-4
<PAGE>
In order to comply with certain state "blue sky" restrictions, the Fund
will not invest more than 10% of its total assets in repurchase agreements which
have a maturity of longer than seven days or in other illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Securities
eligible for resale in accordance with Rule 144A under the Securities Act of
1933 that have legal or contractual restrictions on resale but have a readily
available market will not be considered illiquid for purposes of this limitation
if determined to be liquid by the Board of Directors. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position With Principal Occupations
Name and Address Fund During Past 5 Years
- -------------------- -------------- ----------------------------------------
<S> <C> <C>
Delayne Dedrick Gold Director Marketing and Management Consultant.
c/o Prudential
Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Arthur Hauspurg Director Trustee and former President, Chief Executive Officer and
c/o Prudential Chairman of the Board of Consolidated Edison Company of
Mutual Fund New York, Inc.; Director of COMSAT Corp.
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Director Senior Director (since January 1986) of Prudential
Jr. Securities; formerly Chairman of the Board (1982-1985) of
One Seaport Plaza Prudential Securities and Chairman of the Board and Chief
New York, NY Executive Officer of Bache Group Inc. (1977-1982);
Trustee of the Trudeau Institute; Director of the Center
for National Policy, The First Australia Fund, Inc., The
First Australia Prime Income Fund, Inc., The Global
Government Plus Fund, Inc. and The Global Yield Fund,
Inc.
Thomas J. McCormack Director Chairman, Chief Executive Officer and Editorial Director
175 Fifth Avenue (since 1987) and President (1970-1987) of St. Martin's
New York, NY Press, Inc.; Director of Macmillan Publishers Limited
(London) and Pan Books, Limited (London).
*Lawrence C. McQuade President and Vice Chairman of PMF (since 1988); Managing Director,
One Seaport Plaza Director Investment Banking of Prudential Securities Incorporated
New York, NY (Prudential Securities) (1988-1991); Director of Quixote
Corporation (since February 1992) and BUNZL, PLC (since
June 1991); formerly, Director of Crazy Eddie Inc.
(1987-1990) and Director of Kaiser Tech, Ltd., Kaiser
Aluminum and Chemical Corp. (March 1987-November 1988);
formerly Executive Vice President and Director of WR
Grace & Company; President and Director of The Global
Government Plus Fund Inc., The Global Yield Fund, Inc.
and The High Yield Income Fund, Inc.
Stephen P. Munn Director Chairman (since January 1994), Director and President
101 So. Salina (since 1988) and Chief Executive Officer (1988-December
Street 1993) of Carlisle Companies Incorporated.
Syracuse, NY
Louis A. Weil, III Director Publisher and Chief Executive Officer, Phoenix Newspapers,
120 E. Van Buren Inc. (since August 1991); Director of Central Newspapers,
Phoenix, AZ Inc. (since September 1991); prior thereto, Publisher of
Time Magazine (May 1989-March 1991); formerly, President,
Publisher and Chief Executive Officer of The Detroit News
(February 1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-Westchester;
Director of The Global Government Plus Fund, Inc.
David W. Drasnin Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square
Suite 500
Wilkes-Barre, PA
</TABLE>
B-5
<PAGE>
<TABLE>
<CAPTION>
Position With Principal Occupations
Name and Address Fund During Past 5 Years
- -------------------- -------------- -----------------------------------------------------------
<S> <C> <C>
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President, Treasurer
New York, NY and Chief Financial Officer (since June 1987) of PMF;
Senior Vice President (since March 1987) of Prudential
Securities; Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989) and Vice President
and Director (since February 1992) of Nicholas-Applegate
Fund, Inc.
Susan C. Cote Treasurer Senior Vice President (since January 1989) and First Vice
One Seaport Plaza President (June 1987-December 1988) of PMF; Senior Vice
New York, NY President (since January 1992) and Vice President
(January 1986-December 1991) of Prudential Securities.
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June
New York, NY 1987-December 1990) of PMF; Senior Vice President and
Senior Counsel of Prudential Securities (since July
1992); formerly Vice President and Associate General
Counsel of Prudential Securities.
Ronald Amblard Assistant First Vice President (since January 1994), and Associate
One Seaport Plaza Secretary General Counsel (since January 1992) of PMF; Vice
New York, NY President and Associate General Counsel of Prudential
Securities (since January 1992); formerly, Vice President
(January 1991-December 1993), Assistant General Counsel
(August 1988-December 1991) and Associate Vice President
(January 1989-December 1990) of PMF.
</TABLE>
- ---------------
* "Interested" director, as defined in the Investment Company Act by reason of
their affiliation with Prudential Securities or PMF.
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors, Inc. (PMFD).
The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general
policy.
The Fund pays each of its directors who is not an affiliated person of PMF
or The Prudential Investment Corporation (PIC) annual compensation of $6,000, in
addition to certain out-of-pocket expenses. The Chairman of the Audit Committee
receives an additional $200 per year.
Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee 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 of the Securities and Exchange Commission (SEC), at the daily rate of
return of the Fund (the Fund rate). Payment of the interest so accrued is also
deferred and accruals become payable at the option of the Director. The Fund's
obligation to make payments of deferred Directors' fees, together with interest
thereon, is a general obligation of the Fund.
As of February 11, 1994, the Directors and officers of the Fund, as a
group, owned less than 1% of the outstanding common stock of the Fund.
As of February 11, 1994, Prudential Securities was the record holder for
other beneficial owners of 675,091,510 shares (or 96%) of the outstanding common
stock of the Fund. In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to the
beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc., One
Seaport Plaza, New York, New York 10292 (PMF or the Manager). PMF serves as
manager of the other investment companies that, together with the Fund, comprise
the "Prudential Mutual Funds." See "How the Fund is Managed" in the
Prospectus. As of March 31, 1994, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $49
billion. According to the Investment Company Institute, as of December 31, 1993,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and
B-6
<PAGE>
the composition of the Fund's portfolio, including the purchase, retention,
disposition and loan of securities. In connection therewith, PMF is obligated to
keep certain books and records of the Fund. PMF also administers the Fund's
corporate affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services which
are not being furnished by State Street Bank and Trust Company, the Fund's
custodian, and Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), the Fund's transfer and dividend disbursing agent. The management
services of PMF for the Fund are not exclusive under the terms of the Management
Agreement and PMF is free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to $750
million, .425 of 1% of the Fund's average daily net assets between $750 million
and a $1.5 billion and .375 of 1% in excess of $1.5 billion. The fee is computed
daily and payable monthly. The Management Agreement provides that, in the event
the expenses of the Fund (including the fees payable to PMF, but excluding
interest, taxes, brokerage commissions, distribution fees and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund'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 shares of the Fund are then
qualified for offer and sale, the compensation due to PMF will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable to
PMF will be paid by PMF to the Fund. Currently, the Fund believes that the most
restrictive expense limitation of state securities commissions is 2 1/2% of the
Fund's average daily net assets up to $30 million, 2% of the Fund's average
daily net assets from $30 million to $100 million and 1 1/2% of the excess over
$100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of its and the Fund's personnel except the
fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund, as described below; and
(c) the costs and expenses payable to PIC pursuant to a subadvisory
agreement between PMF and PIC (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated with the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the Fund's
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 Fund and of pricing the Fund's shares, (d)
the charges and expenses of the Fund's legal counsel and independent
accountants, (e) brokerage commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities and futures
transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade association of which the Fund
is a member, (h) the cost of stock certificates representing and/or
non-negotiable share deposit receipts evidencing shares of the Fund, (i) the
cost of fidelity and liability insurance, (j) the fees and expenses involved in
registering and maintaining registration of the Fund and of its shares with the
SEC and registering the Fund as a broker or dealer and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business, and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or any loss suffered by the Fund 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
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 Management Agreement was last approved by the Board of Directors of the
Fund, including a majority of the Directors who are not parties to the agreement
or interested persons of such parties as defined in the Investment Company Act,
on May 2, 1994, and was approved by the shareholders of the Fund on April 28,
1988.
For the fiscal years ended December 31, 1993, 1992 and 1991, the Fund paid
management fees to PMF of $3,632,856, $3,347,940 and $3,629,218, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC furnish investment advisory services in connection with the management of
the Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PMF continues to have responsibility for all
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investment advisory services pursuant to the Management Agreement and supervises
PIC's performance of such services. PIC is reimbursed by PMF for the reasonable
costs and expenses incurred by the PIC in furnishing services to PMF.
The Prudential Investment Corporation (PIC or the Subadviser) maintains a
municipal credit unit which provides credit analysis and research on tax-exempt
fixed-income securities. The portfolio manager consults routinely with the
credit unit in managing the Fund's portfolio. The municipal credit unit, which
currently maintains a staff of 14 persons including 10 credit analysts, reviews
on an ongoing basis issuers of tax-exempt fixed-income obligations, including
prospective purchases and portfolio holdings of the Series. Credit analysts have
broad access to research and financial reports, data retrieval services and
industry analysts. They review financial and operating statements supplied by
state and local governments and other issuers of municipal securities to
evaluate revenue projections and the financial soundness of municipal issuers.
They study the impact of economic and political developments on state and local
governments, evaluate industry sectors and meet periodically with public
officials and other representatives of state and local governments and other
tax-exempt issuers to discuss such matters as budget projections, debt policy,
the strength of the regional economy and, in the case of revenue bonds, the
demand for facilities. They also make site inspections to review specific
projects and to evaluate the progress of construction or the operation of a
facility.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the directors who are not parties to such contract or
interested persons of such parties as defined in the Investment Company Act, on
May 2, 1994, and was approved by the shareholders of the Fund on April 28, 1988.
The Subadvisory 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. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days' nor less than 30
days' written notice. The Subadvisory 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 Subadviser are subsidiaries of The Prudential Insurance
Company of America (The Prudential) which, as of December 31, 1993, is one of
the largest financial institutions in the world and the largest insurance
company in North America. The Prudential has been engaged in the insurance
business since 1875. In July 1993, Institutional Investor ranked The Prudential
the third largest institutional money manager of the 300 largest money
management organizations in the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Fund. It is a corporation
organized under the laws of the State of Delaware and a wholly-owned subsidiary
of PMF.
Distribution and Service Plan
Under the Fund's Distribution and Service Plan and the Distribution
Agreement with PMFD, the Fund pays PMFD, as distributor, a distribution fee of
up to 0.125% of the average daily net assets of the Fund, computed daily and
payable monthly.
For the fiscal year ended December 31, 1993, PMFD incurred distribution
expenses in the aggregate of $908,214, all of which was recovered through the
distribution fee paid by the Fund to PMFD. It is estimated that all this amount
was spent on commission credits to Prudential Securities and Prusec for payments
of account servicing fees to financial advisers and an allocation of overhead
and other branch office distribution-related expenses. The term "overhead and
other branch office distribution-related expenses" represents (a) the expenses
of operating Prudential Securities' and Prusec's branch offices in connection
with the sale of Fund shares including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares, and (d) other incidental expenses relating to
branch promotion of Fund sales.
The Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the directors who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan (as defined in the Investment Company Act), cast in person at a meeting
called for the purpose of voting on such continuance. The Plan may be terminated
at any time, without penalty, by the vote of a majority of the Directors who are
not interested persons or by the vote of the holders of a majority of the
outstanding voting securities of the Fund on not more than 60 days' written
notice to any other party to the Plan. The Plan may not be amended to increase
materially the amounts to be spent by the Fund thereunder without shareholder
approval, and all material amendments are required to be approved by the Board
of Directors in the manner described above. The Plan will automatically
terminate in the event of its assignment.
Pursuant to the Plan, the Directors will be provided with, and will review,
at least quarterly, a written report of the distribution expenses incurred on
behalf of the Fund by PMFD. The report will include an itemization of the
distribution expenses and the purpose of
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such expenditures. In addition, as long as the Plan remains in effect, the
selection and nomination of directors who are not interested persons of the Fund
shall be committed to the Directors who are not interested persons of the Fund
or a committee thereof.
Pursuant to Rule 12b-1, the Plan was last approved by the Board of
Directors, including a majority of the Directors who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plan, in person at a meeting called for such purpose on May 2,
1994, and was approved by the shareholders of the Fund on April 28, 1988.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the "Subadviser." Fixed-income securities 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.
The Fund will not deal with Prudential Securities in any transaction in which
Prudential Securities acts as principal. Purchases and sales of securities on a
securities exchange, while infrequent, will be effected through brokers who
charge a commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
Prudential Securities.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of the policy of obtaining most favorable price and efficient
execution, the Manager will consider research and investment services provided
by brokers or dealers who effect or are parties to portfolio transactions of the
Fund, the Manager or the Manager'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 municipalities and industries. Such services are used by the Manager
in connection with all of its investment activities, and some of such services
obtained in connection with the execution of transactions for the Fund may be
used in managing other investment accounts. Conversely, brokers furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker based on the quality and quantity of execution
services provided by the broker in light of generally prevailing rates. The
Manager is authorized to pay higher commissions on brokerage transactions for
the Fund to brokers other than Prudential Securities in order to secure the
research and investment services described above, subject to the primary
consideration of obtaining the most favorable price and efficient execution in
the circumstances and subject to review by the Fund's Board of Directors from
time to time as to the extent and continuation of this practice. The allocation
of orders among brokers and the commission rates paid are reviewed periodically.
Subject to the above considerations, the Manager may use Prudential
Securities as a broker for the Fund. In order for Prudential Securities to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities 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 on a securities exchange during a comparable period of time.
This standard would allow Prudential Securities 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 Board of Directors of
the Fund, including a majority of the Directors who are not "interested"
directors, has adopted procedures which are reasonably designed to provide that
any commissions, fees or other remuneration paid to Prudential Securities are
consistent with the foregoing standard. Brokerage transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed upon
Prudential Securities by applicable law.
The Fund paid no brokerage commissions for the years ended December 31,
1993, 1992 and 1991.
PURCHASE AND REDEMPTION OF FUND SHARES
How To Purchase Shares
The Fund's shares are sold, without a sales charge, on a continuing basis
on each business day at their net asset value next determined (see "How the
Fund Values its Shares" in the Prospectus) after a purchase order becomes
effective. Shares of the Fund may be purchased by investors directly through
Prudential Mutual Fund Services, Inc. (PMFS), or by Prudential Securities
clients through an account at Prudential Securities. Shares may also be
purchased through Pruco Securities Corporation (Prusec). Prudential Securities
clients who hold Fund shares through Prudential Securities may benefit through
administrative conveniences afforded them as
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Prudential Securities clients, but may be subject to certain additional
restrictions imposed by Prudential Securities. See "Shareholder Guide--How to
Buy Shares of the Fund" in the Prospectus.
How To Redeem Shares
The Fund effects redemption orders received by PMFS by 4:30 P.M., New York
time, on each business day at the net asset value determined as of 4:30 P.M.,
New York time. General information concerning redemption of shares is found in
the Prospectus under "Shareholder Guide--How to Sell Your Shares."
Investors who purchase shares directly from PMFS may use the following
procedures:
Check Redemption. At a shareholder's request, State Street Bank and Trust
Company (State Street) will establish a personal checking account for the
shareholder. Checks drawn on this account can be made payable to the order of
any person in any amount greater than $500. The payee of the check may cash or
deposit it like any other check drawn on a bank. When such check is presented to
State Street for payment, State Street presents the check to the Fund as
authority to redeem a sufficient number of shares in the shareholder's account
to cover the amount of the check. This enables the shareholder to continue
earning daily dividends until the check is cleared. Canceled checks are returned
to the shareholder by State Street.
Shareholders are subject to State Street's rules and regulations governing
such checking accounts, including the right of State Street not to honor checks
in amounts exceeding the value of the shareholder's account at the time the
check is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 15 calendar days after receipt of the purchase check by PMFS.
See "Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus. If
insufficient shares are in the account, or if the purchase was made by check
within 10 calendar days, the check will be returned marked "insufficient
funds." Since the dollar value of an account is constantly changing, it is not
possible for a shareholder to determine in advance the total value of his or her
account so as to write a check for the redemption of the entire account.
PMFS reserves the right to impose a service charge to establish a checking
account and to order checks. State Street, the Fund and PMFS have reserved the
right to modify this checking account privilege or to place a charge for each
check presented for payment for any individual account or for all accounts in
the future.
The Fund, PMFS or State Street may terminate Check Redemption at any time
upon 30 days' notice to participating shareholders. To receive further
information, contact Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, NJ 08906-5010.
Expedited Redemption. In order to use Expedited Redemption, a shareholder
may so designate at the time the initial application form is filed, or at a
later date. Once the Expedited Redemption authorization form has been completed,
the signature(s) on the authorization form guaranteed as set forth below and the
Form returned to PMFS, requests for redemption may be made by telegraph, letter
or telephone. The proceeds of redeemed shares in the amount of $1,000 or more
are transmitted by wire to the shareholder's account at a domestic commercial
bank which is a member of the Federal Reserve System. Proceeds of less than
$1,000 are forwarded by check to the shareholder's designated bank account. The
minimum amount that may be redeemed by Expedited Redemption is $200, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account may be redeemed. The Fund does not
forward redemption proceeds with respect to shares purchased by check until 15
calendar days after receipt of the purchase check by PMFS.
To request Expedited Redemption by telephone, a shareholder should call
PMFS at 800-225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time in order for the redemption to be effective on that day. Requests by letter
should be addressed to Prudential Mutual Funds Services, Inc., at the address
set forth above.
Each shareholder's signature on the authorization form must be guaranteed
by: (a) a commercial bank which is a member of the Federal Deposit Insurance
Corporation; (b) a trust company; or (c) a member firm of a domestic securities
exchange. Guarantees must be signed by an authorized signatory of the bank,
trust company or member firm, and "Signature Guaranteed" should appear with
the signature. Signature guarantees by savings banks, savings and loan
associations and notaries will not be accepted. PMFS may request further
documentation from corporations, executors, administrators, trustees or
guardians. In order to change the name of the commercial bank or account
designated to receive redemption proceeds, it is necessary to execute a new
Expedited Redemption authorization form and submit it to PMFS at the address set
forth above. See "Shareholder Guide--How to Sell Your Shares" in the
Prospectus for additional information on Expedited Redemption.
Regular Redemption. Shareholders may redeem their shares by sending to
PMFS, at the address set forth above, a written request, accompanied by duly
endorsed share certificates, if issued. All written requests for redemption, and
any share certificates,
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must be endorsed by the shareholder with signature guaranteed, as described
above under "Expedited Redemption." PMFS may request further documentation
from corporations, executors, administrators, trustees or guardians. Redemption
proceeds are sent to a shareholder's address by check.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which a record of the share held
is maintained by the Transfer Agent. If a share certificate is desired, it must
be requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the account at any time. There is no
charge to the investor for issuance of a certificate. Whenever a transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of such account.
Procedure for Multiple Accounts
Special procedures have been designed for banks and other institutions that
wish to open multiple accounts. An institution may open a single master account
by filing an Application and Order Form with PMFS, signed by personnel
authorized to act for the institution. Individual sub-accounts may be opened at
the time the master account is opened by listing them, or they may be added at a
later date by written advice or by filing forms supplied by PMFS. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums described in the Prospectus under "Shareholder
Guide--How to Buy Shares of the Fund" are applicable to the aggregate amounts
invested by a group, and not to the amount credited to each sub-account.
PMFS provides each institution with a written confirmation for each
transaction in a sub-account and, to each institution on a monthly basis, a
statement which sets forth for each master account its share balance and income
earned for the month. In addition, each institution receives a statement for
each individual account setting forth transactions in the sub-account for the
year-to-date, the total number of shares owned as of the dividend payment date
and the dividends paid for the current month, as well as for the year-to-date.
For further information on the sub-accounting system and procedures, contact
PMFS.
Automatic Reinvestment of Dividends and Distributions
For the convenience of investors, all dividends and distributions are
automatically invested in full and fractional shares of the Fund at net asset
value. An investor may direct the Transfer Agent in writing not less than 5 full
business days prior to the payable date to have subsequent dividends and/or
distributions sent in cash rather than invested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging
their shares for shares of certain other Prudential Mutual Funds, including one
or more specified money market funds, subject in each case to the minimum
investment requirements of such funds. Class A shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form plus the applicable sales charge. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold under
applicable state laws.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Shareholders of the Fund may exchange their shares for Class A shares of
the Prudential Mutual Funds, shares of Prudential Structured Maturity Fund, and
shares of the money market funds specified below.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
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Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
Shareholders of the Fund may not exchange their shares for Class B shares
of the Prudential Mutual Funds or shares of Prudential Special Money Market Fund
a money market fund, except that shares acquired prior to January 22, 1990
subject to a contingent deferred sales charge may be exchanged for Class B
shares.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in Fund shares each month by authorizing his or her bank account or
Prudential Securities Account (not including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
In addition, an investor may direct the Transfer Agent to redeem on a
monthly or other periodic basis specified amounts (minimum of $100) of shares of
the Fund and invest the proceeds of such redemptions in shares of any Prudential
Mutual Fund pursuant to the "Exchange Privilege" or the "Class B Purchase
Privilege."
Systematic Withdrawal Plan
A withdrawal plan is available for shareholders having shares of the Fund
held through Prudential Securities or the Transfer Agent. Such withdrawal plan
provides for monthly or quarterly checks in any amount, except as provided
below, up to the value of the shares in the shareholder's account.
In the case of shares held through the Transfer Agent, (i) a $10,000
minimum account value applies, (ii) withdrawals may not be for less than $100
and (iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and Distributions" above.
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The plan may be terminated at any
time, and the Distributor reserves the right to initiate a fee of up to $5 per
withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Furthermore, each withdrawal constitutes a
redemption of shares, and any gain or loss realized must be recognized for
federal income tax purposes. Each shareholder should consult his or her own tax
adviser with regard to the tax consequences of the plan, particularly if used in
connection with a retirement plan.
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding.
The Fund 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
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account unrealized capital gains and losses which may result from the effect of
fluctuating interest rates on the market value of the security.
The Fund maintains a dollar-weighted average portfolio maturity of 90 days
or less, purchases instruments having remaining maturities of one year or less
and invests only in securities determined by the investment adviser under the
supervision of the Board of Directors to present minimal credit risks and to be
of "eligible quality" in accordance with regulations of the SEC. The Board has
established procedures designed to stabilize, to the extent reasonably possible,
the Fund's price per share as computed for the purpose of sales and redemptions
at $1.00. Such procedures include review of the Fund's portfolio holdings by the
Board of Directors, at such intervals as it may deem appropriate, to determine
whether the Fund'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 Board of Directors. If such deviation
exceeds 1/2 of 1%, the Board will promptly consider what action, if any, will be
initiated. In the event the Board determines that a deviation exists which may
result in material dilution or other unfair results to investors or existing
shareholders, the Board will take such corrective action which it regards 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.
CALCULATION OF YIELD
The Fund will prepare a current quotation of yield from time to time. The
yield quoted will be the simple annualized yield for an identified seven
calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the share but excluding any capital
changes. 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 Fund's portfolio, and its operating
expenses. The Fund 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.
Effective yield (equal) [(base period return + 1)365/7] - 1
The Fund may also calculate the tax equivalent yield over a 7-day period.
The tax equivalent yield will be determined by first computing the current yield
as discussed above. The Fund will then determine what portion of the yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to Alternative
Minimum Tax) and then added to the portion of the yield that is attributable to
other securities.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., Donoghue's Money Fund Report, The Bank Rate Monitor,
other industry publications, business periodicals, rating services and market
indices.
The Fund's yield fluctuates, and an annualized yield quotation is not a
representation by the Fund as to what an investment in the Fund will actually
yield for any given period. Actual yields will depend upon not only changes in
interest rates generally during the period in which the investment in the Fund
is held, but also on any realized or unrealized gains and losses and changes in
the Fund's expenses.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended ("Internal Revenue Code"). Qualification as a regulated
investment company under the Internal Revenue Code requires, among other things,
that the Fund (a) derive at least 90% of its annual gross income (without offset
for losses from the sale or other disposition of securities or foreign
currencies) from interest, payments with respect to securities loans, dividends
and gains from the sale or other disposition of securities or foreign currencies
and certain financial futures, options and forward contracts, thereon; (b)
derive less than 30% of its gross annual income from gains from the sale or
other disposition of securities or options thereon held for less than three
months; and (c) diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund'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 Fund's assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities). In addition, in order not to be
subject to federal income tax on amounts distributed to shareholders, the Fund
must distribute to its shareholders as ordinary dividends at least 90% of its
net investment income and net short-term capital gains in excess of its net
long-term capital losses earned in each year.
B-13
<PAGE>
The Fund generally will be subject to a nondeductible excise tax of 4% to
the extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.
The Fund intends to invest its assets so that dividends payable from net
tax-exempt interest income will qualify as exempt-interest dividends and be
excluded from a shareholder's gross income under the Internal Revenue Code. In
order for its dividends to qualify as tax-exempt income, (i) at least 50 percent
of the value of the total assets of the Fund at the close of each quarter of its
taxable year must consist of certain tax-exempt government obligations and (ii)
the Fund must designate the dividend as an exempt-interest dividend in a written
notice mailed to shareholders not later than sixty days after the end of its
taxable year.
Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations are a preference item for purposes of
computing the alternative minimum tax for both individuals and corporations.
Moreover, interest on tax-exempt obligations, whether or not private activity
bonds, that are held by corporations will be taken into account (i) in
determining the alternative minimum tax imposed on 75% of the excess of adjusted
current earnings over alternative minimum taxable income, (ii) in calculating
the environmental tax equal to 0.12 percent of a corporation's modified
alternative minimum taxable income in excess of $2 million, and (iii) in
determining the foreign branch profits tax imposed on the effectively connected
earnings and profits (with adjustments) of United States branches of foreign
corporations. The Fund plans to avoid to the extent possible investing in
private activity obligations.
Interest on indebtedness incurred or continued by a shareholder, whether a
corporation or an individual, to purchase or carry shares of the Fund is not
deductible. Shareholders who have held their shares for six months or less may
be subject to a disallowance of losses from the sale or exchange of those shares
to the extent of any exempt-interest dividends received by the shareholder with
respect to the shares and if such losses are not disallowed, they will be
treated as long-term capital losses to the extent of any distribution of
long-term capital gains received by the shareholder with respect to such shares.
Moreover, any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the disposition, such as pursuant to a
dividend reinvestment in shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Entities or persons
who are "substantial users" (or related persons) of facilities financed by
private activity bonds should consult their tax advisers before purchasing
shares of the Fund.
The Fund does not expect to realize long-term capital gains or losses.
The Fund may be subject to state or local tax in certain other states where
it is deemed to be doing business. Further, in those states which have income
tax laws, the tax treatment of the Fund and of shareholders of the Fund with
respect to distributions by the Fund may differ from federal tax treatment. The
exemption of interest income for federal income tax purposes may not result in
similar exemption under the laws of a particular state or local taxing
authority. The Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income on Municipal Bonds
received by the Fund during the preceding year and on other aspects of the
federal income tax status of distributions made by the Fund.
Pennsylvania Personal Property Tax. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise tax upon initiating its intended
business activities in Pennsylvania. Accordingly, Fund shares are believed to be
exempt from Pennsylvania personal property taxes. The Fund anticipates that it
will continue such business activities but reserves the right to suspend them at
any time, resulting in the termination of the exemption.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT,
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to agreements with the Fund.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey 08837, (PMFS) serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, 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, a new account set-up fee for each manually-established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to postage,
stationery, printing, allocable communications expenses and other costs. For the
fiscal year ended December 31, 1993, the Fund incurred fees of $376,057 for the
services of PMFS.
Price Waterhouse, 1177 Avenue of the Americas, New York, New York, serves
as the Fund's independent accountants and in that capacity audits the Fund's
annual financial statements.
B-14
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND Portfolio of Investments
December 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
ALABAMA--2.6%
Alabama Hsg. Fin. Auth.,
Sngl. Fam. Mtge. Rev.,
A.N.N.M.T.,
3.10%, 10/1/94,
A-1+* $ 15,585 Ser. 91-D1................. $ 15,585,000
------------
ARIZONA--0.8%
Maricopa Cnty. Poll.
Ctrl.
Corp., Pub. Svc. Co.,
A.N.N.O.T.,
3.10%, 8/1/94, Ser.
VMIG1 5,000 85A........................ 5,000,000
------------
CALIFORNIA--6.4%
California Poll. Ctrl.
Rev. Fin.
Auth., Chevron USA
Inc., A.N.N.O.T.,
P-1 2.50%, 6/15/94, Ser.
5,000 84B........................ 4,994,688
Los Angeles Int'l.
Arpt.,
LAX Two Proj., F.R.D.D.,
VMIG2 18,700 4.75%, 1/3/94................ 18,700,000
San Diego Multifamily
Hsg.
Rev., Louisiana
Cima Apts., F.R.W.D.,
VMIG2 3.55%, 1/6/94, Ser.
3,605 85K........................ 3,605,000
Student Education Loan
Marketing Corp.,
Student Loan Rev.,
A.N.N.M.T.,
VMIG1 2.65%, 11/1/94, Ser.
11,200 A......................... 11,200,000
------------
38,499,688
------------
COLORADO--3.4%
Avon Cnty. Ind. Dev. Rev.,
Beaver Creek Proj.,
F.R.M.D.,
P-1 $ 4,500 2.60%, 1/18/94, Ser. 84 ..... $ 4,500,000
Colorado Hsg. Fin. Auth.,
Multifamily Hsg. Rev.,
S.E.M.O.T.,
Aa 10,910 2.90%, 4/1/94, Ser.
92A ....................... 10,910,000
Aa 5,000 2.90%, 4/1/94, Ser.
92A3 ...................... 5,000,000
-----------
20,410,000
-----------
CONNECTICUT--0.8%
Connecticut St. Spec. Assmt.
Unemployment,
Compensation Adv. Fund Rev.,
A.M.B.A.C.,
A-1+* 5,100 2.70%, 2/15/94, Ser. A ...... 5,100,000
-----------
DISTRICT OF COLUMBIA--1.5%
Dist. of Columbia Hsg. Fin.
Agcy., Carmel Plaza,
F.R.W.D.,
VMIG1 8,830 3.05%, 1/6/94, Ser. 91 ...... 8,830,000
-----------
FLORIDA--1.6%
Florida Mun. Pwr. Agcy.
Rev., Stanton II Proj.,
F.R.W.D.,
VMIG1 4,000 3.30%, 1/6/94, Ser. 1018 .... 4,000,000
</TABLE>
B-15 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
FLORIDA (cont'd.)
Sarasota Cnty. Pub.
Hosp.
Dist. Rev., Sarasota
Memorial Hosp.,
T.E.C.P.,
P-1 2.70%, 1/12/94, Ser.
$ 5,400 85B......................... $ 5,400,000
-----------
9,400,000
-----------
GEORGIA--6.4%
Cobb Cnty. Dev. Auth.
Rev.,
Institute of Nuclear
Pwr., F.R.W.D.,
NR 3.20%, 1/5/94, Ser.
7,985 92.......................... 7,985,000
De Kalb Cnty. Dev.
Auth.,
General Motors,
F.R.W.D.,
VMIG2 3.60%, 1/4/94, Ser.
10,305 85.......................... 10,305,000
Fulco Hosp. Auth.,
St. Joseph Hosp.,
T.E.C.P.,
VMIG1 2.65%, 1/12/94, Ser.
4,445 89.......................... 4,445,000
Fulton Cnty. Dev. Auth.
Rev.,
Robert W. Woodruff Art,
F.R.W.D.,
NR 3.20%, 1/6/94, Ser.
10,000 93.......................... 10,000,000
Roswell Hsg. Auth.
Multifamily Rev.,
Rosemont Hsg. Rev.
Rfdg., F.R.W.D.,
A-1* 3.25%, 1/6/94, Ser.
5,500 93.......................... 5,500,000
-----------
38,235,000
-----------
ILLINOIS--13.9%
Chicago O'Hare Int'l.
Arpt.,
Amer. Airlines Inc.,
F.R.D.D.,
P-2 4.00%, 1/3/94, Ser.
4,645 84B......................... 4,645,000
Elmhurst Illinois Rev.,
Joint Commission
Healthcare, F.R.W.D.,
VMIG1 $18,800 3.20%, 1/6/94, Ser. 88....... $18,800,000
Hazel Crest Vlg. Rev.,
Waterford Estates Proj.,
F.R.W.D.,
VMIG1 7,500 3.15%, 1/7/94, Ser. 92A...... 7,500,000
Illinois Dev. Fin. Auth.,
Orleans Multifamily Hsg.
Rev., F.R.W.D.,
A-1+* 17,020 3.15%, 1/7/94, Ser. 92....... 17,020,000
Illinois Ed. Facs. Auth. Rev.,
National College Education,
F.R.W.D.,
A-1+* 11,100 2.90%, 1/6/94, Ser.89........ 11,100,000
Illinois Hlth. Facs. Auth.
Rev., Evanston Hosp.,
S.E.M.M.T.,
VMIG1 5,000 2.65%, 5/5/94, Ser. 87E...... 5,000,000
Wheeling Multifamily Hsg.
Rev., Woodland Creek II,
F.R.W.D.,
SP-1+* 9,655 3.50%, 1/7/94, Ser. 90....... 9,655,000
Woodridge Dupage Cntys.,
Multifamily Hsg. Rev.
Rfdg., Hinsdale Terr.
Apts., F.R.W.D.,
NR 10,000 3.15%, 1/7/94, Ser. 90....... 10,000,000
-----------
83,720,000
-----------
IOWA--1.5%
Iowa Gen. Oblig.,
T.R.A.N.,
MIG1 9,000 3.25%, 6/30/94, Ser. 93A..... 9,013,765
-----------
</TABLE>
B-16 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LOUISIANA--1.3%
Louisiana Hsg. Fin. Agcy.,
Sngl. Fam. Mtge. Rev. Rfdg.,
A.N.N.M.T.,
VMIG1 $ 7,900 2.65%, 6/2/94, Ser. 92A....... $ 7,900,000
-----------
MAINE--3.8%
Biddeford Res. Rec. Rev.,
Energy Rec. Co. Proj.,
F.R.M.D.,
VMIG1 23,000 2.75%, 1/3/94, Ser. 85........ 23,000,000
-----------
MARYLAND--5.6%
Baltimore Cnty. Poll. Ctrl.
Rev.,
Baltimore Gas & Elec. Co.,
T.E.C.P.,
VMIG1 3,600 2.70%, 1/4/94, Ser. 85........ 3,600,000
Maryland St. Cmnty. Dev.
Auth., Multifamily Hsg.
Rev., S.E.M.O.T.,
Aa 5,265 2.80%, 5/15/94, Ser. 84B...... 5,265,000
Sngl. Fam. Mtge. Rev.,
S.E.M.O.T.,
Aa 10,090 2.90%, 4/1/94, Ser. 85-2...... 10,090,000
Aa 6,790 2.90%, 4/1/94, Ser. 87-2...... 6,790,000
Montgomery Cnty. Hsg.,
Sngl. Fam. Mtge. Rev.,
F.R.W.D.,
NR 7,600 3.30%, 1/6/94, Ser. PA40...... 7,600,000
-----------
33,345,000
-----------
MASSACHUSETTS--4.0%
Massachusetts Hsg. Fin. Agcy.,
Sngl. Fam. Hsg. Rev.,
A.N.N.M.T.,
VMIG1 4,650 2.95%, 9/1/94, Ser. 25........ 4,650,000
Q.T.R.O.T.,
Aaa $ 6,600 2.70%, 3/1/94, Ser. 5......... $ 6,600,000
Massachusetts Ind. Fin.
Agcy., Poll. Ctrl. Rev.,
New England Pwr. Co.,
T.E.C.P.,
VMIG1 13,000 2.55%, 1/27/94, Ser. 93A...... 13,000,000
-----------
24,250,000
-----------
MICHIGAN--2.6%
Grand Rapids Econ. Dev.
Corp., Ind. Dev. Rev.
Rfdg., F.R.W.D.,
Aa2 7,500 3.20%, 1/6/94, Ser. 92........ 7,500,000
Michigan Strategic Fd., Poll.
Ctrl. Rev., General Motors
Proj., F.R.W.D.,
VMIG2 8,335 3.25%, 1/4/94, Ser. 85........ 8,335,000
-----------
15,835,000
-----------
MINNESOTA--2.2%
Minnesota Gen. Oblig.,
F.R.W.D.,
NR 5,980 3.45%, 1/5/94, Ser. 6......... 5,980,061
Minnetonka Multifamily Hsg.
Rev., Cliffs Ridgedale
Proj., F.R.W.D.,
A-1* 7,000 3.50%, 1/7/94, Ser. 85A....... 7,000,000
-----------
12,980,061
-----------
MISSOURI--5.3%
Missouri Econ. Dev.,
Export & Infrastructure
Facs. Rev., F.R.W.D.,
VMIG1 9,450 3.25%, 1/5/94, Ser. 92A....... 9,450,000
</TABLE>
B-17 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
MISSOURI (cont'd.)
Missouri St. Environ. Impvt.
& Energy Res. Auth.,
Union Elec. Co.,
A.N.N.O.T.,
P-1 $ 5,500 2.65%, 6/1/94, Ser. 84A....... $ 5,500,000
P-1 7,500 2.65%, 6/1/94, Ser. 84B....... 7,500,000
T.E.C.P.,
P-1 9,370 2.40%, 1/5/94, Ser. 85B....... 9,370,000
-----------
31,820,000
-----------
NEBRASKA--1.5%
Nebraska Investment Fin.
Auth., Briarhurst
Candletree Proj.,
S.E.M.M.T.,
A-1* 9,190 3.00%, 4/1/94, Ser. 85........ 9,190,000
-----------
NEVADA--1.2%
Nevada Hsg. Dev.,
Sngl. Fam. Mtge. Rev.,
S.E.M.O.T.,
AA* 7,100 2.95%, 4/1/94, Ser. 88-1A..... 7,100,000
-----------
NEW YORK--0.9%
New York City, Gen. Oblig.,
F.R.D.D.,
VMIG1 1,800 4.00%, 1/3/94, Ser. 94A-4..... 1,800,000
New York St. Energy Res. &
Dev. Auth., LILCO Proj.,
A.N.N.M.T.,
VMIG1 3,835 2.50%, 3/1/94, Ser. 85A....... 3,835,000
-----------
5,635,000
-----------
NORTH CAROLINA--3.2%
Cabarrus Cnty. Ind. Facs.
Auth., Poll. Ctrl. Rev.
Phillip Morris Proj.,
F.R.W.D.,
P-1 $ 5,000 3.20%, 1/5/94, Ser. 92........ $ 5,000,000
North Carolina Eastern
Municipal Pwr., T.E.C.P.,
P-1 7,200 2.55%, 1/11/94................ 7,200,000
Rockingham Cnty. Ind. Facs.,
Poll. Ctrl. Rev., Phillip
Morris Proj.,
P-1 7,200 3.20%, 1/5/94, F.R.W.D........ 7,200,000
-----------
19,400,000
-----------
OHIO--1.4%
Toledo-Lucas Cnty.,
Convntn. & Visitors
Bureau, M.T.H.O.T.,
VMIG1 8,445 2.55%, 2/1/94, Ser. 88........ 8,445,000
-----------
OKLAHOMA--3.4%
Oklahoma Political Subdiv.,
Cash Mgmt. Trust,
SP-1+* 12,390 3.35%, 6/30/94, Ser. 93....... 12,413,763
Tulsa Pub. Facs. Auth.,
Solid Waste Sys. Rev.,
S.E.M.M.T.,
VMIG1 7,825 2.85%, 5/2/94, Ser. 88........ 7,825,000
-----------
20,238,763
-----------
</TABLE>
B-18 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
PENNSYLVANIA--6.8%
Beaver Cnty. Ind. Dev. Auth.,
Poll. Ctrl. Rev., Toledo
Edison Proj., M.T.H.M.T.,
A-1* $11,000 2.50%, 3/16/94, Ser. 92E...... $11,000,000
Emmaus Gen. Auth. Rev.,
F.R.W.D.,
A-1* 7,000 3.45%, 1/5/94, Ser. 89C5...... 7,000,000
Philadelphia Gas Wks. Rev.,
T.E.C.P.,
P-1 4,800 2.30%, 2/2/94, Ser. A......... 4,800,000
Philadelphia, T.R.A.N.,
MIG1 10,000 3.25%, 6/15/94, Ser. A........ 10,022,000
Quakertown Hosp. Auth.,
F.R.W.D.,
VMIG1 8,200 3.10%, 1/4/94, Ser. 85........ 8,200,000
-----------
41,022,000
-----------
SOUTH DAKOTA--0.8%
So. Dakota Hsg. Dev. Auth.,
Homeownership Mtge.,
S.E.M.O.T.,
Aa 5,000 2.80%, 5/1/94, Ser. 86C....... 5,000,000
-----------
TEXAS--3.3%
Brazos River Texas Harbor
Nav. Dist., Dow Chemical Co.
Proj., T.E.C.P.,
P-1 2,200 2.50%, 4/26/94, Ser. 91....... 2,200,000
Greater East Texas,
Higher Ed. Auth., Student
Ln. Rev., A.N.N.M.T.,
VMIG1 8,000 2.55%, 5/1/94, Ser. 92A....... 8,000,000
Southeast Texas Hsg. Fin.
Corp., Banc One Corp.,
Tax Exempt Trust,
F.R.W.D.,
Aaa $ 9,795 3.20%, 1/6/94, Ser. 91D....... $ 9,795,000
-----------
19,995,000
-----------
UTAH--3.7%
Intermountain Pwr. Auth.
Pwr. Supply Rev.,
Ser. 85E,
VMIG1 4,500 2.55%, 3/15/94, S.E.M.O.T..... 4,500,000
VMIG1 10,000 2.70%, 6/15/94, A.N.N.O.T..... 10,000,000
Ser. 85F,
VMIG1 2,000 2.10%, 1/7/94, T.E.C.P........ 1,999,400
Salt Lake City Rev.,
T.E.C.P.,
VMIG1 5,600 2.55%, 1/11/94, Ser. 90....... 5,600,000
-----------
22,099,400
-----------
VIRGINIA--2.8%
Chesterfield Cnty. Ind. Dev.
Auth., Phillip Morris
Proj., F.R.W.D.,
P-1 6,500 3.20%, 1/5/94................. 6,500,000
Virginia Hsg. Dev. Auth.,
Comnwith. Mtge. Rev.,
S.E.M.M.T.,
VMIG1 10,000 2.95%, 5/12/94, Ser. C-3...... 10,000,000
-----------
16,500,000
-----------
WASHINGTON--5.2%
Washington Gen. Oblig.,
Q.T.R.O.T.,
A-1+* 9,000 2.80%, 4/4/94, Ser. G......... 9,000,000
</TABLE>
B-19 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
WASHINGTON (cont'd.)
Washington Hsg. Fin. Comn.,
Sngl. Fam. Mtge. Rev.,
A.N.N.M.T.,
SP-1+* $ 9,230 2.60%, 6/10/94, Ser. 92B...... $ 9,230,000
Washington Public Pwr.
Supply, F.R.W.D.,
NR 13,046 3.45%, 1/5/94, Ser. 5......... 13,046,425
-----------
31,276,425
-----------
WISCONSIN--4.6%
Madison Met.Tax & Rev.,
T.R.A.N.
NR 8,000 3.00%, 2/22/94, Ser. 93....... 8,005,775
Wisconsin Gen. Oblig.,
F.R.W.D.,
VMIG1 9,000 3.00%, 1/6/94, Ser. 93-3...... 9,000,000
Wisconsin Hsg. & Econ. Dev.
Auth., Home Ownership
Rev., S.E.M.O.T.,
Aa 10,875 2.80%, 3/1/94, Ser. 90D....... 10,875,000
-----------
27,880,775
-----------
Total Investments--102.5%
(amortized cost $616,705,877;
Note 1)..................... 616,705,877
Liabilities in excess of other
assets--(2.5%).............. (15,083,995)
------------
Net Assets--100%.............. $601,621,882
============
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Co. A.N.N.M.T.--Annual
Mandatory Tender A.N.N.O.T.--Annual Optional Tender F.R.D.D.--Floating
Rate (Daily) Demand Note** F.R.M.D.--Floating Rate (Monthly) Demand
Note** F.R.W.D.--Floating Rate (Weekly) Demand Note** M.T.H.M.T.--Monthly
Mandatory Tender M.T.H.O.T.--Monthly Optional Tender
S.E.M.M.T.--Semi-Annual Mandatory Tender S.E.M.O.T.--Semi-Monthly Tender
Offer T.E.C.P.--Tax-Exempt Commercial Paper T.R.A.N.--Tax & Revenue
Anticipation Note Q.T.R.O.T.--Quarterly Tax & Reserve Optional Tender
* Standard & Poor's Rating.
** For purposes of amortized cost valuation, the maturity date of these
instruments is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard and Poor's ratings.
B-20 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets December 31, 1993
-----------------
<S> <C>
Investments, at value................................................................. $616,705,877
Receivable for investments sold....................................................... 12,021,222
Receivable for Fund shares sold....................................................... 8,088,553
Interest receivable................................................................... 2,997,179
Prepaid expenses...................................................................... 17,565
------------
Total assets...................................................................... 639,830,396
------------
Liabilities
Bank overdraft........................................................................ 21,282,876
Payable for Fund shares reacquired.................................................... 16,132,852
Due to Manager........................................................................ 294,437
Accrued expenses...................................................................... 272,022
Dividends payable..................................................................... 194,256
Due to Distributor.................................................................... 32,071
------------
Total liabilities................................................................. 38,208,514
------------
Net Assets............................................................................ $601,621,882
============
Net assets were comprised of:
Common stock, $.01 par value........................................................ $ 6,017,162
Paid-in capital in excess of par.................................................... 595,604,720
------------
Net assets, December 31, 1993....................................................... $601,621,882
============
Net asset value, offering price and redemption price per share ($601,621,882 (div)
601,716,161 shares of common stock issued and outstanding; 3 billion shares
authorized)......................................................................... $1.00
============
</TABLE>
See Notes to Financial Statements.
B-21
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................. $18,773,851
-----------
Expenses
Management fee....................... 3,632,856
Distribution fee..................... 908,214
Transfer agent's fees and expenses... 425,000
Custodian's fees and expenses........ 125,000
Registration fees.................... 85,000
Franchise taxes...................... 65,000
Audit fee............................ 47,000
Reports to shareholders.............. 40,000
Directors' fees...................... 30,200
Insurance............................ 23,000
Legal fees........................... 20,000
Miscellaneous........................ 3,521
-----------
Total expenses..................... 5,404,791
-----------
Net investment income.................. 13,369,060
Realized Gain on Investments
Net realized gain on investment
transactions......................... 237
-----------
Net Increase in Net Assets
Resulting from Operations.............. $13,369,297
===========
</TABLE>
PRUDENTIAL TAX-FREE MONEY FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease) ----------------------------------
in Net Assets 1993 1992
--------------- ---------------
<S> <C> <C>
Operations
Net investment
income............. $ 13,369,060 $ 17,432,261
Net realized gain
on securities
transactions..... 237 109,098
--------------- ---------------
Net increase in net
assets resulting
from
operations....... 13,369,297 17,541,359
--------------- ---------------
Dividends to
shareholders....... (13,369,297) (17,432,261)
--------------- ---------------
Fund share
transactions (at
$1.00 per share)
Net proceeds from
shares
subscribed....... 2,398,092,847 1,989,624,621
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends........ 12,745,371 16,898,883
Cost of shares
reacquired....... (2,423,549,007) (2,009,166,930)
--------------- ---------------
Net decrease in net
assets from Fund
share
transactions....... (12,710,789) (2,643,426)
--------------- ---------------
Total decrease....... (12,710,789) (2,534,328)
Net Assets
Beginning of year.... 614,332,671 616,866,999
--------------- ---------------
End of year.......... $ 601,621,882 $ 614,332,671
=============== ===============
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-22
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
Notes to Financial Statements
Prudential-Bache Tax-Free Money Fund, Inc., doing business as Prudential
Tax-Free Money Fund (the "Fund"), is registered under the Investment Company
Act of 1940 as a diversified, open-end management investment company. The
investment objective of the Fund is to attain the highest level of current
income that is exempt from federal income taxes, consistent with liquidity and
preservation of capital. The Fund will invest in short-term tax-exempt debt
securities of state and local governments. The ability of the issuers of the
securities held by the Fund to meet their obligations may be affected by
economic or political developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund
in the preparation of its financial statements.
Securities Valuation: Portfolio securities are valued at amortized cost, which
approximates market value. The amortized cost method of valuation involves
valuing a security at its cost on the date of purchase and thereafter assuming
a constant amortization to maturity of any discount or premium. Securities
Transactions and Investment Income: Securities transactions are recorded on
the trade date. Realized gains and losses on sales of investments are
calculated on an identified cost basis. Interest income is recorded on an
accrual basis.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its net income to its shareholders. For
this reason and because substantially all the Fund's gross income consists of
tax-exempt interest, no federal income tax provision is required.
Dividends: The Fund declares dividends daily from net investment income.
Payment of dividends is made monthly.
Reclassification of Capital Accounts: Effective January 1, 1993, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. As a result of this statement, the Fund
changed the classification of distributions to shareholders to better disclose
the differences between financial statements amounts and distributions
determined in accordance with income tax regulations. The effect caused by
adopting this statement was to decrease paid-in capital by $846,050 and
decrease accumulated net realized loss on investments by $846,050 compared to
amounts previously reported through December 31, 1992. Net investment income,
net realized gains and net assets were not affected by this change.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund
Management, Inc. ("PMF"). Pursuant to
this agreement PMF has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PMF has entered into
a subadvisory agreement with Prudential Investment Corporation ("PIC"); PIC
furnishes investment advisory services in connection with the management of
the Fund. PMF pays for the cost of the subadviser's services, the compensation
of officers of the Fund, occupancy and certain clerical and bookkeeping costs
of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly. For the
period through August 31, 1993 the management fee was paid at an annual rate
of .50 of 1% of the Fund's average daily net assets. Effective September 1,
1993, PMF revised the fee structure to be paid at an annual rate of .50 of 1%
of the Fund's average daily net assets up to $750 million, .425 of 1% of the
next $750 million of average daily net assets and .375 of 1% of average daily
net assets in excess of $1.5 billion.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for
expenses (including the fees of PMF, but excluding interest, taxes, brokerage
commissions, distribution fees, and litigation and indemnification expenses
and other extraordinary expenses) in excess of the most restrictive expense
limitation imposed by state securities commissions. The most restrictive
expense limitation is presently believed to be 2 1/2% of the Fund's average
daily net assets up to $30 million, 2% of the next $70 million of average
daily net assets and 1 1/2% thereafter. Such expense reimbursement, if any,
will be estimated and accrued daily. No reimbursement was required due to such
limitation for the year ended December 31, 1993.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. ("PMFD"). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement,
accrued daily and payable monthly, at an annual rate of .125 of 1% of the
Fund's average daily net assets. PMFD pays various
B-23
<PAGE>
broker-dealers, including Prudential Securities Incorporated ("PSI") and
Pruco Securities Corporation, affiliated broker-dealers, for account servicing
fees and other expenses incurred by such broker-dealers. PMFD is a
wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect) wholly-owned
subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions With Services, Inc. ("PMFS"), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended December 31, 1993, the Fund incurred fees of $376,057
for the services of PMFS. As of December 31, 1993, approximately $32,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Federal The cost of securities for federal income tax
Income Taxes purposes is substantially the same as for
financial reporting purposes.
B-24
<PAGE>
PRUDENTIAL TAX-FREE MONEY FUND
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1993 1992 1991 1990 1989
<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
Net investment income and realized gains................... .018 .026 .041 .053 .056
Dividends and distributions to shareholders................ (.018) (.026) (.041) (.053) (.056)
---------- -------- -------- -------- --------
Net asset value, end of year............................... $ 1.00 $1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ======== ======== ========
TOTAL RETURN:#............................................. 1.86% 2.63% 4.22% 5.42% 5.74%
Ratios/Supplemental Data:
Net assets, end of year (000).............................. $ 601,622 $614,333 $616,867 $700,859 $653,268
Average net assets (000)................................... $ 726,571 $669,588 $725,844 $701,869 $644,820
Ratios to average net assets:
Expenses, including distribution fee..................... .74% .74% .75% .74% .78%
Expenses, excluding distribution fee..................... .62% .62% .63% .61% .66%
Net investment income.................................... 1.84% 2.60% 4.15% 5.30% 5.65%
</TABLE>
- ---------------
# Includes reinvestment of dividends and distributions.
See Notes to Financial Statements.
B-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudential Tax-Free Money Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio 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 Prudential
Tax-Free Money Fund ("the Fund") at December 31, 1993, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1993 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
February 16, 1994
B-26
<PAGE>
APPENDIX A
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
Corporate and Tax-Exempt Bond Ratings
The four highest ratings of Moody's Investors Service, Inc. ("Moody's")
for tax-exempt and corporate bonds are Aaa, Aa, A and Baa. Bonds rated Aaa are
judged to be of the "best quality." The rating of Aa is assigned to bonds
which are of "high quality by all standards," but as to which margins of
protection or other elements make long-term risks appear somewhat larger than
Aaa rated bonds. The Aaa and Aa rated bonds comprise what are generally known as
"high grade bonds." Bonds which are rated A by Moody's possess many favorable
investment attributes and are considered "upper medium grade obligations."
Factors giving security to principal and interest of A rated bonds are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future. Bonds rated Baa are considered as "medium
grade" obligations. 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. Moody's
applies numerical modifiers "1", "2", and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. 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. The foregoing ratings for tax-exempt bonds are
sometimes presented in parentheses preceded with a "con" indicating the bonds
are rated conditionally. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed or (d) payments to which some
other limiting condition attaches. Such parenthetical rating denotes the
probable credit stature upon completion of construction or elimination of the
basis of the condition.
The four highest ratings of Standard & Poor's Ratings Group ("Standard &
Poor's") for tax-exempt and corporate bonds are AAA, AA, A and BBB. Bonds rated
AAA bear the highest rating assigned by Standard & Poor's to a debt obligation
and indicate an extremely strong capacity to pay principal and interest. Bonds
rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Bonds rated A have a strong
capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating, which is the lowest "investment grade" security
rating by Standard & Poor's, indicates an adequate capacity to pay principal and
interest. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this category than
for bonds in the A category. The foregoing ratings are sometimes followed by a
"p" indicating that the rating is provisional. A provisional rating assumes
the successful completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is largely and entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
Tax-Exempt Note Ratings
The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and MIG
4. Notes bearing the designation MIG 1 are judged to be of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Notes bearing the designation MIG 2 are judged to be of
high quality, with margins of protection ample although not so large as in the
preceding group. Notes bearing the designation MIG 3 are judged to be of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established. Notes bearing the designation
MIG 4 are judged to be of adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment security and not
distinctly or predominantly speculative.
The ratings of Standard & Poor's for municipal notes issued on or after
July 29, 1984 are "SP-1", "SP-2" and "SP-3." Prior to July 29, 1984,
municipal notes carried the same symbols as municipal bonds. The designation
"SP-1" indicates a very strong capacity to pay principal and interest.
A "+" is added for those issues determined to possess overwhelming safety
characteristics. An "SP-2" designation indicates a satisfactory capacity to
pay principal and interest while an "SP-3" designation indicates speculative
capacity to pay principal and interest.
Corporate and Tax-Exempt Commercial Paper Ratings
Moody's and Standard & Poor's rating grades for commercial paper, set forth
below, are applied to Municipal Commercial Paper as well as taxable commercial
paper.
A-1
<PAGE>
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, superior capacity; Prime-2, strong capacity; and
Prime-3, acceptable capacity.
Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Issues assigned A ratings
are regarded as having the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety. The "A-1" designation indicates the degree of
safety regarding timely payment is very strong. A "+" designation is applied
to those issues rated "A-1" which possess an overwhelming degree of safety.
The "A-2" designation indicates that capacity for timely payment is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1." The "A-3" designation indicates that the capacity for
timely payment is satisfactory. Such issues, however, are somewhat more
vulnerable to the adverse effects of changes in circumstances than obligations
carrying the higher designations. Issues rated "B" are regarded as having only
an adequate capacity for timely payment and such capacity may be impaired by
changing conditions or short-term adversities.
A-2
