<PAGE>
As filed with the Securities and Exchange Commission on March 1, 1994
Registration No. 2-66407
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 20 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 19 [X]
(Check appropriate box or boxes)
-----------
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
(Exact name of registrant as specified in charter)
(doing business as Prudential National Municipals Fund)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) 1994 pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (a), of Rule 485.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Amount Being Offering Price Aggregate Amount of
Title of Securities Being Registered Registered Per Unit Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------------------------
Shares of Common Stock par
value $.01 per share 2,119,514 16.88 35,777,397 $100
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* The calculation of the maximum aggregate offering price was made pursuant to
Rule 24e-2 and was based upon an offering price of $16.88 per share, which
was equal to the net asset value per share as of the close of business on
February 18, 1994, plus the maximum initial sales charge of 4.5% pursuant to
Rule 457(d). The total amount of shares redeemed during the fiscal year ended
December 31, 1993 amounted to $238,761,384. Of this amount, none has been
used for reduction pursuant to paragraph (a) of Rule 24e-2 in all previous
filings of post-effective amendments during the current year, and
$203,273,987 of this amount has been used for reduction pursuant to paragraph
(c) of Rule 24f-2 in all previous filings during the current year.
$35,487,397 of shares is the amount of redeemed shares for the fiscal year
ended December 31, 1993 being used for the reductions in the post-effective
amendment being filed herein.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK PAR
VALUE $.01 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS
FISCAL YEAR ENDED DECEMBER 31, 1993 ON FEBRUARY 25 , 1994.
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses
Item 3. Condensed Financial Information......... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant....... Cover Page; Fund Highlights;
How the Fund Invests; General
Information
Item 5. Management of the Fund.................. Financial Highlights; How the
Fund is Managed
Item 6. Capital Stock and Other Securities...... Dividends, Distributions and
Taxes; General Information
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the
Fund Values its Shares
Item 8. Redemption or Repurchase................ Shareholder Guide; How the
Fund Values its Shares;
General Information
Item 9. Pending Legal Proceedings............... Not Applicable
PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... General Information
Item 13. Investment Objectives and Policies...... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund.................. Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders of
Securities...................................... Not Applicable
Item 16. Investment Advisory and Other Services.. Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices....................................... Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities...... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered........................ Purchase and Redemption of
Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status.............................. Taxes, Dividends and
Distributions
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
<PAGE>
Prudential National Municipals Fund
- --------------------------------------------------------------------
PROSPECTUS DATED FEBRUARY 28, 1994
- --------------------------------------------------------------------
Prudential-Bache National Municipals Fund, Inc., doing business as
Prudential National Municipals Fund (the Fund), is an open-end, di-
versified management investment company whose investment objective
is to seek a high level of current income exempt from federal in-
come taxes. In attempting to achieve this objective, the Fund in-
tends to invest substantially all of its total assets in carefully
selected long-term Municipal Bonds of medium quality, i.e., obliga-
tions of issuers possessing adequate but not outstanding capacities
to service their debt. Subject to the limits described herein, the
Fund may also buy and sell financial futures for the purpose of
hedging its securities portfolio. See "How the Fund is Managed--In-
vestment 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 Prospectus sets forth concisely the information about the Fund
that a prospective investor ought to know before investing. Addi-
tional information about the Fund has been filed with the Securi-
ties and Exchange Commission in a Statement of Additional Informa-
tion, dated February 28, 1994, which information is incorporated
herein by reference (is legally considered a part of this Prospec-
tus) and is available without charge upon request to the Fund at
the address or telephone number noted above.
- --------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for
future reference.
- --------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECU-
RITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURI-
TIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PRO-
SPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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 NATIONAL MUNICIPALS FUND?
Prudential National Municipals 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 seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, under normal circumstances, the Fund intends to invest
substantially all, and in any event at least 80%, of its total assets in
Municipal Bonds and Municipal Notes. See "How the Fund Invests--Investment
Objective and Policies" at page 7.
WHAT ARE THE FUND'S SPECIAL CHARACTERISTICS AND RISKS?
The Fund's portfolio will consist primarily of carefully selected long-
term Municipal Bonds of medium quality. While the Fund's investment adviser
will not be limited by the ratings assigned by the rating services, the
Municipal Bonds in which the Fund's portfolio will be principally invested
will be rated A and Baa by Moody's Investors Service (Moody's) and A and
BBB by Standard & Poor's Ratings Group (S&P) or, if not rated, will be, in
the judgment of the investment adviser, of substantially comparable
quality. The Fund may also engage in various hedging strategies, including
the purchase of put or tender options on Municipal Bonds and Notes and the
purchase and sale of financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies" at page 7.
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 and including
$250 million, .475 of 1% of the next $250 million, .45 of 1% of the next
$500 million, .425 of 1% of the next $250 million, .40 of 1% of the next
$250 million and .375 of 1% of the Fund's average daily net assets in
excess of $1.5 billion. As of January 31, 1994, PMF served as manager or
administrator to 66 investment companies, including 37 mutual funds, with
aggregate assets of approximately $51 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 13.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Fund's Class A shares. The Fund currently reimburses PMFD for
expenses related to the distribution of Class A shares at an annual rate of
up to .10 of 1% of the average daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a
major securities underwriter and securities and commodities broker, acts as
the Distributor of the Fund's Class B shares. Prudential Securities is
reimbursed for its expenses related to the distribution of Class B shares
at an annual rate of up to .50 of 1% of the average daily net assets of the
Class B shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent 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 20 and "Shareholder Guide--Shareholder Services" at
page 27.
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 plus a sales
charge which may be imposed either at the time of purchase or on a deferred
basis. See "How the Fund Values its Shares" at page 16 and "Shareholder Guide--
How to Buy Shares of the Fund" at page 20.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers two classes of shares which may be purchased at the next
determined NAV plus a sales charge which, at your election, may be imposed
either at the time of purchase (Class A shares) or on a deferred basis (Class B
shares).
. Class A shares are sold with an initial sales charge of up to 4.5% of the
offering price.
. Class B shares are sold without an initial sales charge but are
subject to a contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the redemption
proceeds) which will be imposed on certain redemptions made within six
years of purchase.
You should understand that over time the deferred sales charge plus the
distribution fee of the Class B shares will exceed the initial sales charge
plus the distribution fee of the Class A shares.
See "Shareholder Guide--Alternative Purchase Plan" at page 21.
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.
Although Class B shares are sold without an initial sales charge, the proceeds
of redemptions of Class B shares held for six years or less may be subject to a
contingent deferred sales charge declining from 5% to zero. See "Shareholder
Guide--How to Sell Your Shares" at page 23.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of any net capital gains, if any, at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
(INITIAL SALES (DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE) ALTERNATIVE)
-------------- ---------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................. 4.5% None
Maximum Sales Load or Deferred
Sales Load Imposed on Reinvested
Dividends....................... None None
Deferred Sales Load (as a per-
centage of original purchase
price or redemption proceeds, None 5% during the first year,
whichever is lower)............. decreasing by 1% annually
to 1% in the fifth and sixth
years and 0% the seventh
year and thereafter
Redemption Fees.................. None None
Exchange Fees.................... None None
ANNUAL FUND OPERATING EXPENSES
<CAPTION>
(as a percentage of average net assets) CLASS A CLASS B
------- -------
<S> <C> <C>
Management Fees.................. .47% .47%
12b-1 Fees +..................... .10%++ .50%
Other Expenses................... .12% .12%
--- ---
Total Fund Operating Expenses.... .69% 1.09%
=== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
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:
Class A................................... $52 $66 $82 $127
Class B................................... $61 $65 $70 $133
You would pay the following expenses on the
same investment assuming no redemption:
Class A................................... $52 $66 $82 $127
Class B................................... $11 $35 $60 $133
</TABLE>
The above example is based on data for the Fund's fiscal year ended Decem-
ber 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 investors in understanding the vari-
ous costs and expenses that an investor in the Fund will bear, whether di-
rectly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund Is Managed." "Other Expenses" includes op-
erating expenses of the Fund, such as directors' and professional fees,
registration fees, reports to shareholders, transfer agency and custodian
fees.
--------
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of the
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on the Fund rather than on a per shareholder basis. Therefore,
long-term Class B shareholders of the Fund may pay more in total sales
charges than the economic equivalent of 6.25% of such shareholders'
investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to limit
its distribution fees with respect to Class A shares of the Fund to no more
than .10 of 1% of the average daily net asset value of the Class A shares
for the year ending December 31, 1994. See "How the Fund is Managed--
Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights have been audited by Price Waterhouse, in-
dependent 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 finan-
cial highlights contain selected data for a Class A share of common stock out-
standing, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data con-
tained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
------------------------------------
JANUARY 22,
YEAR ENDED 1990+
DECEMBER 31, THROUGH
----------------------- DECEMBER
1993 1992 1991 31, 1990
------- ------ ------ -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 15.94 $16.00 $15.09 $14.98
------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................... .90 .94 .97 .90
Net realized and unrealized gain on in-
vestment transactions.................... 1.05 .43 .91 .11
------- ------ ------ ------
Total from investment operations......... 1.95 1.37 1.88 1.01
------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income...... (.90) (.94) (.97) (.90)
Distributions from net realized capital
gains.................................... (.69) (.49) -- --
------- ------ ------ ------
Total distributions....................... (1.59) (1.43) (.97) (.90)
------- ------ ------ ------
Net asset value, end of period............ $ 16.30 $15.94 $16.00 $15.09
======= ====== ====== ======
TOTAL RETURN: ++.......................... 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $14,167 $7,700 $3,819 $1,846
Average net assets (000).................. $11,786 $5,401 $2,697 $1,161
Ratios to average net assets:+++
Expenses, including distribution fees.... .69% .72% .75% .75%*
Expenses, excluding distribution fees.... .59% .62% .65% .65%*
Net investment income.................... 5.49% 5.79% 6.27% 6.43%*
Portfolio turnover........................ 82% 114% 59% 110%
</TABLE>
- --------
* Annualized.
+ Commencement of offering of Class A shares.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
+++ The Fund commenced a public offering of Class A shares on January 22, 1990.
Accordingly, historical expenses and ratios of expenses to average net
assets of Class B shares are not necessarily indicative of future expenses
and related ratios of Class A shares. See "Financial Highlights--Class B
Shares" and "How the Fund is Managed--Distributor."
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE YEARS INDICATED)
(CLASS B SHARES)
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, in-
dependent 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 finan-
cial highlights contain selected data for a Class B share of common stock out-
standing, total return, ratios to average net assets and other supplemental
data for each of the years indicated. The information is based on data con-
tained in the financial statements.
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988* 1987 1986 1985 1984
-------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERAT-
ING PERFORMANCE:
Net asset value,
beginning of
year............. $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04 $ 14.57 $ 16.18 $ 15.37 $ 13.86 $ 13.63
-------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
INCOME FROM IN-
VESTMENT
OPERATIONS:
Net investment in-
come ............ .84 .88 .91 .90 .96 1.03 1.05 1.18 1.28 1.25
Net realized and
unrealized gain
(loss) on
investment
transactions..... 1.05 .44 .91 (.04) .11 .47 (1.55) 1.59 1.52 .23
-------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
Total from
investment
operations...... 1.89 1.32 1.82 .86 1.07 1.50 (.50) 2.77 2.80 1.48
-------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
LESS
DISTRIBUTIONS:
Dividends from net
investment in-
come............. (.84) (.88) (.91) (.90) (.96) (1.03) (1.05) (1.18) (1.28) (1.25)
Distributions from
net realized cap-
ital gains....... (.69) (.49) -- -- -- -- (.06) (.78) (.01) --
-------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
Total distribu-
tions........... (1.53) (1.37) (.91) (.90) (.96) (1.03) (1.11) (1.96) (1.29) (1.25)
-------- -------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
Net asset value,
end of year...... $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04 $ 14.57 16.18 $ 15.37 $ 13.86
======== ======== ======== ======== ========== ========== ========== ========== ======== ========
TOTAL RETURN: +... 12.15% 8.50% 12.42% 5.96% 7.43% 10.49% (3.14)% 18.78% 21.04% 11.52%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000) ...... $848,299 $828,702 $874,338 $882,212 $1,033,173 $1,066,159 $1,046,293 $1,103,508 $558,662 $261,649
Average net assets
(000)............ $854,919 $829,830 $862,249 $940,215 $1,027,726 $1,081,122 $1,126,394 $ 859,796 $377,053 $237,479
Ratios to average
net assets:++
Expenses, includ-
ing distribution
fees............ 1.09% 1.12% 1.15% 1.13% 1.01% 1.02% 1.01% .90% .73% .74%
Expenses, exclud-
ing distribution
fees............ .59% .62% .65% .64% .66% .66% .65% .62% .65% .74%
Net investment
income.......... 5.09% 5.39% 5.87% 6.03% 6.45% 6.86% 6.83% 7.13% 8.39% 9.23%
Portfolio turno-
ver.............. 82% 114% 59% 110% 198% 152% 105% 117% 124% 219%
</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.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
++ The Fund adopted a plan of distribution effective July 1, 1985 which was
amended and restated on January 22, 1990. Consequently, historical expenses
and ratios of expenses to average net assets for Class B shares are not
necessarily indicative of future expenses and related ratios for that
Class. See "How the Fund is Managed--Distributor."
6
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK A HIGH LEVEL OF CURRENT IN-
COME EXEMPT FROM FEDERAL INCOME TAXES. IN ATTEMPTING TO ACHIEVE THIS OBJEC-
TIVE, UNDER NORMAL CIRCUMSTANCES THE FUND INTENDS TO INVEST SUBSTANTIALLY ALL,
AND IN ANY EVENT AT LEAST 80%, OF ITS TOTAL ASSETS IN MUNICIPAL BONDS AND MU-
NICIPAL NOTES. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS OBJECTIVE.
See "Investment Objective and Policies" in the Statement of Additional Infor-
mation.
Interest on certain Municipal Bonds and Municipal Notes may be subject to
the federal alternative minimum tax. From time to time the Fund may purchase
Municipal Bonds and Municipal Notes that are "private activity bonds" (as de-
fined in the Internal Revenue Code), the interest on which is a tax preference
subject to the alternative minimum tax. See "Taxes, Dividends and Distribu-
tions."
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). FUND POLICIES THAT ARE NOT FUN-
DAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
THE FUND'S PORTFOLIO WILL CONSIST PRIMARILY OF CAREFULLY SELECTED LONG-TERM
MUNICIPAL BONDS OF MEDIUM QUALITY. WHILE THE FUND'S INVESTMENT ADVISER WILL
NOT BE LIMITED BY THE RATINGS ASSIGNED BY THE RATING SERVICES, THE MUNICIPAL
BONDS IN WHICH THE FUND'S PORTFOLIO WILL BE PRINCIPALLY INVESTED WILL BE RATED
A AND BAA BY MOODY'S INVESTORS SERVICE (MOODY'S) AND A AND BBB BY STANDARD &
POOR'S RATINGS GROUP (S&P) OR, IF NOT RATED, WILL BE, IN THE JUDGMENT OF THE
INVESTMENT ADVISER, OF SUBSTANTIALLY COMPARABLE QUALITY. Bonds rated BBB by
S&P normally exhibit adequate payment protection parameters, but in the event
of adverse market conditions are more likely to lead to a weakened capacity to
pay principal and interest than bonds in the A category. Bonds rated Baa by
Moody's are considered "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 char-
acteristics as well. A more complete description of these and other Municipal
Bond and Note ratings is contained in Appendix A to the Statement of Addi-
tional Information.
Because issuers of medium quality Municipal Bonds may choose not to have
their obligations rated, it is possible that a substantial portion of the
Fund's portfolio may consist of obligations which are not rated. The market
for rated bonds is usually broader than that for non-rated bonds, which may
result in less flexibility in disposal of such non-rated bonds.
The Fund may also acquire Municipal Bonds which have been rated below medium
quality by the rating services if, in the judgment of the Fund's investment
adviser, the Bonds have the characteristics of medium quality obligations. In
determining whether Municipal Bonds which are not rated or which have been
rated below medium quality by the rating services have the characteristics of
rated Municipal Bonds of medium quality, the investment adviser will rely upon
information from various sources, including, if available, reports by the rat-
ing services, research, analysis and appraisals of brokers and dealers and the
views of the Fund's directors and others regarding economic developments and
the creditworthiness of particular issuers.
7
<PAGE>
Municipal Bonds of medium quality are subject to fluctuation in value as a
result of changing economic circumstances as well as changes in interest
rates. Thus, while medium quality obligations will generally provide a higher
yield than do high quality Municipal Bonds of similar maturities, they are
subject to a greater degree of market fluctuation with less certainty of the
issuer's continuing ability to meet the payments of principal and interest
when due and may have speculative characteristics not present in bonds of
higher quality. In addition, obligations with longer maturities (e.g., 20
years or more) generally offer both higher yields and greater exposure to mar-
ket fluctuation from changes in interest rates than do those with shorter ma-
turities. Consequently, shares of the Fund may not be suitable for persons who
cannot assume the somewhat greater risks of capital depreciation involved in
seeking higher tax-exempt yields.
In recent years, there has been a narrowing of the yield spreads between
higher and lower quality Municipal Bonds and a reduction in the supply of me-
dium grade Municipal Bonds. As a result of these changing conditions in the
municipal securities markets, the investment adviser has invested a substan-
tial portion of the Fund's assets in higher quality Municipal Bonds. The in-
vestment adviser intends to invest in medium grade Municipal Bonds to the ex-
tent market conditions warrant.
The interest rates payable on certain Municipal Bonds and Notes are not
fixed and may fluctuate based upon changes in market rates. Municipal Bonds
and Notes of this type are called "variable rate" obligations. The interest
rate payable on a variable rate obligation is adjusted either at predesignated
intervals or whenever there is a change in the market rate of interest on
which the interest rate payable is based. Other features may include the right
whereby the Fund may demand prepayment of the principal amount of the obliga-
tion prior to its stated maturity (a demand feature) and the right of the is-
suer to prepay the principal amount prior to maturity. The principal benefit
of a variable rate obligation is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result, the purchase of
variable rate obligations should enhance the ability of the Fund to maintain a
stable net asset value per share and to sell an obligation prior to maturity
at a price approximating the full principal amount of the obligation. The pay-
ment 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.
The Fund may also invest in inverse floaters. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the oppo-
site direction of the interest rate on another security or the value of an in-
dex. Changes in the interest rate on the other security or index inversely af-
fect the residual interest rate paid on the inverse floater, with the result
that the inverse floater's price will be considerably more volatile than that
of a fixed rate bond. The market for inverse floaters is relatively new.
THE FUND MAY BE ABLE TO REDUCE THE RISK OF FLUCTUATIONS IN ASSET VALUE
CAUSED BY CHANGES IN INTEREST RATES BY HEDGING ITS PORTFOLIO THROUGH THE USE
OF FINANCIAL FUTURES. During or in anticipation of a decline in interest
rates, the Fund may purchase futures contracts to hedge against subsequent
purchases of long-term bonds at higher prices. During or in anticipation of an
increase in interest rates, the Fund may hedge its portfolio securities by
selling futures contracts for the purpose of limiting the exposure of its
portfolio to the resulting decrease in value. There are risks associated with
hedging transactions and there can be no assurance that hedges will have the
intended result. See "Financial Futures Contracts and Options on Futures" be-
low.
ALSO, THE FUND MAY PURCHASE SECONDARY MARKET INSURANCE ON MUNICIPAL BONDS
AND NOTES WHICH IT HOLDS OR ACQUIRES. Although the fee for secondary market
insurance will reduce the yield of the insured Bonds and Notes, such insurance
would be reflected in the market value of the municipal obligation purchased
and may enable the Fund to dispose of a defaulted obligation at a price
similar to that of comparable municipal obligations which are not in default.
8
<PAGE>
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor.
While insurance coverage for the Municipal Bonds and Notes held by the Fund
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, i.e., the market value, of the municipal obligations caused by changes
in interest rates and other factors, nor in turn against fluctuations in the
net asset value of the shares of the Fund.
PUTS
THE FUND MAY PURCHASE AND EXERCISE PUTS OR TENDER OPTIONS ON MUNICIPAL BONDS
AND NOTES. PUTS OR TENDER OPTIONS GIVE THE FUND THE RIGHT TO SELL SECURITIES
HELD IN THE FUND'S PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A SPECIFIED
DATE. Puts or tender options may be acquired to reduce the volatility of the
market value of securities subject to puts or tender options compared to the
volatility of similar securities not subject to puts. The acquisition of a put
or tender option may involve an additional cost to the Fund compared to the
cost of securities with similar credit ratings, stated maturities and interest
coupons but without applicable puts. Such increased cost may be paid either by
way of an initial or periodic premium for the put or by way of a higher pur-
chase price for securities to which the put is attached. In addition, there is
a credit risk associated with the purchase of puts or tender options in that
the issuer of the put or tender option may be unable to meet its obligation to
purchase the underlying security. Accordingly, the Fund will acquire puts or
tender options under the following circumstances: (1) the put or tender option
is written by the issuer of the underlying security and such security is rated
within the 4 highest quality grades as determined by Moody's or S&P; (2) the
put or tender option is written by a person other than the issuer of the un-
derlying security and such person has securities outstanding which are rated
within such 4 highest quality grades; or (3) the put or tender option is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the 2 highest quality
grades of such rating services.
The Fund anticipates being as fully invested as practicable in Municipal
Bonds and Notes; however, because the Fund does not intend to invest in taxa-
ble 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
redemptions, the Fund might be required to sell securities at a loss.
Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agent for their customers on securities
exchanges, Municipal Bonds and Notes are customarily purchased from or sold to
dealers who are selling or buying for their own account. There are no require-
ments that most Municipal Bonds and Notes be registered with or qualified for
sale by federal or state securities regulators. Since there are large numbers
of Municipal Bond and Note issues of many different issuers, most issues do
not trade on any single day. On the other hand, most issues are always market-
able, since a major dealer will normally, on request, bid for any issue, other
than obscure ones. Regional municipal securities dealers are frequently more
willing to bid on issues of municipalities in their geographic area.
Although almost all Municipal Bonds and Notes are marketable, the structure
of the market introduces its own element of risk; a seller may find, on occa-
sion, that dealers are unwilling to make bids for certain issues that the
seller considers reasonable. If the seller is forced to sell, he or she may
realize a capital loss that would not have been necessary in different circum-
stances. Because the net asset value of the Fund's shares reflects the degree
of willingness of dealers to bid for Municipal Bonds and Notes, the price of
the Fund's shares may be subject to greater fluctuation than shares of other
investment companies with different investment policies. See "Net Asset Value"
in the Statement of Additional Information.
9
<PAGE>
The ratings of Moody's and S&P represent each service's opinion as to the
quality of the Municipal Bonds or Notes rated. It should be emphasized that
ratings are general and are not absolute standards of quality or guarantees as
to the creditworthiness of an issuer. Subsequent to its purchase by the Fund,
an issue of Municipal Bonds or Notes may cease to be rated, or its ratings may
be reduced. Neither event requires the elimination of that obligation from the
Fund's portfolio, but will be a factor in determining whether the Fund should
continue to hold that issue in its portfolio.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for in-
terest on Municipal Bonds and Notes and for providing state and local govern-
ments with federal credit assistance. Reevaluation of the Fund's investment
objectives and structure might be necessary in the future due to market condi-
tions which may result from future changes in the tax laws.
FINANCIAL FUTURES CONTRACTS AND OPTIONS ON FUTURES
THE FUND MAY ATTEMPT TO REDUCE THE RISK OF FLUCTUATIONS IN THE VALUE OF ITS
ASSETS CAUSED BY INTEREST RATE CHANGES BY HEDGING ITS PORTFOLIO THROUGH THE
USE OF FINANCIAL FUTURES AND OPTIONS THEREON TRADED ON A COMMODITIES EXCHANGE
OR BOARD OF TRADE. Financial futures are commodities contracts which obligate
the buyer to take and the seller to make delivery at a future date of a speci-
fied quantity of a financial instrument or the cash value of a securities in-
dex. Presently, futures contracts are available in several types of fixed in-
come securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities, three-
month U.S. Treasury Bills and bank certificates of deposit. Futures contracts
are also available on a municipal bond index as described below.
When a futures contract is entered into, each party deposits with a broker
or in a segregated custodial account a good faith deposit of approximately 1
1/2-2% of the contract amount, called the "initial margin." Additionally, dur-
ing the term of the contract, the amount of the deposit is adjusted daily
based on the current value of the futures contract by payments of "variation
margin" to or from the broker or segregated account.
Although most interest rate futures contracts call for making or taking de-
livery of the underlying securities, these obligations are typically cancelled
or closed out before the scheduled settlement date. The closing is accom-
plished by purchasing (or selling) an identical futures contract to offset a
short (or long) position. Such an offsetting transaction cancels the contrac-
tual obligations established by the original futures transaction. Other finan-
cial futures contracts call for cash settlements rather than delivery of secu-
rities. If the price of the offsetting futures transaction varies from the
price of the original futures transaction, the hedger will realize a gain or
loss corresponding to the difference. That gain or loss will tend to offset
the unrealized loss or gain on the hedged securities position, but may not al-
ways or completely do so.
THE FUND INTENDS TO ENGAGE IN TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS
ON FUTURES CONTRACTS AS A HEDGE AGAINST CHANGES, RESULTING FROM MARKET CONDI-
TIONS, IN THE VALUE OF SECURITIES WHICH ARE HELD IN THE FUND'S PORTFOLIO OR
WHICH THE FUND INTENDS TO PURCHASE. THE FUND WILL NOT ENTER INTO ANY FINANCIAL
FUTURES CONTRACT OR PURCHASE RELATED OPTIONS (AS DEFINED IN THE CFTC REGULA-
TIONS) IF IMMEDIATELY THEREAFTER THE SUM OF INITIAL AND NET CUMULATIVE VARIA-
TION MARGINS ON ITS OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID
ON OPTIONS THEREON WOULD EXCEED 20% OF ITS TOTAL ASSETS. See "Investment Ob-
jective and Policies--Financial Futures Contracts--Limitations on Purchase and
Sale" in the Statement of Additional Information.
10
<PAGE>
The Fund's successful use of financial futures contracts and options on
futures contracts depends upon the ability of its investment adviser to pre-
dict movements in the direction of interest rates and other factors affecting
markets for securities. For example, if the Fund has hedged against the possi-
bility of an increase in interest rates which would adversely affect the price
of securities in its portfolio and prices of such securities increase instead,
the Fund will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash to meet daily
variation margin requirements, it may have to sell securities to meet such re-
quirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it is disadvantageous to do so. Where futures are
purchased to hedge against a possible increase in the price of securities be-
fore the Fund is able to invest its cash in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest
in securities at that time because of concern as to possible future market de-
cline or for other reasons, the Fund will realize a loss on the futures con-
tract that is not offset by a reduction in the price of the securities pur-
chased. For a further discussion of the risks associated with the use of
futures contracts for hedging purposes, see "Investment Objective and Poli-
cies--Financial Futures Contracts--Risks of Financial Futures Transactions" in
the Statement of Additional Information.
MUNICIPAL BOND INDEX FUTURES CONTRACTS
A futures contract on a municipal bond index began trading on the Chicago
Board of Trade in 1985. The contract, which provides for cash settlement
rather than delivery of securities, is based on the Bond Buyer Municipal Bond
Index, an index of 40 actively traded municipal bonds. To make the index as
representative as possible of price trends in the municipal securities market,
twice a month new issues are added to the index and an equal number of the
least actively traded issues are dropped from the index. Each bond in the in-
dex is priced daily by a group of five brokers.
THE MUNICIPAL BOND INDEX CONTRACT IS DESIGNED TO PROVIDE A WAY TO HEDGE MU-
NICIPAL BOND PORTFOLIOS, SINCE PRICES OF EXISTING FUTURES ON TAXABLE SECURI-
TIES DO NOT ALWAYS CORRELATE WELL WITH MUNICIPAL BOND PRICES. Because the mu-
nicipal bond index contract should correlate better with the Fund's price
changes than the Treasury Bond futures contract, the Fund's investment adviser
expects to do most of the Fund's hedging using the municipal bond index con-
tract. However, there may be times when the adviser believes that the Treasury
Bond contract corresponds well with municipal bond prices and trades at a
price that makes hedging with this contract less expensive than hedging with
the municipal contract. Accordingly, the Fund intends to use both the Treasury
Bond and the municipal bond index contracts for hedging purposes.
MUNICIPAL LEASE OBLIGATIONS
THE FUND MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FI-
NANCED BY THE ISSUE. Typically, municipal lease obligations are issued by a
state or municipal financing authority to provide funds for the construction
of facilities (e.g., schools, dormitories, office buildings or prisons). The
facilities are typically used by the state or municipality pursuant to a lease
with a financing authority. Certain municipal lease obligations may trade in-
frequently. Accordingly, the investment adviser will monitor the liquidity of
municipal lease obligations under the supervision of the Board of Directors.
Municipal lease obligations will not be considered illiquid for purposes of
the Fund's 15% limitation on illiquid securities provided the investment advi-
ser determines that there is a readily available market for such securities.
See "Investment Objective and Policies--Illiquid Securities" in the Statement
of Additional Information.
11
<PAGE>
OTHER INVESTMENTS AND POLICIES
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 be-
tween purchase and settlement, no interest accrues to the purchaser. In the
case of purchases 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 ob-
ligations on that date. While securities may be sold prior to the settlement
date, the Fund intends to purchase these securities with the purpose of actu-
ally 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 in
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.
The Fund may also purchase municipal forward contracts. A municipal forward
contract is a municipal security which is purchased on a when-issued basis
with delivery taking place up to five years from the date of purchase. No in-
terest will accrue on the security prior to the delivery date. The investment
adviser will monitor the liquidity, value, credit quality and delivery of the
security under the supervision of the Board of Directors.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary, ex-
traordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings. How-
ever, the Fund will not purchase portfolio securities when borrowings exceed
5% of the value of the Fund's total assets.
PORTFOLIO MANAGEMENT TECHNIQUES
In seeking to achieve the Fund's investment objective, the Fund's investment
adviser will cause the Fund to purchase securities which it believes represent
the best values then currently available in the marketplace. Such values are a
function of yield, maturity, issue classification and quality characteristics,
coupled with expectations regarding the economy, movements in the general
level and term structure of interest rates, political developments and varia-
tions in the supply of funds available for investment in the tax-exempt market
relative to the demand for funds placed upon it. The following are some of the
more important management techniques which will be utilized by the Fund's in-
vestment adviser.
ADJUSTMENT OF MATURITIES
The investment adviser will seek to anticipate movements in interest rates
and will adjust the maturity distribution of the portfolio accordingly. Longer
term securities have ordinarily yielded more than shorter term securities.
From time to time, however, the normal yield relationships between longer and
shorter term securities have been reversed. In addition, longer term securi-
ties have historically been subject to greater and more rapid price fluctua-
tion. The investment adviser will be free to take advantage of price volatil-
ity in order to attempt to increase the Fund's net asset value by making ap-
propriate sales and purchases of portfolio securities.
12
<PAGE>
ISSUE AND QUALITY CLASSIFICATION
Securities with the same general quality rating and maturity characteris-
tics, but which vary according to the purpose for which they were issued, of-
ten tend to trade at different yields. Similarly, securities issued for simi-
lar purposes and with the same general maturity characteristics, but which
vary according to the creditworthiness of their respective issuers, tend to
trade at different yields. These yield differentials tend to fluctuate in re-
sponse to political and economic developments as well as temporary imbalances
in normal supply and demand relationships. The investment adviser monitors
these fluctuations closely, and will adjust portfolio positions in various is-
sue and quality classifications according to the value disparities brought
about by these yield relationship fluctuations.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its in-
vestment objective, constitute fundamental policies. Fundamental policies can-
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. 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 AC-
TIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPER-
VISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FUR-
NISHES DAILY INVESTMENT ADVISORY SERVICES.
For the year ended December 31, 1993, the Fund's total expenses as a per-
centage of average net assets for the Fund's Class A and Class B shares were
.69% and 1.09%, respectively. See "Financial Highlights."
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 AND INCLUDING $250 MILLION, .475 OF 1% OF THE NEXT $250 MIL-
LION, .45 OF 1% OF THE NEXT $500 MILLION, .425 OF 1% OF THE NEXT $250 MILLION,
.40 OF 1% OF THE NEXT $250 MILLION AND .375 OF 1% OF THE FUND'S AVERAGE DAILY
NET ASSETS 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 management fees to PMF of .47% of the Fund's average daily
net assets. See "Manager" in the Statement of Additional Information.
As of January 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 $51 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT OP-
ERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
13
<PAGE>
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), 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.
The current portfolio manager of the Fund is Patricia Dolan, a Managing
Director of Prudential Investment Advisors, a unit of PIC. Ms. Dolan has
responsibility for the day-to-day management of the Fund's portfolio. Ms.
Dolan has managed the Fund's portfolio since she joined PIC in October 1991.
She was formerly a Vice President and Portfolio Manager in the Municipal Trust
Department of Citibank Private Banking Division where she was employed from
1981 to 1991. Ms. Dolan also serves as the portfolio manager of Prudential
Municipal Bond Fund-Insured Series.
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), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE
OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND.
IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (FORMERLY PRUDENTIAL-BACHE SECURITIES
INC.), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292 (PRUDENTIAL SECURITIES OR
PSI), IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND
SERVES AS THE DISTRIBUTOR OF THE CLASS B SHARES OF THE FUND. IT IS AN
INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN AND THE
CLASS B PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER RULE 12B-1
UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS (THE
DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A AND CLASS B
SHARES, RESPECTIVELY. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities
and Pruco Securities Corporation (Prusec), an affiliated broker-dealer,
commissions and 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, interest and/or carrying
charges (Class B only), 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 Fund shares,
including lease, utility, communications and sales promotion expenses. 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 registered there as
broker-dealers.
UNDER THE CLASS A PLAN, THE FUND REIMBURSES PMFD FOR ITS DISTRIBUTION-
RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30
OF 1% OF THE AVERAGE DAILY NET ASSET VALUE OF THE CLASS A SHARES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance
of shareholder accounts (service fee) and (ii) total distribution fees
(including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. It is expected that in the
case of Class A shares, proceeds from the distribution fee will be used
primarily to pay account servicing fees to financial advisers. Unlike the
Class B Plan, there are no carry forward amounts under the Class A Plan, and
interest expenses are not incurred under the Class A Plan. The Distributor has
advised the Fund that distribution fees under the Class A Plan will not exceed
.10 of 1% of the average daily net assets of the Class A shares for the fiscal
year ending December 31, 1994.
14
<PAGE>
For the fiscal year ended December 31, 1993, PMFD incurred distribution
expenses under the Class A Plan of $11,786, all of which was recovered through
the distribution fee paid by the Fund to PMFD. In addition, for this period,
PMFD received approximately $251,600 in initial sales charges.
UNDER THE CLASS B PLAN, THE FUND REIMBURSES PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B SHARES AT AN ANNUAL RATE
OF UP TO .50 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES
(ASSET-BASED SALES CHARGES). Prudential Securities recovers the distribution
expenses it incurs through the receipt of reimbursement payments from the Fund
under the Class B Plan and the receipt of contingent deferred sales charges
from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charge--Class B Shares." For the fiscal year
ended December 31, 1993, Prudential Securities received approximately $510,600
in contingent deferred sales charges.
THE CLASS B PLAN ALSO PROVIDES FOR THE PAYMENT OF A SERVICE FEE TO
PRUDENTIAL SECURITIES AT A RATE NOT TO EXCEED .25 OF 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B SHARES. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan
and will be carried forward and paid by the Fund under the Class B Plan or its
shareholders from payments received through contingent deferred sales charges
in future years so long as the Class B Plan is in effect. Interest is accrued
monthly on such carry forward amounts at a rate comparable to that paid by
Prudential Securities for bank borrowings. See "Distributor" in the Statement
of Additional Information.
THE AGGREGATE DISTRIBUTION FEE FOR CLASS B SHARES (ASSET-BASED SALES CHARGES
PLUS SERVICE FEES) WILL NOT EXCEED THE ANNUAL RATE OF .50 OF 1% OF THE AVERAGE
DAILY NET ASSETS OF THE CLASS B SHARES UNDER THE CLASS B PLAN.
For the fiscal year ended December 31, 1993, the Distributor received
$4,274,596 from the Fund under the Class B Plan. It is estimated that the
Distributor spent approximately $4,599,900 on behalf of the Fund during the
year ended December 31, 1993. At December 31, 1993, the aggregate amount of
distribution expenses incurred by the Distributor and not yet reimbursed by
the Fund or recovered through contingent deferred sales charges was
approximately $18,588,600, or 2.2%, of the Fund's net assets of the Class B
shares. These unreimbursed amounts may be recovered by the Distributor through
future payments under the Class B Plan or contingent deferred sales charges.
For the fiscal year ended December 31, 1993, the Fund paid distribution
expenses of .10% and .50% of the average net assets of the Class A and Class B
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income.
Distribution expenses attributable to the sale of both Class A and Class B
shares will be allocated to each class based upon the ratio of sales of each
class to the sales of all shares of the Fund. The distribution fee and initial
sales charge in the case of Class A shares will not be used to subsidize the
sale of Class B shares. Similarly, the distribution fee and contingent
deferred sales charge in the case of Class B shares will not be used to
subsidize the sale of Class A shares.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of
15
<PAGE>
the applicable class of the Fund. In the event of termination or
noncontinuation of the Class B Plan, the Board of Directors may consider the
appropriateness of having the Fund reimburse Prudential Securities for the
outstanding carry forward amounts plus interest thereon.
In addition to distribution and service fees paid by the Fund under the
Class A and Class B Plans, the Manager (or one of its affiliates) may make
payments to dealers and other persons who 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.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission
merchant 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 Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records
for the Fund. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMFS is a wholly-owned subsidiary of PMF.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM ITS ASSETS AND DIVIDING THE REMAINDER BY THE NUMBER OF
OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE BOARD OF
DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S
NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
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 shares have been received by the Fund 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.
Although the legal rights of Class A and Class B shares are substantially
identical, the different expenses borne by each class may result in different
NAVs and dividends. As long as the Fund declares dividends daily, the NAV of
Class A and B shares will generally be the same. It is expected, however, that
the Fund's dividends will differ by approximately the amount of the distribu-
tion expense accrual differential between the classes.
16
<PAGE>
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD," "TAX EQUIVALENT
YIELD," AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND
"AGGREGATE" TOTAL RETURN) IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX
EQUIVALENT YIELD, AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A AND
CLASS B SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The "yield" refers to the income
generated by an investment in the Fund over a 30-day period. This income is
then "annualized;" that is, the amount of income generated by the investment
during that 30-day period is assumed to be generated each 30-day period for
twelve periods and is shown as a percentage of the investment. The income
earned on the investment is also assumed to be reinvested at the end of the
sixth 30-day period. The "tax equivalent yield" is calculated similarly to the
"yield," except that the yield is increased using a stated income tax rate to
demonstrate the taxable yield necessary to produce an after-tax yield
equivalent to the Fund. The "total return" shows what an investment in the
Fund would have earned over a specified period of time (i.e., one, five or ten
years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects
actual performance over a stated period of time. "Average annual" total return
is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent
deferred sales charges. Neither "average annual" total return nor "aggregate"
total return takes into account any federal or state income taxes which may be
payable upon redemption. The Fund also may include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc., other
industry publications, business periodicals, and market indices. See
"Performance Information" in the Statement of Additional Information. The Fund
will include performance data for both Class A and Class B shares of the Fund
in any advertisement or information including performance data of the Fund.
Further performance information is contained in the Fund's annual and semi-
annual report to shareholders, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
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 INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. SEE
"TAXES, DIVIDENDS AND DISTRIBUTIONS" IN THE STATEMENT OF ADDITIONAL
INFORMATION.
Gain or loss realized by the Fund from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary
income to the extent of any "market discount." Market discount generally is
the difference, if any, between the price paid by the Fund for the security
and the principal amount of the security (or, in the case of a security issued
at an original issue discount, the revised issue price of the security). The
market discount rule does not apply to any security that was acquired by the
Fund at its original issue price.
TAXATION OF SHAREHOLDERS
Distributions out of net investment income, to the extent attributable to
interest received on tax-exempt securities, are exempt from federal income tax
when paid to shareholders. Distributions of other net investment income and
net
17
<PAGE>
short-term capital gains in excess of net long-term capital losses will be
taxable as ordinary income to the shareholder whether or not reinvested. Any
net long-term capital gains (i.e., the excess of net long-term capital gains
over net short-term capital losses) distributed to shareholders will be
taxable as such to the shareholders, whether or not reinvested and regardless
of the length of time a shareholder has owned his or her shares.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.
Interest on certain "private activity" tax-exempt obligations issued on or
after August 8, 1986, is a preference item for purposes of the alternative
minimum tax for both individual and corporate shareholders. In the event that
the Fund invests in such obligations, the portion of an exempt-interest
dividend of the Fund that is allocable to such municipal obligations will be
treated as a preference item to shareholders for purposes of the alternative
minimum tax. In addition, a portion of the exempt-interest dividends received
by corporate shareholders with respect to interest on 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.
Any gain or loss realized upon a sale of shares of the Fund by a shareholder
who is not a dealer in securities will be treated as a long-term capital gain
or loss if the shares have been held for more than one year, and otherwise as
a short-term capital gain or loss. However, any loss realized by a shareholder
upon the sale of shares of the Fund held by the shareholder for six months or
less will be disallowed to the extent of any distribution of tax exempt
interest received by the shareholder with respect to the shares.
Net tax-exempt interest distributed by the Fund to shareholders may not be
exempt from state or local taxation. 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, capital gain
distributions and redemption proceeds 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 net 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 MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS, IF ANY. Dividends paid by the Fund with respect to Class A and Class B
shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount
except that each class will bear its own distribution expenses, resulting in
lower dividends for Class B shares. Distributions of net capital gains, if
any, will be paid in the same amount for Class A and Class B shares. See "How
the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NET ASSET VALUE OF FUND SHARES ON THE PAYMENT DATE OR SUCH OTHER DATE AS
THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING
NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIV-
IDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to Pruden-
tial Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. The Fund will notify each share-
holder after the close of the Fund's taxable year both of the dollar amount
and the taxable status of that year's dividends and distributions on a per
share basis. If you hold shares through Prudential Securities, you should con-
tact your financial adviser to elect to receive dividends and distributions in
cash.
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<PAGE>
In determining the amount of capital gains to be distributed, any capital
loss carryovers from prior years will be offset against capital gains. The
Fund intends to invest its assets so that dividends paid from net tax-exempt
interest earned from Municipal Bonds and Notes will qualify as exempt-interest
dividends and be excluded from the shareholder's gross income under the
Internal Revenue Code.
Any distributions of net capital gains paid shortly after a purchase by an
investor will have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the distributions. Such
distributions, although in effect a return of invested principal, are subject
to federal income taxes. Accordingly, prior to purchasing shares of the Fund,
an investor should carefully consider the impact of capital gains
distributions which are expected to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JANUARY 9, 1980. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO TWO CLASSES, DESIGNATED CLASS A AND CLASS B COMMON STOCK,
EACH OF WHICH CONSISTS OF 250 MILLION AUTHORIZED SHARES. Both Class A and
Class B common stock represent an interest in the same assets of the Fund and
are identical in all respects except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. See "How the Fund is Managed--Distributor." The Fund has
received an order from the Securities and Exchange Commission (SEC) permitting
the issuance and sale of multiple classes of common stock. Currently, the Fund
is offering only two classes designated Class A and Class B shares. Pursuant
to the Fund's Articles of Incorporation, the Board of Directors may authorize
the creation of additional series of common stock and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of Class A and Class B common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares. There are no
conversion, preemptive 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 debt and expenses of the Fund have been
paid. Since Class B shares bear higher distribution expenses, the liquidation
proceeds to Class B shareholders are likely to be lower than to Class A
shareholders. The Fund's shares 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 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
19
<PAGE>
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, PRUSEC OR
DIRECTLY FROM THE FUND 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 or custodial accounts for
the benefit of minors. For purchases through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Services" below.
THE PURCHASE PRICE IS THE NET ASSET VALUE PER SHARE NEXT DETERMINED
FOLLOWING RECEIPT OF AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES
PLUS A SALES CHARGE WHICH, AT THE OPTION OF THE PURCHASER, MAY BE IMPOSED AT
THE TIME OF PURCHASE OR ON A DEFERRED BASIS. SEE "ALTERNATIVE PURCHASE PLAN"
BELOW. SEE ALSO, "HOW THE FUND VALUES ITS SHARES."
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.
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 Fund shares made through dealers other than Prudential
Securities or Prusec may be subject to postage and handling charges imposed by
the dealer; however, you may avoid such charges by placing orders directly
with the Fund's Transfer Agent, Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, 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 National Municipals Fund, specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A or Class B shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
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<PAGE>
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential National
Municipals Fund, Class A or Class B shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS TWO CLASSES OF SHARES WHICH ALLOWS YOU TO CHOOSE THE MOST
BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE
AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND
OTHER RELEVANT CIRCUMSTANCES. You may purchase shares at the next determined
NAV plus a sales charge which, at your election, may be imposed either at the
time of purchase (the Class A shares or the initial sales charge alternative)
or on a deferred basis (the Class B shares or the deferred sales charge
alternative) (the Alternative Purchase Plan).
CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE OF UP TO 4.5% OF THE
OFFERING PRICE AND AN ANNUAL DISTRIBUTION FEE WHICH IS CURRENTLY BEING CHARGED
AT A RATE OF UP TO .10 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A
SHARES. Certain purchases of Class A shares may qualify for reduction or
waiver of initial sales charges. See "Initial Sales Charge Alternative--Class
A Shares--Reduction and Waiver of Initial Sales Charges" below.
CLASS B SHARES DO NOT INCUR A SALES CHARGE WHEN THEY ARE PURCHASED BUT ARE
SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE (DECLINING FROM 5% TO ZERO OF
THE LESSER OF THE AMOUNT INVESTED OR THE REDEMPTION PROCEEDS) WHICH WILL BE
IMPOSED ON CERTAIN REDEMPTIONS MADE WITHIN SIX YEARS OF PURCHASE AND AN ANNUAL
DISTRIBUTION FEE OF UP TO .50 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS B SHARES. Certain redemptions of Class B shares may qualify for waiver
or reduction of the contingent deferred sales charge. See "How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charge" and "How To Sell Your
Shares--Quantity Discount."
The two classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that each class bears
the separate expenses of its Rule 12b-1 distribution plan and has exclusive
voting rights with respect to such a plan. The two classes also have separate
exchange privileges. See "How to Exchange Your Shares" below. The net income
attributable to each class and the dividends payable on the shares of each
class will be reduced by the amount of the distribution fee of each class.
Class B shares bear the expenses of a higher distribution fee which will cause
the Class B shares to have a higher expense ratio and to pay lower dividends
than the Class A shares.
Financial advisers will receive different compensation for selling Class A
and Class B shares.
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect the initial sales
charge alternative because a similar sales charge reduction is not available
for purchases under the deferred sales charge alternative. However, because
the initial sales charge is deducted at the time of purchase, you would not
have all of your money invested initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for a long period of time, you might also
elect the initial sales charge alternative because over time the accumulated
continuing distribution charges of Class B shares will exceed the initial
sales charge plus distribution fees of Class A shares. Again, however, you
must weigh this consideration against the fact that not all of your funds will
be invested
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<PAGE>
initially. Furthermore, the ongoing distribution charges under the deferred
sales charge alternative will be offset to the extent any return is realized
on the additional funds. However, there can be no assurance that any return
will be realized on the additional funds.
On the other hand, you might determine that it is more advantageous to have
all of your money invested initially, although it is subject to a distribution
fee of up to .50 of 1% and, for a six-year period, a contingent deferred sales
charge. For example, based on current fees and expenses, if you purchase Class
A shares you would have to hold your investment more than 11 years for the .50
of 1% Class B distribution fee to exceed the initial sales charge plus distri-
bution fee of the Class A shares. In this example, if you intend to maintain
your investment for more than 11 years, you should consider purchasing Class A
shares. However, this example does not take into account the time value of
money which further reduces the impact of the .50 of 1% distribution fee on
the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions while the contingent
deferred sales charge is applicable.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge (ex-
pressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $50,000.......... 4.50% 4.71% 4.25%
$50,000 to $99,999......... 4.00% 4.17% 3.75%
$100,000 to $249,999....... 3.50% 3.63% 3.25%
$250,000 to $499,999....... 3.00% 3.09% 2.90%
$500,000 to $999,999....... 2.00% 2.04% 1.90%
$1,000,000 to $2,499,999... 1.00% 1.01% 0.95%
$2,500,000 and above....... 0.50% 0.50% 0.45%
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Sales charges are reduced
under Rights of Accumulation and Letters of Intent. Class A shares are offered
at NAV to participants in certain retirement and deferred compensation plans
including qualified or non-qualified plans under the Internal Revenue Code and
certain affinity group and group savings plans, provided that the plan has
existing assets of at least $10 million or 2,500 eligible employees or
members. Additional information concerning the reduction and waiver of initial
sales charges is set forth in the Statement of Additional Information. In the
case of pension, profit-sharing or stock bonus plans under Section 401 of the
Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code (Benefit Plans) whose
accounts are held directly with the Transfer Agent and for which the Transfer
Agent does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares are offered at NAV to participants
who are repaying loans made from such plans to the participant.
Class A shares are offered at NAV to Directors and officers of the Fund and
other Prudential Mutual Funds, to employees of Prudential Securities and PMF
and their subsidiaries and to members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent. Class A shares are offered at NAV to employees and special
agents of Prudential and its subsidiaries and to all persons who have retired
directly from active service with Prudential or one of its subsidiaries.
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<PAGE>
Class A shares are offered at NAV to an investor who has a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
of any open-end investment company sponsored by the financial adviser's
previous employer (other than a money market fund or other no-load fund which
imposes a distribution or service fee of .25 of 1% or less) on which no
deferred sales load, fee or other charge was imposed on redemption and (iii)
the financial adviser served as the chief's broker on the previous purchase.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or
waiver of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
The offering price of Class B shares for investors choosing the deferred
sales charge alternative is the NAV next determined following receipt of an
order by the Transfer Agent or Prudential Securities. Although there is no
sales charge imposed at the time of purchase, redemptions of Class B shares
may be subject to a contingent deferred sales charge. See "How to Sell Your
Shares--Contingent Deferred Sales Charge--Class B Shares."
HOW TO SELL YOUR SHARES
YOU MAY 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." In certain
cases, however, redemption proceeds from the Class B shares will be reduced by
the amount of any applicable contingent deferred sales charge, as described
below. See "Contingent Deferred Sales Charge--Class B Shares" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. 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 or Preferred
Services offices.
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<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or
the right of redemption suspended at times (a) when the New York Stock
Exchange is closed for other than customary weekends and holidays, (b) when
trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations
of the SEC shall govern as to whether the conditions prescribed in (b), (c) or
(d) 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 IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as in regular redemption. See "Net Asset Value." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charges will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem 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 after the date of
the redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B shares. You must notify the Fund's
Transfer Agent, either directly or through Prudential Securities or Prusec, at
the time the repurchase privilege is exercised that you are entitled to credit
for the contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon 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.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
If you have elected to purchase shares without an initial sales charge
(Class B), a contingent deferred sales charge or CDSC (declining from 5% to
zero) will be imposed at the time of redemption. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to you. The CDSC will
be imposed on any redemption by you which reduces the current value of your
Class B shares to an amount which is lower than the amount of all payments by
you for Class B shares during the preceding six years. A CDSC will be applied
on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares
purchased through reinvestment of dividends or distributions are not subject
to a CDSC. The amount of any contingent deferred sales charge will be paid to
and retained by the Distributor. See "How the Fund is Managed--Distributor"
and "Waiver of the Contingent Deferred Sales Charge" below.
24
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The following table sets forth the rates of the CDSC:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
OF DOLLARS INVESTED OR
YEAR SINCE PURCHASE PAYMENT MADE REDEMPTION PROCEEDS
-------------------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh and thereafter........................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares purchased six years prior to the redemption;
then of amounts representing the cost of shares acquired prior to July 1,
1985; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable six-year period (five years for
shares purchased prior to January 22, 1990).
For example, assume you purchased 100 shares at $10 per share for a cost of
$1,000. Subsequently, you acquired 5 additional shares through dividend
reinvestment. During the second year after the purchase you decided to redeem
$500 of your investment. Assuming at the time of the redemption the net asset
value had appreciated to $12 per share, the value of your shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE. The CDSC will be waived in
the case of a redemption following the death or disability of a shareholder
or, in the case of a trust, following the death or disability of the grantor.
The waiver is available for total or partial redemptions of shares owned by a
person, either individually or in joint tenancy (with rights of survivorship),
at the time of death or initial determination of disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include a lump-sum or other
distribution after retirement, or for an IRA or Section 403(b) custodial
account, after attaining age 59 1/2, a tax-free return of an excess
contribution or plan distributions following the death or disability of the
shareholder. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service. In the
case of Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC
will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not
25
<PAGE>
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted.
The CDSC will also be waived on redemptions of shares held by a Prudential
Securities financial adviser's client, provided that the purchase was made
within 90 days of the commencement of the financial adviser's employment with
Prudential Securities, if certain conditions set forth in the Statement of Ad-
ditional Information are met.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the contingent deferred sales charge. The waiver will be
granted subject to confirmation of your entitlement.
QUANTITY DISCOUNT. The CDSC is reduced on redemptions of Class B shares of
the Fund if immediately after a purchase of such shares, the aggregate cost of
all Class B shares of the Fund owned by you in a single account exceeds
$500,000. For example, if you purchase $100,000 of Class B shares of the Fund
and the following year purchase an additional $450,000 of Class B shares with
the result that the aggregate cost of your Class B shares of the Fund
following the second purchase is $550,000, the quantity discount would be
available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeds $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE
OF DOLLARS INVESTED
OR
YEAR SINCE PURCHASE PAYMENT MADE REDEMPTION PROCEEDS
-------------------------------- --------------------------
$500,001
TO
$1 MILLION OVER $1 MILLION
---------- ---------------
<S> <C> <C>
First........................................ 3.0% 2.0%
Second....................................... 2.0% 1.0%
Third........................................ 1.0% 0%
Fourth and thereafter........................ 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced contingent deferred sales charge. The reduced
contingent deferred sales charge will be granted subject to confirmation of
your holdings.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A
AND CLASS B SHARES MAY EXCHANGE FOR CLASS A AND CLASS B SHARES, RESPECTIVELY,
OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. Any applicable CDSC payable
upon the redemption of shares exchanged will be calculated from the first day
of the month after the initial purchase, excluding the time shares were held
in a money market fund. Class B shares may not be exchanged into money market
funds other than Prudential Special Money Market Fund. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
26
<PAGE>
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE 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, on
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. 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 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.
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.
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 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 sixty
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 WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full 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 the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (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 Class A or Class B shares of the Fund which provides for
monthly or quarterly checks. Withdrawals of Class B shares may be subject to a
CDSC. See "How to Sell Your Shares--Contingent Deferred Sales Charge--Class B
Shares."
27
<PAGE>
. 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 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. In addition, monthly unaudited financial data
are available upon request from the Fund.
. 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.
28
<PAGE>
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<PAGE>
[This page intentionally left blank]
<PAGE>
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
investment 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 Funds at (800) 225-1852 for a free prospectus. Read the
prospectus carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund
Prudential Government Plus Fund
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund
Prudential Structured Maturity Fund
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund
Prudential Global Natural Resources Fund
Prudential Intermediate Global Income 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.
EQUITY FUNDS
Prudential Equity Fund
Prudential Equity Income Fund
Prudential FlexiFund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Growth Fund, Inc.
Prudential Growth Opportunity Fund
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
.Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
.Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California 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
.Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
.Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
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 Distributor. 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 7
Investment Objective and Policies......................................... 7
Other Investments and Policies............................................ 12
Portfolio Management Techniques........................................... 12
Investment Restrictions................................................... 13
HOW THE FUND IS MANAGED.................................................... 13
Manager................................................................... 13
Distributor............................................................... 14
Portfolio Transactions.................................................... 16
Custodian and Transfer and
Dividend Disbursing Agent................................................ 16
HOW THE FUND VALUES ITS SHARES............................................. 16
HOW THE FUND CALCULATES PERFORMANCE........................................ 17
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 17
GENERAL INFORMATION........................................................ 19
Description of Common Stock............................................... 19
Additional Information.................................................... 19
SHAREHOLDER GUIDE.......................................................... 20
How to Buy Shares of the Fund............................................. 20
Alternative Purchase Plan................................................. 21
How to Sell Your Shares................................................... 23
How to Exchange Your Shares............................................... 26
Shareholder Services...................................................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
104A 440011L
CUSIP Nos.:
Class A: 743918 20 3
Class B: 743918 10 4
- --------------------------------------------------------------------------------
ART
Prudential
National
Municipals Fund
- --------------------------------------------------------------------------------
[ART]
LOGO
- --------------------------------------------------------------------------------
P R O S P E C T U S
FEBRUARY 28, 1994
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
Statement of Additional Information
February 28, 1994
Prudential-Bache National Municipals Fund, Inc., doing business as
Prudential National Municipals Fund (the Fund), is an open-end, diversified
management investment company whose investment objective is to seek a high
level of current income exempt from federal income taxes. In attempting to
achieve this objective, the Fund intends to invest substantially all of its
total assets in carefully selected long-term Municipal Bonds of medium
quality, i.e., obligations of issuers possessing adequate but not outstanding
capacities to service their debt. Subject to the limits described herein, the
Fund may also buy and sell financial futures for the purpose of hedging its
securities portfolio. 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 and should be
read in conjunction with the Fund's Prospectus, dated February 28, 1994, a
copy of which may be obtained from the Fund upon request at the address or
telephone noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information....................................... B-2 19
Investment Objective and Policies......................... B-2 7
Investment Restrictions................................... B-6 13
Directors and Officers.................................... B-7 13
Manager................................................... B-9 13
Distributor............................................... B-11 14
Portfolio Transactions and Brokerage...................... B-12 16
Purchase and Redemption of Fund Shares.................... B-13 20
Shareholder Investment Account............................ B-15 27
Net Asset Value........................................... B-18 16
Taxes, Dividends and Distributions........................ B-18 17
Performance Information................................... B-20 17
Custodian and Transfer and Dividend Disbursing Agent and
Independent Accountants.................................. B-22 16
Financial Statements...................................... B-23 --
Report of Independent Accountants......................... B-34 --
Appendix A--Description of Tax-Exempt Security Ratings.... A-1 --
</TABLE>
- -------------------------------------------------------------------------------
104B 4440201
<PAGE>
GENERAL INFORMATION
On April 30, 1987, the shareholders of the Fund at the Annual Meeting of
Shareholders approved an amendment to the Fund's Articles of Incorporation, as
recommended by the Board of Directors, to change the Fund's name from
Prudential-Bache High Yield Municipals, Inc. to Prudential-Bache National
Municipals Fund, Inc. 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 National Municipals Fund, Inc. and authorized the Fund to do
business under the name Prudential National Municipals 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 seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, the Fund intends to invest substantially all, and in any event at
least 80%, of its total assets in Municipal Bonds and Municipal Notes, except
in certain circumstances. From time to time the Fund may invest in Municipal
Bonds and Municipal Notes that are "private activity bonds" (as defined in the
Internal Revenue Code), the interest on which is a tax preference subject to
the alternative minimum tax. See "Taxes, Dividends and Distributions" in the
Prospectus. For a further description of the Fund's investment objective and
policies see "How the Fund Invests--Investment Objective and Policies" in the
Prospectus.
MUNICIPAL NOTES
For liquidity purposes, pending investment in Municipal Bonds, or on a
temporary or defensive basis due to market conditions, the Fund may invest in
tax-exempt short-term debt obligations (maturing in one year or less). These
obligations, known as "Municipal Notes," include tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes. The interest from these Notes is exempt from federal income taxes.
The Fund will limit its investments in Municipal Notes to (1) those which are
rated, at the time of purchase, within the three highest grades assigned by
Moody's Investors Service (Moody's) or the two highest grades assigned by
Standard & Poor's Ratings Group (S&P); (2) those of issuers having, at the
time of purchase, an issue of outstanding Municipal Bonds rated within the
four highest grades of Moody's or S&P; or (3) those which are guaranteed by
the U.S. Government, its agents or instrumentalities.
MUNICIPAL BONDS
Municipal Bonds include debt obligations of a state, a territory, or a
possession of the United States, or any political subdivision thereof (e.g.,
counties, cities, towns, villages, districts, authorities) or the District of
Columbia issued to obtain funds for various purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to loan to public or private
institutions for the construction of facilities such as education, hospital
and housing facilities. In addition, certain types of private activity bonds
may be issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or
water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. Such obligations
are included within the term Municipal Bonds if the interest paid thereon is
at the time of issuance, in the opinion of the issuer's bond counsel, exempt
from federal income tax. The current federal tax laws, however, substantially
limit the amount of such obligations that can be issued in each state. See
"Taxes, Dividends and Distributions."
The two principal classifications of Municipal Bonds are "general
obligation" and limited 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, whereas revenue bonds are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Private activity bonds that are Municipal Bonds are
in most cases revenue bonds and do not generally constitute the pledge of the
credit of the issuer of such bonds. The credit quality of private activity
revenue bonds is usually directly related to the credit standing of the
industrial user involved. There are, in addition, a variety of hybrid and
special types of municipal obligations as well as numerous differences in the
security of Municipal Bonds, both within and between the two principal
classifications described above.
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" obligations. The
interest rate payable on a variable rate obligation is adjusted either at
predesignated intervals or whenever there is a change in the market rate of
interest on which the
B-2
<PAGE>
interest rate payable is based. Other features may include the right whereby
the Fund may demand prepayment of the principal amount of the obligation prior
to its stated maturity (a demand feature) and the right of the issuer to
prepay the principal amount prior to maturity. The principal benefit of a
variable rate obligation is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result, the purchase of
variable rate obligations should enhance the ability of the Fund to maintain a
stable net asset value per share 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.
PURCHASE AND EXERCISE OF PUTS
Puts give the Fund the right to sell securities held in the Fund's portfolio
at a specified exercise price on a specified date. Puts or tender options may
be acquired to reduce the volatility of the market value of securities subject
to puts or tender options compared to the volatility of similar securities not
subject to puts or tender options. The acquisition of a put or tender option
may involve an additional cost to the Fund, compared to the cost of securities
with similar credit ratings, stated maturities and interest coupons but
without applicable puts or tender options. Such increased cost may be paid
either by way of an initial or periodic premium for the put or tender option
or by way of a higher purchase price for securities to which the put or tender
option is attached. In addition, there is a credit risk associated with the
purchase of puts or tender options in that the issuer of the put or tender
option may be unable to meet its obligation to purchase the underlying
security. Accordingly, the Fund will acquire puts or tender options under the
following circumstances: (1) the put or tender option is written by the issuer
of the underlying security and such security is rated within the four highest
quality grades as determined by Moody's or S&P; (2) the put or tender option
is written by a person other than the issuer of the underlying security and
such person has securities outstanding which are rated within such four
highest quality grades; or (3) the put or tender option is backed by a letter
of credit or similar financial guarantee issued by a person having securities
outstanding which are rated within the two highest quality grades of such
rating services.
PORTFOLIO TURNOVER
Although the Fund does not intend to engage in substantial short-term
trading, it may sell portfolio securities without regard to the length of time
that they have been held in order to take advantage of new investment
opportunities or yield differentials or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the issuer. In order to seek a high level of current income, the
investment adviser intends to change the composition of the Fund's portfolio,
adjusting maturities and the quality and type of issue. Accordingly, it is
possible that the Fund's portfolio turnover rate may reach, or even exceed,
150%. A portfolio turnover rate of 150% may exceed that of other investment
companies with similar objectives. The portfolio turnover rate is computed by
dividing the lesser of the amount of the securities purchased or securities
sold (excluding all securities whose maturities at acquisition were one year
or less) by the average monthly value of such securities owned during the
year. A 100% turnover rate would occur, for example, if all of the securities
held in the Fund's portfolio were sold and replaced within one year. However,
when portfolio changes are deemed appropriate due to market or other
conditions, such turnover rate may be greater than anticipated. A higher rate
of turnover results in increased transaction costs to the Fund. For the years
ended December 31, 1992 and 1993 the Fund's portfolio turnover rates were 114%
and 82%, respectively.
FINANCIAL FUTURES CONTRACTS
The Fund will engage in transactions in financial futures contracts as a
hedge against interest rate related fluctuations in the value of securities
which are held in the Fund's portfolio or which the Fund intends to purchase.
The Fund will engage in such transactions consistent with the Fund's
investment objective. A clearing corporation associated with the commodities
exchange on which a futures contract trades assumes responsibility for the
completion of transactions and guarantees that open futures contracts will be
performed. Although interest rate futures contracts call for actual delivery
or acceptance of debt securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery.
OPTIONS ON FINANCIAL FUTURES. The Fund may purchase and write put and call
options on futures contracts and enter into closing transactions with respect
to such options to terminate an existing position. The Fund will use options
on futures in connection with hedging strategies.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which
B-3
<PAGE>
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between
the exercise price of the option and the closing price of the futures contract
on the expiration date. Currently options can be purchased or written with
respect to futures contracts on U.S. Treasury Bonds and the Municipal Bond
Index on the Chicago Board of Trade. As with options on debt securities, the
holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guaranty that such
closing transactions can be effected.
When the Fund hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When the
Fund writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option. In instances involving the purchase of a call
option on a futures contract, the Fund will deposit in a segregated account
with the Fund's Custodian an amount in cash, cash equivalents or liquid, high-
grade, fixed-income securities equal to the market value of the obligation
underlying the futures contract, less any amount held in the initial and
variation margin accounts.
LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
of 1940 (the Investment Company Act) are exempt from the definition of
"commodity pool operator," subject to compliance with certain conditions. The
exemption is conditioned upon a requirement that all of the investment
company's futures transactions constitute bona fide hedging transactions. With
respect to long positions assumed by the Fund, the Fund will segregate with
its Custodian an amount of cash, U.S. Government securities or liquid, high
grade debt securities so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the
market value of the futures contracts, and thereby insure that the use of
futures contracts is unleveraged. The Fund will continue to invest at least
80% of its total assets in Municipal Bonds and Municipal Notes except in
certain circumstances, as described in the Prospectus under "How the Fund
Invests--Investment Objective and Policies." The Fund may not enter into
futures contracts if, immediately thereafter, the sum of the amount of initial
and net cumulative variation margin on outstanding futures contracts, together
with premiums paid on options thereon, would exceed 20% of the total assets of
the Fund.
RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in
"How the Fund Invests--Investment Objective and Policies" in the Prospectus,
there are a number of other risks associated with the use of financial futures
for hedging purposes.
Hedging involves the risk of imperfect correlation because changes in the
price of futures contracts only generally parallel but do not necessarily
equal changes in the prices of the securities being hedged. The risk of
imperfect correlation increases as the composition of the Fund's securities
portfolio diverges from the securities that are the subject of the futures
contract, for example, those included in the municipal index. Because the
change in price of the futures contract may be more or less than the change in
prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.
The Fund intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in such futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that
a liquid market will always exist for any particular contract at any
particular time. Accordingly, there can be no assurance that it will always be
possible to close a futures position when such closing is desired; and in the
event of adverse price movements, the Fund would continue to be required to
make daily cash payments of variation margin. However, in the event futures
contracts have been sold to hedge portfolio securities, such securities will
not be sold until the offsetting futures contracts can be executed. Similarly,
in the event futures have been bought to hedge anticipated securities
purchases, such purchases will not be executed until the offsetting futures
contracts can be sold.
The hours of trading of interest rate futures contracts may not conform to
the hours during which the Fund may trade Municipal Bonds. To the extent that
the futures markets close before the municipal bond market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Compared to the sale of financial futures, the purchase of
put options on financial futures involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
put option on a financial future would result in a loss to the Fund when the
sale of a financial future would not, such as when there is no movement in the
price of debt securities.
B-4
<PAGE>
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that the Fund would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of
underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange could continue to be
exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell Municipal Bonds or Notes on a when-issued or
delayed delivery basis. When-issued or delayed delivery transactions arise
when securities are purchased or sold by the Fund with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. When-issued and delayed delivery transactions may not settle for
up to one year or more from the time of entering into such transactions. The
Fund bears the credit risk of the counter-party to the transaction until
settlement. Therefore, the credit quality and suitability of the issuer is
examined carefully prior to entering into such when-issued and delayed
delivery transactions. The Fund's Custodian will maintain, in a segregated
account of the Fund, cash, U.S. Government securities or other liquid high-
grade debt obligations having a value equal to or greater than the Fund's
purchase commitments; the Custodian will likewise segregate securities sold on
a delayed delivery basis.
ILLIQUID SECURITIES
A Fund may not invest more than 15% of its net 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 contractual restrictions on resale.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period. Mutual funds do not typically hold a significant amount of
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the Fund's 15% limitation on illiquid securities provided the investment
adviser determines that there is a readily available market for such
securities. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). With respect to municipal lease obligations, the investment
adviser also considers: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed
by nationally recognized statistical rating organizations in evaluating the
credit quality of a municipal lease obligation, including (i) whether the
lease can be cancelled; (ii) if applicable, what assurance there is that the
assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and
financial characteristics); (iv) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the
B-5
<PAGE>
operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations
as determined by the investment adviser.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Fund as
fundamental policies. Under the Investment Company Act, fundamental policies
may not be changed without the approval of the majority of the Fund's
outstanding voting securities which under the Investment Company Act 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.
The Fund may not:
(1) Invest in securities other than Municipal Bonds and Notes (including
when-issued and delayed delivery purchases, and rights to resell Municipal
Bonds and Notes and financial futures contracts and options thereon) as
described under "Investment Objective and Policies" in the Prospectus and this
Statement of Additional Information.
(2) With respect to 75% of its total assets, 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 U.S. Government, its
agencies or instrumentalities). It is the current policy (but not a
fundamental policy) of the Fund not to invest more than 5% of the market or
other fair value of its total assets in the securities of any one 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 and
margin payments in connection with transactions in financial futures
contracts.
(5) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions. The Fund may pledge up to 20% of the value
of its total assets to secure such borrowings. Secured 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. For purposes of this restriction,
obligations of the Fund to Directors pursuant to deferred compensation
arrangements, the purchase and sale of securities on a when-issued or delayed
delivery basis, the purchase and sale of financial futures contracts and
options and collateral arrangements with respect to margins for financial
futures contracts and with respect to options are not deemed to be the
issuance of a senior security or a pledge of assets.
(6) Engage in the underwriting of securities or purchase any securities as
to which registration under the Securities Act of 1933 would be required for
resale of such securities to the public.
(7) Purchase or sell real estate or real estate mortgage loans, although it
may purchase Municipal Bonds or Notes secured by interests in real estate.
(8) 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.
(9) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(10) Invest for the purpose of exercising control or management of another
company.
(11) Purchase or sell puts, calls, or combinations thereof, except that it
may obtain rights to resell Municipal Bonds and Notes and it may purchase and
sell puts and options on futures contracts as set forth under "Investment
Objective and Policies" in the Prospectus and this Statement of Additional
Information.
B-6
<PAGE>
(12) 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.
(13) Purchase or retain the securities of any issuer if officers or
directors of the Fund or officers or directors of the Adviser 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.
(14) Purchase or sell commodities or commodities futures contracts except
financial futures contracts and options thereon as described under "Investment
Objective and Policies" in the Prospectus and this Statement of Additional
Information.
(15) Invest more than 25% of the value of its total assets in securities
whose issuers are located in any one state.
Although not a fundamental investment policy requiring shareholder approval,
the Fund may not invest more than 10% of its assets in Municipal Bonds and
Notes which are illiquid or which have limited marketability.
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.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Purchase warrants if as a result the Fund would then have more than 5% of
its net assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of the Fund's net assets (determined at the
time of investment). For the purpose of this limitation, warrants acquired in
units or attached to securities are deemed to be without value.
2. Invest in oil, gas and mineral leases.
The Board of Directors has recommended, subject to shareholder approval,
deletion of Investment Restriction Number 13 which prohibits the purchase of
any security of an issuer if officers and Directors of the Fund or the Manager
or Subadviser in the aggregate own more than 5% of the outstanding securities
of such issuer and replacement of such restriction with a non-fundamental
policy. There can be no assurance that shareholders will approve this change
to the investment restrictions.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION
NAME AND WITH PRINCIPAL OCCUPATIONS
ADDRESS FUND DURING PAST 5 YEARS
- -------- -------- ---------------------
<S> <C> <C>
Delayne De- Director Marketing and Management Consultant.
drick Gold
c/o Pruden-
tial Mutual
Fund Manage-
ment, Inc.
One Seaport
Plaza
New York,
New York
Arthur Director Trustee and former President, Chief Executive Officer
Hauspurg and Chairman of the Board of Consolidated Edison Com-
c/o Pruden- pany of New York, Inc.; Director of COMSAT Corp.
tial Mutual
Fund Manage-
ment, Inc.
One Seaport
Plaza
New York,
New York
*Harry A. Director Senior Director (since January 1986) of Prudential Secu-
Jacobs, Jr. rities Incorporated (Prudential Securities); formerly
One Seaport Interim Chairman and Chief Executive Officer of Pruden-
Plaza tial Mutual Fund Management, Inc. (PMF) (June-September
New York, 1993); formerly Chairman of the Board of Prudential Se-
New York curities (1982-1985) and Chairman of the Board and
Chief 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.
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Thomas J. McCormack Director Chairman, Chief Executive Officer and Editorial Director
175 Fifth Avenue (since 1987) and President (1970-1987), St. Martin's
New York, New York 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 (1988-
New York, New York 1991); Director of Quixote Corporation (since February
1992) and BUNZL, PLC (since June 1991); formerly, Di-
rector 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 St. (since 1988) and Chief Executive Officer (1988-December
Syracuse, New York 1993) of Carlisle Companies Incorporated; formerly
President of Carrier Transicold (a division of United
Technologies Carrier) (1985-1988).
Louis A. Weil, III Director Publisher and Chief Executive Officer, Phoenix Newspa-
120 E. Van Buren pers, Inc. (since August 1991); Director of Central
Phoenix, Arizona Newspapers, Inc. (since September 1991); prior thereto,
Publisher of Time Magazine (May 1989-March 1991); for-
merly President, Publisher and Chief Executive Officer
of The Detroit News (February 1986-August 1989); for-
merly 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 Securi-
39 Public Square ties.
Suite 500
Wilkes-Barre, Pennsylva-
nia
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President, Trea-
New York, New York surer and Chief Financial Officer (since June 1987) of
PMF; Senior Vice President (since March 1987) of Pru-
dential Securities; Vice President and Director of The
Asia Pacific Fund, Inc. (since May 1989).
Susan C. Cote Treasurer and Senior Vice President (since January 1989) of PMF; Se-
One Seaport Plaza Principal Financial and nior Vice President (since January 1992) and Vice Pres-
New York, New York Accounting Officer ident (January 1986-December 1991) of Prudential Secu-
rities.
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Coun-
One Seaport Plaza sel (since June 1987) and First Vice President (June
New York, New York 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 Vice President (since January 1991) and Associate Gen-
One Seaport Plaza Secretary eral Counsel (since January 1992) of PMF; Vice Presi-
New York, New York dent and Associate General Counsel of Prudential Secu-
rities (since January 1992), Assistant General Counsel
(August 1988-December 1991) and Associate Vice Presi-
dent (January 1989-December 1990) of PMF.
</TABLE>
- ---------
* "Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-8
<PAGE>
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.
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 $7,500,
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 SEC
exemptive order, 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.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the
Manager.
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 394,443 Class A shares (or 42% of the outstanding
Class A shares) and 18,537,506 Class B shares (or 36% of the outstanding Class
B shares) of the Fund. In the event of any meeting 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. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager to substantially all 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 January 31, 1994, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $51 billion. According to the Investment Company
Institute, as of June 30, 1993, the Prudential Mutual Funds were the 10th
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 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
and including $250 million, .475 of 1% of the next $250 million, .45 of 1% of
the next $500 million, .425 of 1% of the next $250 million, .40 of 1% of the
next $250 million and .375 of 1% of the Fund's average daily net assets in
excess of $1.5 billion. The fee is computed daily and payable monthly. The
Management Agreement also provides that, in the event the expenses of the Fund
(including the fees of 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)
B-9
<PAGE>
for any fiscal year exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statutes or regulations of any
jurisdiction in which the Fund's shares are 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 next $70 million of such
assets and 1 1/2% of such assets in excess of $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 all 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 The Prudential Investment Corporation
(PIC) pursuant to the 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 persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of
stock certificates representing 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 Securities and
Exchange Commission, 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 in the
amount necessary for distribution to the 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 for 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 will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. 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 contract or interested persons of any such party as defined in
the Investment Company Act on April 30, 1991 and by shareholders of the Fund
on April 28, 1988.
For the fiscal years ended December 31, 1993, 1992 and 1991, the Fund paid
PMF management fees of $4,087,672, $3,946,039 and $4,079,852, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential Insurance Company of America
(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 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 PIC
in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to such contracts or
interested persons of such parties as defined in the Investment Company Act,
on May 3, 1993, and by 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
B-10
<PAGE>
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 (The Prudential Investment Corporation) are
subsidiaries of Prudential which, as of December 31, 1991, was the largest
insurance company in the United States and the second largest insurance company
in the world. Prudential has been engaged in the insurance business since 1875.
In July 1993, Institutional Investor ranked 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 Class A shares of the
Fund. Prudential Securities Incorporated (formerly Prudential-Bache Securities
Inc.), One Seaport Plaza, New York, New York 10292 (Prudential Securities),
acts as the distributor of the Class B shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan and
the Class B Plan, collectively the Plans) adopted by the Fund under Rule 12b-1
under the Investment Company Act and separate distribution agreements (the
Distribution Agreements), PMFD and Prudential Securities (collectively the
Distributor) incur the expenses of distributing the Fund's Class A and Class B
shares, respectively. See "How the Fund is Managed--Distributor" in the
Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
existing Class B shares). On October 6, 1989, 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 Class A or Class B Plan or in any agreement related to either Plan (the
Rule 12b-1 Directors), at a meeting called for the purpose of voting on each
Plan, adopted a new plan of distribution for the Class A shares of the Fund
(the Class A Plan) and approved an amended and restated plan of distribution
with respect to the Class B shares of the Fund (the Class B Plan). On February
8, 1993, the Board of Directors, including a majority of the Rule 12b-1
Directors, at a meeting called for the purpose of voting on each Plan,
approved modifications to the Fund's Class A and Class B Plans and
Distribution Agreements to conform them to recent amendments to the National
Association of Securities Dealers, Inc. (NASD) maximum sales charge rule
described below. As modified, the Class A Plan provides that (i) up to .25 of
1% of the average daily net assets of the Class A shares may be used to pay
for personal service and the maintenance of shareholder accounts (service fee)
and (ii) total distribution fees (including the service fee of .25 of 1%) may
not exceed .30 of 1%. As modified, the Class B Plan provides that (i) up to
.25 of 1% of the average daily net assets of the Class B shares may be paid as
a service fee and (ii) up to .50 of 1% (including the service fee) of the
average daily net assets of the Class B shares (asset-based sales charge) may
be used as reimbursement for distribution-related expenses with respect to the
Class B shares. The Plans were last approved by the Board of Directors,
including a majority of the Rule 12b-1 Directors, on April 30, 1992. The Class
A Plan was approved by the Class A shareholders on December 19, 1990. The
Class B Plan was approved by shareholders of the Fund on January 11, 1990.
CLASS A PLAN. For the fiscal year ended December 31, 1993, PMFD incurred
distribution and service expenses in the aggregate of approximately $11,786,
all of which was recovered through the distribution fee paid by the Fund to
PMFD under the Class A Plan. This amount was primarily expended on commission
credits to Prudential Securities and Prusec for payment of account servicing
fees to financial advisers.
CLASS B PLAN. For the fiscal year ended December 31, 1993, the Distributor
received $4,274,596 from the Fund under the Plan. It is estimated that the
Distributor spent approximately $4,599,900 in distributing the Fund's Class B
shares, on behalf of the Fund during the year ended December 31, 1993. It is
estimated that of this amount approximately $5,000 (0.1%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$1,677,400 (36.5%) on compensation to Prusec, an affiliated broker-dealer, for
commissions to its financial advisers and other expenses, including an
allocation of overhead and other branch office distribution-related expenses,
incurred by it for distribution of Fund shares; $645,000 (14.0%) on interest
and/or carrying costs; and $2,272,500 (49.4%) on commission credits to
Prudential Securities branch offices for payments of commissions to financial
advisers ($1,336,900 or 29.1%) and an allocation on account of overhead and
other branch office distribution-related expenses ($935,600 or 20.3%). The
term "overhead and other branch office distribution-related expenses"
represents (a) the expenses of operating the Prudential Securities 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 Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charge--Class B
B-11
<PAGE>
Shares" in the Prospectus. The amount of distribution expenses reimbursable by
the Class B shares of the Fund is reduced by the amount of such contingent
deferred sales charges. For the fiscal year ended December 31, 1993, the
Distributor received approximately $510,600 in contingent deferred sales
charges.
The Class A and Class B Plans continue 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 Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Class A and Class B Plans may each 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 shares of the applicable class on not more than 60 days' written
notice to any other party to the Plans. Neither Plan may be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class, and all material
amendments are required to be approved by the Board of Directors in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under either the Class A or Class B Plan if it is terminated or not
continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of the Class
A and Class B shares of the Fund by PMFD and Prudential Securities,
respectively. The report will include an itemization of the distribution
expenses and the purposes of such expenditures. In addition, as long as the
Plans remain 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.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including
a majority of the Rule 12b-1 Directors, on May 3, 1993.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. In the case of Class B shares, interest charges on
unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on Class B shares of the Fund
may not exceed .75 of 1%. The 6.25% limitation applies to the Fund rather than
on a per shareholder basis. If aggregate sales charges were to exceed 6.25% of
total gross sales of either class, all sales charges on shares of that class
would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures contracts for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the 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, and purchases and sales of futures on
a commodities exchange or board of trade 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 and its affiliates.
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 provide 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 companies 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.
B-12
<PAGE>
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, whose aggregate assets are 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's policy is to pay higher commissions to
brokers, other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when,
in the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers other than
Prudential Securities in order to secure 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 by the Board of Directors.
Subject to the above considerations, the Manager may use Prudential
Securities as a broker or futures commission merchant for the Fund. In order
for Prudential Securities to effect any portfolio transactions for the Fund on
an exchange or board of trade, 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 or futures
commission merchants in connection with comparable transactions involving
similar securities or futures contracts being purchased or sold on a
securities exchange or board of trade 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
or futures commission merchant 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.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, during the existence of the
syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the Securities and Exchange
Commission. This limitation, in the opinion of the Fund, will not
significantly affect the Fund's ability to pursue its present objective.
However, in the future in other circumstances, the Fund may be at a
disadvantage because of this limitation in comparison to other funds with
similar investment objectives but not subject to such limitations.
The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1991, 1992 and 1993.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (the initial sales
charge alternative), or (ii) on a deferred basis (the deferred sales charge
alternative). See "Shareholder Guide" in the Prospectus.
The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares represent an interest in the same portfolio of investments of the Fund
and have the same rights, except that each class bears the separate expenses
of its Rule 12b-1 distribution plan and has exclusive voting rights with
respect to such plan. See "Distributor." The two classes also have separate
exchange privileges. See "Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
4.5% and Class B shares of the Fund are sold at net asset value.* Using the
Fund's net asset value at December 31, 1993, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Net asset value and redemption price per Class A share............ $16.30
------
Maximum sales charge (4.5% of offering price)..................... .77
------
Offering price to public.......................................... $17.07
======
<CAPTION>
CLASS B
<S> <C>
Net asset value, offering price and redemption price per Class B
share*........................................................... $16.33
======
</TABLE>
---------
*Class B shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How
to Sell Your Shares--Contingent Deferred Sales Charge--
Class B Shares" in the Prospectus.
B-13
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
RETIREMENT AND GROUP PLANS. Class A shares are offered at net asset value to
participants in certain retirement, deferred compensation, affinity group and
group savings plans, provided the plan has existing assets of at least $10
million or 2,500 eligible employees or members. The term "existing assets"
includes transferable cash, shares of Prudential Mutual Funds held at the
Transfer Agent and GICs maturing within three years. The retirement and group
plans eligible for this waiver of the initial sales charge include, but are
not limited to, pension, profit-sharing or stock bonus plans qualified or non-
qualified within the meaning of Section 401 of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code), deferred compensation and
annuity plans within the meaning of Sections 403(b)(7) and 457 of the Internal
Revenue Code, certain affinity group plans such as plans of credit unions and
trade associations and certain group savings plans.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other
Prudential Mutual Funds, the purchases may be combined to take advantage of
the reduced sales charges applicable to larger purchases. See the table of
breakpoints under "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in retirement and group plans described above under "Retirement
and Group Plans."
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of the
Class A shares of the Fund and Class A shares of other Prudential Mutual Funds
to determine the reduced sales charge. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values its Shares" in the Prospectus. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of accumulation are not available to individual
participants in the retirement and group plans described above under
"Retirement and Group Plans."
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors) who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of Class A
shares of the Fund and Class A shares of other Prudential Mutual Funds. All
Class A shares of the Fund and Class A shares of other Prudential Mutual Funds
which were previously purchased and are still owned are also included in
determining the applicable reduction. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in retirement and group plans described
above under "Retirement and Group Plans."
B-14
<PAGE>
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of
Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such
difference. If the goal is exceeded in an amount which qualifies for a lower
sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
Investors electing to purchase Class A shares of the Fund pursuant to a Letter
of Intent should carefully read such Letter of Intent.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Class A or Class B shares of the Fund, a
Shareholder Investment Account is established for each investor under which a
record of the shares 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 the Account. The Fund makes available to the shareholders
the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net
asset value per share. An investor may direct the Transfer Agent in writing
not less than five full business days prior to the record date to have
subsequent dividends and/or distributions sent to him or her in cash rather
than reinvested. 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
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. Such shareholder will receive credit
for any contingent deferred sales charge paid in connection with the amount of
proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its Class A and Class B shareholders the
privilege of exchanging their shares of the Fund 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.
Shares of such other Prudential Mutual Funds may also be exchanged for Class A
and Class B shares, respectively, 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. 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. For retirement and
group plans having a limited menu of Prudential Mutual Funds, the Exchange
Privilege is available for those funds eligible for investment in the
particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Structured Maturity Fund and Prudential Government Securities Trust
(Intermediate Term Series) and shares of the money market funds specified
below. No fee or sales load will be imposed upon the exchange. Shareholders of
money market funds who acquired such shares upon exchange of Class A shares
may use the Exchange Privilege only to acquire Class A shares of the
Prudential Mutual Funds participating in the Exchange Privilege.
B-15
<PAGE>
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
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
CLASS B. Shareholders of the Fund may exchange their Class B shares for
Class B shares of certain other Prudential Mutual Funds and shares of
Prudential Special Money Market Fund, a money market fund. If Class B shares
of the Fund are exchanged for Class B shares of other Prudential Mutual Funds,
no contingent deferred sales charge will be payable upon such exchange of
Class B shares, but a contingent deferred sales charge will be payable upon
the redemption of Class B shares acquired as a result of the exchange. The
applicable sales charge will be that imposed by the fund in which shares were
initially purchased and the purchase date will be deemed to be the first day
of the month after the initial purchase, rather than the date of the exchange.
Class B shares of the Fund may also be exchanged for shares of Prudential
Special Money Market Fund without imposition of any contingent deferred sales
charge at the time of exchange. Upon subsequent redemption from such money
market fund or after re-exchange into the Fund, such shares will be subject to
the Class B contingent deferred sales charge calculated by excluding the time
such shares were held in the money market fund. In order to minimize the
period of time in which shares are subject to a contingent deferred sales
charge, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held
in a money market fund and "tolled" for purposes of calculating the CDSC
holding period, exchanges are deemed to have been made on the last day of the
month. Thus, if shares are exchanged into the Fund from a money market fund
during the month (and are held in the Fund at the end of the month), the
entire month will be included in the CDSC holding period. Conversely, if
shares are exchanged into a money market fund prior to the last day of the
month (and are held in the money market fund on the last day of the month),
the entire month will be excluded from the CDSC holding period.
At any time after acquiring shares of other funds participating in the Class
B exchange privilege the shareholder may again exchange those shares (and any
reinvested dividends and distributions) for Class B shares of the Fund without
subjecting such shares to any contingent deferred sales charge. Shares of any
fund participating in the Class B exchange privilege that were acquired
through reinvestment of dividends or distributions may be exchanged for Class
B shares of other funds without being subject to any contingent deferred sales
charge.
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.
B-16
<PAGE>
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals/2/.
<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................. $ 110 $ 165 $ 220 $ 275
20 Years............................. 176 264 352 440
15 Years............................. 296 444 592 740
10 Years............................. 555 833 1,110 1,388
5 Years............................. 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------
/1/Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics;
and the U.S. Department of Education. Average costs for private institutions
include tuition, fees, room and board.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in Class A or Class B shares of the Fund monthly by authorizing his
or her bank account or Prudential Securities account (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.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available for shareholders having Class A or
Class B 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. Withdrawals of Class B shares may be subject to a CDSC.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charge--Class B Shares" in the Prospectus.
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/or Distributions."
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 systematic withdrawal 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 generally must be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B shares.
Each shareholder should consult his or her own tax adviser with regard to the
tax consequences of the systematic withdrawal plan.
B-17
<PAGE>
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 will compute its net asset value once daily at
4:15 P.M., New York time, on each day the New York Stock Exchange is open for
trading except on days on which no orders to purchase, sell or redeem Fund
shares have been received or days on which changes in the value of the Fund's
portfolio securities do not affect the net asset value. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. When market quotations are not readily
available, such securities and other assets are valued at fair value in
accordance with procedures adopted by the Board of Directors. Under these
procedures, the Fund values municipal securities on the basis of valuations
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. This service is expected to be furnished by J. J. Kenny
Information Systems Inc. Short-term securities maturing within 60 days of the
valuation date are valued at amortized cost, if their original maturity was 60
days or less, or by amortizing their value on the 61st day prior to maturity,
if their original term to maturity exceeded 60 days, unless such valuation is
determined not to represent fair value by the Board of Directors.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund will declare a dividend immediately prior to 4:15 P.M. on each day
that net asset value per share of the Fund is determined of all of the daily
net income of the Fund to shareholders of record of the Fund as of 4:15 P.M.,
New York time, of the preceding business day. The amount of the dividend may
fluctuate from day to day. Unless otherwise requested by the shareholder,
dividends are automatically reinvested monthly in additional full or
fractional shares of the Fund at net asset value per share. The dividend
payment date is on or about the 25th day of each month, although the Fund
reserves the right to change this date without further notice to shareholders.
Shareholders may receive cash payments from the Fund equal to the dividends
earned during the month by completing the appropriate section on the
Application Form or by notifying Prudential Mutual Fund Services, Inc. (PMFS),
the Fund's Transfer and Dividend Disbursing Agent, at least five business days
prior to the payable date. Cash distributions are paid by check within five
business days after the dividend payment date.
The Fund intends to distribute to shareholders of record monthly dividends
consisting of all of the net investment income of the Fund. Net capital gains
of the Fund will be distributed at least annually.
The per share dividends on Class B shares will be lower than the per share
dividends on Class A shares as a result of the higher distribution fee
applicable with respect to the Class B shares. Distributions of net capital
gains, if any, will be paid in the same amount for Class A and Class B shares.
See "Net Asset Value."
The Fund has qualified and intends to remain qualified as a regulated
investment company under the Internal Revenue Code of 1986, as amended
(Internal Revenue Code). Under the Internal Revenue Code, the Fund is not
subject to federal income taxes on the taxable income that it distributes to
shareholders, provided that at least 90% of its net investment income and net
short-term capital gains in excess of net long-term capital losses in each
taxable year is so distributed. 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; (b) derive less than
30% of its gross 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 market value 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). The Fund
intends to comply with the provisions of the Internal Revenue Code that
require at least 50% of the value of its total assets at the close of each
quarter of its taxable year to consist of obligations the interest on which is
exempt from federal income tax in order to pass through tax-exempt income to
its shareholders.
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.
B-18
<PAGE>
Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year except in certain cases where the Fund acquires a put. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. Certain financial futures contracts held by the Fund will be required
to be "marked to market" for federal income tax purposes, that is, treated as
having been sold at their fair market value on the last day of the Fund's
taxable year. Any gain or loss recognized on actual or deemed sales of these
financial futures contracts will be treated 60% as long-term capital gain or
loss and 40% as short-term capital gain or loss. The Fund may be required to
defer the recognition of losses on financial futures contracts to the extent
of any unrecognized gains on related positions held by the Fund.
The Fund's gains and losses on the sale, lapse, or other termination of call
options it holds on financial futures contracts will generally be treated as
gains and losses from the sale of financial futures contracts. If call options
written by the Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. The Fund may also
have short-term gains and losses associated with closing transactions with
respect to call options written by the Fund. If call options written by the
Fund are exercised, the selling price of the financial futures contract is
increased by the amount of the premium received by the Fund, and the capital
gain or loss on the sale of the futures contract is long-term or short-term,
depending on the contract's holding period.
Upon the exercise of a put held by the Fund, the premium initially paid for
the put is offset against the amount received for the futures contract, bond
or note sold pursuant to the put thereby decreasing any gain (or increasing
any loss) realized on the sale. Generally, such gain or loss is short-term or
long-term capital gain or loss, depending on the holding period of the futures
contract, bond or note. However, in certain cases in which the put is not
acquired on the same day as the underlying securities identified to be used in
the put's exercise, gain on the exercise, sale or disposition of the put is
short-term capital gain. If a put is sold prior to exercise, any gain or loss
recognized by the Fund would be short-term or long-term capital gain or loss,
depending on the holding period of the put. If a put expires unexercised, the
Fund would realize short-term or long-term capital loss, depending on the
holding period of the put, in an amount equal to the premium paid for the put.
In certain cases in which the put and securities identified to be used in its
exercise are acquired on the same day, however, the premium paid for the
unexercised put is added to the basis of the identified securities. In certain
cases, a put may affect the holding period of the underlying security for
purposes of the 30% of gross income test described above, and accordingly, the
Fund's ability to utilize puts or dispose of securities with respect to which
it has held a put may be limited.
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 to the extent that distributions from the Fund are exempt from
Federal income tax. The Treasury has the authority to issue regulations which
would disallow the interest deduction if incurred to purchase or carry shares
of the Fund owned by the taxpayer's spouse, minor child or an entity
controlled by the taxpayer. 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 dividends received by the
shareholders on such 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 shareholders with respect to such
shares. 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.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations is a preference item for purposes of
computing the alternative minimum tax for both individuals and corporations.
Moreover, exempt-interest dividends, whether or not on 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 tax-exempt obligations.
B-19
<PAGE>
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 personal property tax
exemption.
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.
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. The yield is determined separately for Class A and Class B
shares. Yield is determined separately for Class A and Class B shares. The
yield will be computed by dividing the Fund's net investment income per share
earned during this 30-day period by the net asset value per share on the last
day of this period.
Yield is calculated according to the following formula:
a -- b
YIELD = 2 [ ( ------ +1)/6/-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
The yield for the 30-day period ended December 31, 1993 for the Fund's Class
A and Class B shares was 4.62% and 4.46%, respectively.
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.
TAX EQUIVALENT YIELD. The Fund may also calculate the tax equivalent yield
over a 30-day period. The tax equivalent yield is determined separately for
Class A and Class B shares. The tax equivalent yield will be determined by
first computing the 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.
Tax equivalent yield is calculated according to the following formula:
TAX EQUIVALENT YIELD = Yield
-----
1-.396
The tax equivalent yield for the 30-day period ended December 31, 1993 for
the Fund's Class A and Class B shares was 7.68% and 7.38%, respectively.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also from time to time advertise
its average annual total return. Average annual total return is determined
separately for Class A and Class B shares. See "How the Fund Calculates
Performance" in the Prospectus.
B-20
<PAGE>
Average annual total return is computed according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
The average annual total return with respect to the Class A shares for the
one year and since inception periods ended December 31, 1993 was 7.54% and
9.17%, respectively. The average annual total return with respect to the Class
B shares of the Fund for the one, five, and ten year periods ended on December
31, 1993 was 7.15%, 9.11% and 10.32%, respectively.
AGGREGATE TOTAL RETURN. The Fund may from time to time advertise its
aggregate total return. Aggregate total return is determined separately for
Class A and Class B shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 investment
made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return with respect to the Class A shares for the one
year and since inception (two and two-thirds years) periods ended December 31,
1993 was 12.60% and 47.99%, respectively. The aggregate total return with
respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1993 was 12.15%, 55.71% and 167.20%,
respectively. See "How the Fund Calculates Performance" in the Prospectus.
B-21
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of
inflation/1/.
[GRAPHIC APPEARS HERE]
/1/Source: Ibbotson-Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500
Stock Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
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 an agreement with the Fund.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, 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 $483,900 for the services of PMFS.
Price Waterhouse, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and, in that capacity, audits the
Fund's annual financial statements.
B-22
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND Portfolio of Investments
December 31, 1993
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--98.0%
Alabama--1.0%
Courtland Ind. Dev.
Brd. Rev.,
Champion Int'l.
Corp.,
Baa1 $ 6,000 7.20%, 12/1/13, Ser.
A................... $ 6,640,500
Univ. So. Alabama
Hosp. &
Auxiliary Rev.,
A.M.B.A.C.,
Aaa 2,000+ 7.00%, 5/15/04........ 2,306,480
------------
8,946,980
------------
Alaska--0.5%
Anchorage Gen. Oblig.,
A.M.B.A.C.,
Aaa 1,755+ 7.00%, 8/1/04......... 1,993,750
Aaa 2,075 7.00%, 8/1/06......... 2,357,283
------------
4,351,033
------------
Arizona--1.4%
Mesa Ind. Dev. Auth.,
Hlth. Care Facs.
Rev.,
Aaa 3,805 7.50%, 1/1/04,
B.I.G............... 4,378,794
Salt River Proj.,
Elec. Sys. Rev.,
Agricultural Imp. &
Pwr. Dist.,
Aa 4,580 4.75%, 1/1/17, Ser.
C................... 4,282,025
Univ. Arizona Med.
Ctr. Corp.,
Hosp. Rev.,
M.B.I.A.,
Aaa 3,750 5.00%, 7/1/21......... 3,598,575
------------
12,259,394
------------
California--4.0%
California St. Pub.
Wks. Brd.
Lease Rev., Dept. of
Corrections,
A.M.B.A.C.,
Aaa 6,500 5.25%, 12/1/13........ 6,563,765
Aaa 12,000 5.00%, 12/1/19........ 11,511,480
Univ. of California
Projs. Rev., Ser. A,
A1 6,125 5.50%, 6/1/10......... 6,224,225
A1 4,500 5.50%, 6/1/14......... 4,554,990
Sacramento Mun. Util.
Dist.,
Elec. Util.,
M.B.I.A.,
Aaa $ 5,000 6.375%, 8/15/22....... $ 5,471,500
------------
34,325,960
------------
Colorado--5.2%
Colorado Springs Arpt.
Rev.,
BBB* 3,700 6.90%, 1/1/12, Ser.
A................... 4,026,488
BBB* 7,960 7.00%, 1/1/22, Ser.
A................... 8,688,101
Denver City & Cnty.
Arpt. Rev.,
Baa1 9,500 7.25%, 11/15/12, Ser.
B................... 10,419,125
Baa1 3,750 7.75%, 11/15/13, Ser.
D................... 4,530,225
Baa1 10,750 7.75%, 11/15/21, Ser.
D................... 12,050,535
Baa1 5,000 7.25%, 11/15/25, Ser.
A................... 5,520,200
------------
45,234,674
------------
Delaware--0.6%
Wilmington, Gen.
Oblig.,
Aaa 5,500 5.00%, 7/1/08,
F.G.I.C............. 5,511,165
------------
District Of Columbia--0.5%
Dist. of Columbia,
Cert. of Part.,
BBB* 4,000 7.30%, 1/1/13......... 4,500,000
------------
Florida--2.1%
Broward Cnty. Res.
Rec. Rev.,
Broward Cnty. L.P.
South,
A 14,045 7.95%, 12/1/08........ 16,028,997
Florida St. Brd. Ed.,
Cap. Outlay,
Aa 195 9.125%, 6/1/14........ 290,062
Aa 1,260+ 9.125%, 6/1/14........ 1,874,250
------------
18,193,309
------------
Georgia--6.0%
Atlanta Urban Res.
Fin. Auth.,
Clark Atlanta Univ.
Dorm. Proj.,
N.R. 4,890+ 9.25%, 6/1/10......... 6,302,330
</TABLE>
See Notes to Financial Statements.
B-23
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Georgia--(cont'd.)
Atlanta Wtr. & Swr.
Rev.,
Aa $ 4,410 6.00%, 1/1/11......... $ 4,868,243
Aa 15,850 4.75%, 1/1/23......... 14,402,737
Georgia Mun. Elec.
Auth. Pwr. Rev.,
A1 7,000 6.25%, 1/1/17, Ser.
B................... 7,817,880
Georgia St. Gen.
Oblig.,
Aaa 5,000 6.50%, 12/1/09........ 5,895,150
Aaa 5,620 4.00%, 7/1/12, Ser.
C................... 4,984,153
Georgia St. Res. Fin.
Auth.,
Sngl. Fam. Insured
Mtge.,
Ser. C-C1,
Aa 6,550 8.00%, 12/1/16........ 7,144,216
------------
51,414,709
------------
Illinois--2.3%
Chicago O'Hare Int'l.
Arpt.,
Spec. Fac. Rev.,
Ref. 2nd Lien,
Ser. C, M.B.I.A.,
Aaa 8,750 5.75%, 1/1/09......... 9,303,350
Aaa 4,250 5.00%, 1/1/18......... 4,022,795
Illinois Hlth. Facs.
Auth. Rev.,
Westlake Cmnty. Hosp.,
Baa1 5,450 7.75%, 1/1/04......... 6,052,716
------------
19,378,861
------------
Iowa--0.4%
Muscatine Elec. Rev.,
Aaa 3,000 6.70%, 1/1/13......... 3,499,410
------------
Kentucky--2.5%
Kentucky St. Prpty. &
Bldgs. Comm. Rev.,
A 19,100 6.25%, 9/1/07......... 21,401,550
------------
Louisiana--4.1%
Louisiana St. Offshore
Term.
Auth., Deepwater
Port Rev.,
A3 $ 3,000 7.45%, 9/1/04, Ser.
E................... $ 3,438,630
Orleans Parish, Sch.
Brd.,
Aaa 5,780 8.90%, 2/1/07,
M.B.I.A............. 8,131,998
Pointe Coupee Parish
Poll.
Ctrl. Rev., Gulf
States Utils.,
Baa3 2,850 6.70%, 3/1/13......... 3,051,609
Regl. Louisiana Trans.
Auth. Rev.,
Aaa 3,700 8.00%, 12/1/08,
F.G.I.C............. 4,352,865
St. Charles Parish,
Poll. Ctrl. Rev.,
Louisiana
Pwr. & Lt. Co.,
Baa3 4,000 8.25%, 6/1/14......... 4,687,160
Baa3 5,000 8.00%, 12/1/14,
Ser. 1989........... 5,863,300
West Feliciana Parish
Poll.
Ctrl. Rev., Gulf
States Util.,
Baa3 5,000 7.00%, 11/1/15........ 5,536,900
------------
35,062,462
------------
Maryland--2.7%
Maryland St. Hlth. &
Higher
Ed. Facs. Auth.
Rev.,
Greater Baltimore
Med. Ctr.,
Aaa 12,085 5.00%, 7/1/19,
F.G.I.C............. 11,500,086
Univ. of Maryland
Med.,
Aaa 7,000 5.00%, 7/1/20,
F.G.I.C............. 6,655,040
Northeast Waste Disp.
Auth.,
Baltimore City Sludge
Proj.,
N.R. 4,800 7.25%, 7/1/07......... 4,804,080
------------
22,959,206
------------
</TABLE>
See Notes to Financial Statements.
B-24
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Massachusetts--2.2%
Massachusetts St.
Gen. Oblig.,
A $ 4,000 5.50%, 11/1/08........ $ 4,160,520
Massachusetts St.
Hlth. &
Edl. Facs. Auth.
Rev.,
Valley Regl. Hlth.
Sys.,
Baa 4,500 8.00%, 7/1/18, Ser.
B................... 5,133,915
Massachusetts St.
Tpke.
Auth. Rev.,
F.G.I.C.,
Aaa 9,500 5.125%, 1/1/23, Ser.
A................... 9,200,465
------------
18,494,900
------------
Michigan--2.2%
Michigan St. Hsg. Dev.
Auth. Rev., Rental
Hsg.,
A* 1,000 7.55%, 4/1/23, Ser.
B................... 1,074,770
Sngl. Fam. Mtge.,
AA* 5,185 7.50%, 6/1/15, Ser.
A................... 5,584,193
AA* 3,130 7.75%, 12/1/19, Ser.
D................... 3,392,419
Monroe Cnty. Poll.
Ctrl.
Rev., Detroit Edison
Co.,
Proj. 1,
Aaa 5,000 7.65%, 9/1/20,
F.G.I.C............. 5,889,150
Okemos Pub. Sch.
Dist.,
Cnty. of Ingham,
M.B.I.A.,
Aaa 1,100 Zero Coupon, 5/1/12... 406,560
Aaa 1,700 Zero Coupon, 5/1/13... 595,136
Western Michigan Univ.
Rev.,
Aaa 2,300 5.00%, 7/15/21,
F.G.I.C............. 2,207,011
------------
19,149,239
------------
Missouri--2.2%
Missouri St. Hlth &
Ed. Fac.,
St. Lukes Hlth. Sys.,
M.B.I.A.,
Aaa 10,250 5.125%, 11/15/19...... 10,012,405
Sikeston Elec. Rev.,
M.B.I.A., Ser. 92,
Aaa $ 8,000 6.25%, 6/1/22......... $ 8,635,200
------------
18,647,605
------------
Nevada--0.8%
Clark Cnty.,
Southwest Gas Corp.,
Ba1 6,500 7.50%, 9/1/32, Ser.
B................... 7,270,770
------------
New Jersey--7.1%
Bergen Cnty. Util.
Auth.,
Wtr. Poll. Ctrl. Rev.,
Ser. B, F.G.I.C.,
Aaa 7,640 Zero Coupon,
12/15/07............ 3,855,984
Aaa 4,695 Zero Coupon,
12/15/09............ 2,065,565
Camden Cnty. Poll.
Ctrl. Fin.
Auth., Solid Waste
Res. Rec. Rev.,
Baa1 2,980 7.125%, 12/1/01, Ser.
C................... 3,219,771
Baa1 5,100 7.50%, 12/1/09, Ser.
B................... 5,512,335
Hudson Cnty. Impvt.
Auth.,
Solid Waste Sys.,
BBB-* 12,000 7.10%, 1/1/20......... 13,242,960
Mercer Cnty. Impvt.
Auth.
Rev., Solid Waste
Res.
Rec., Proj. B,
Baa1 3,450 6.80%, 4/1/05......... 3,804,902
Baa1 7,000 Zero Coupon, 4/1/15... 1,795,010
New Jersey Econ. Dist.
Heating & Cool.,
Trigen Trenton Proj.,
BBB-* 1,400 6.20%, 12/1/10........ 1,461,082
New Jersey Sports &
Exposition Auth.,
Convention Ctr. Luxury
Tax Rev., M.B.I.A.,
Aaa 5,500 6.00%, 7/1/13......... 5,959,085
</TABLE>
See Notes to Financial Statements.
B-25
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
New Jersey--(cont'd.)
New Jersey Sports &
Exposition Auth.,
Convention Ctr. Luxury
Tax Rev., M.B.I.A.,
Aaa $ 2,250 6.25%, 7/1/20, Ser.
A................... $ 2,455,965
New Jersey St. Hsg. &
Mtge. Fin. Agcy.,
Aaa 5,405 7.70%, 10/1/29,
M.B.I.A............. 5,950,202
New Jersey St. Tpke.
Auth. Rev.,
A 3,000 6.75%, 1/1/08, Ser.
A................... 3,391,170
New Jersey Waste Wtr.
Treat., Trust Loan
Rev.,
Aa 2,000 6.875%, 6/15/09....... 2,257,420
Union Cnty. Utils.
Auth.,
Solid Waste Rev.,
A-* 5,500 7.10%, 6/15/06, Ser.
A................... 6,090,810
------------
61,062,261
------------
New York--13.5%
New York City, Gen.
Oblig.,
Baa1 5,000 8.25%, 11/15/02, Ser.
F................... 6,060,700
Baa1 3,500 8.00%, 8/1/03, Ser.
D................... 4,191,810
Baa1 1,500 8.00%, 8/1/04, Ser.
D................... 1,795,425
Baa1 2,000 7.75%, 8/15/04, Ser.
A................... 2,350,140
Baa1 1,500 8.25%, 6/1/06, Ser.
B................... 1,870,605
Baa1 2,900 5.75%, 8/15/09, Ser.
D................... 2,885,645
Baa1 2,295 5.75%, 8/15/10........ 2,281,643
Baa1 4,730 5.50%, 10/1/10........ 4,575,991
New York City, Mun.
Wtr.
Fin. Auth.,
Wtr. & Swr. Sys.
Rev.,
Aaa 21,250 6.75%, 6/15/16,
F.G.I.C............. 23,911,350
Aaa 4,510 6.20%, 6/15/21,
A.M.B.A.C........... 4,846,221
New York St. Dorm.
Auth.
Rev., Court Facs.,
Baa1 $ 3,250 5.25%, 5/15/21........ $ 3,035,500
New York St. Energy
Resh. & Dev. Auth.
Rev.,
Long Island Ltg. Co.,
Baa3 12,000 7.15%, 9/1/19, Ser.
A................... 13,041,480
New York St. Hsg. Fin.
Agcy.
Rev., Multifamily
Hsg.,
Aa 3,350 7.05%, 8/15/24, Ser.
A................... 3,683,560
New York St. Local
Gov't.
Assist. Corp.,
A 9,625 6.00%, 4/1/14......... 10,391,920
A 3,000 6.875%, 4/1/19, Ser.
A................... 3,416,070
A 10,000 6.50%, 4/1/20, Ser.
A................... 10,875,500
Port Auth. New York &
New Jersey,
Aaa 1,110 5.875%, 7/15/16,
Ser. 84, M.B.I.A.... 1,172,082
Aaa 3,900 5.875%, 7/15/17,
Ser. 84, M.B.I.A.... 4,121,013
A1 10,000 7.35%, 10/1/27, Ser.
72.................. 11,916,900
------------
116,423,555
------------
North Carolina--0.4%
No. Carolina Mun. Pwr.
Agcy.,
No. 1, Ser. A, Catawba
Elec. Rev.,
Aaa 3,500 5.00%, 1/1/18,
M.B.I.A............. 3,381,350
------------
Ohio--2.2%
Columbus Wtr. Sys.
Rev.,
Ctrl. Rev. Detroit
Ed.,
A1 2,000 6.375%, 11/1/10....... 2,196,560
</TABLE>
See Notes to Financial Statements.
B-26
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Ohio--(cont'd.)
Franklin Cnty. Hosp.
Rev.,
Holy Cross Hlth.
Sys.,
A.M.B.A.C., Ser. B,
Aaa $ 3,000+ 7.65%, 6/1/10......... $ 3,615,120
Hamilton Cnty. Wtr.
Sys. Rev.,
Aaa 3,000 5.00%, 12/1/14,
F.G.I.C............. 2,938,860
Ohio St. Pub. Facs.,
Comm. of Higher Ed.,
A 5,000 7.25%, 5/1/04......... 5,726,550
Ohio St. Wtr. Dev.
Auth.,
Poll. Ctrl. Facs.
Rev., Ohio Edison,
Baa3 4,500 7.625%, 7/1/23........ 4,848,435
------------
19,325,525
------------
Oklahoma--2.4%
Tulsa Mun. Arpt. Trust
Rev.,
American Airlines,
Inc.,
Baa2 19,000 7.375%, 12/1/20....... 20,487,700
------------
Pennsylvania--1.8%
Beaver Cnty. Ind. Dev.
Auth., Poll. Ctrl.
Rev.,
Ohio Edison Proj.,
Baa3 4,000 7.75%, 9/1/24, Ser.
A................... 4,419,280
Philadelphia Gas Wks.
Rev.,
Baa1 3,950 6.375%, 7/1/26........ 4,155,598
Pittsburgh Wtr. & Swr.
Sys.
Rev., Ser. A,
F.G.I.C.,
Aaa 7,320 4.75%, 9/1/16......... 6,801,012
------------
15,375,890
------------
Puerto Rico--8.2%
Puerto Rico Comnwlth.,
Baa 10,400 5.25%, 7/1/18......... 10,052,328
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
Baa 5,975 5.10%, 12/1/03........ 6,091,214
Puerto Rico Hwy. &
Trans. Auth. Rev.,
Baa1 $ 8,405 6.375%, 7/1/08........ $ 9,218,772
Baa1 4,000 6.625%, 7/1/12, Ser.
V................... 4,426,320
Baa1 4,460 6.625%, 7/1/12, Ser.
T................... 4,935,347
Baa1 2,500 5.50%, 7/1/13, Ser.
X................... 2,554,175
Baa1 14,000 5.50%, 7/1/15, Ser.
1993................ 14,221,480
Baa1 2,000 5.50%, 7/1/15......... 2,031,640
Baa1 8,855 5.00%, 7/1/22......... 8,306,079
Puerto Rico Tel. Auth.
Rev.,
Ser. I, M.B.I.A.,
Aaa 4,100 7.632%, 1/25/07....... 4,417,750
Aaa 3,800 8.162%, 1/16/15....... 4,023,250
------------
70,278,355
------------
South Carolina--2.7%
Charleston Waterworks
& Swr. Rev.,
Aaa 7,415 10.375%, 1/1/10....... 11,908,490
Aaa 7,265 5.00%, 1/1/22,
M.B.I.A............. 6,969,242
So. Carolina St. Pub.
Svc. Auth. Rev.,
Santee Cooper,
F.G.I.C.,
Aaa 5,000 5.00%, 1/1/25, Ser.
C................... 4,736,550
------------
23,614,282
------------
Tennessee--0.8%
Metropolitan Gov't.
Nashville & Davidson
Cnty., Wtr. & Swr.
Rev.,
A1 6,575 7.30%, 1/1/08......... 7,109,548
------------
Texas--9.6%
Alliance Arpt. Auth.
Inc., Spec. Facs.
Rev.,
American Airlines,
Inc.,
Baa1 4,500 7.50%, 12/1/29........ 4,883,670
</TABLE>
See Notes to Financial Statements.
B-27
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Texas--(cont'd.)
Austin Combined Util. Sys. Rev.,
A $ 5,400 7.75%, 11/15/08, Ser.
B................... $ 6,233,760
Aaa 8,625 Zero Coupon, 11/15/09,
A.M.B.A.C........... 3,748,253
Brownsville Util. Sys.
Rev.,
Baa 5,000 11.625%, 9/1/14....... 5,445,400
Dallas Ft. Worth,
Regl. Arpt.
Rev., Ser. A,
F.G.I.C.,
Aaa 3,500 7.375%, 11/1/08....... 4,208,995
Aaa 3,500 7.375%, 11/1/09....... 4,208,995
Harris Cnty. Hlth.
Facs. Dev.
Corp., Spec. Facs.
Rev.,
Texas Med. Ctr. Hosp.,
Aaa 4,100 7.25%, 5/15/07,
M.B.I.A............. 4,742,511
Houston Wtr. & Swr.
Sys. Rev.,
A 4,000 6.375%, 12/1/14, Ser.
B................... 4,345,800
Katy Indpt. Sch.
Dist.,
Aaa 5,000 Zero Coupon,
2/15/09............. 2,230,700
Plano Indpt. Sch.
Dist.,
Aaa 2,000 8.625%, 2/15/02,
Ser. B, F.G.I.C..... 2,488,140
San Antonio Elec. &
Gas Rev.,
Aa1 8,500 5.00%, 2/1/17......... 8,140,450
Tarrant Cnty. Wtr.
Ctrl. & Imp. Dist.,
A.M.B.A.C.,
Aaa 1,500 4.75%, 3/1/12......... 1,422,840
Aaa 5,000 4.75%, 3/1/13......... 4,734,500
Texas Mun. Pwr. Agcy.
Rev.,
M.B.I.A.,
Aaa 13,980 Zero Coupon, 9/1/14... 4,582,924
Texas St. Higher Ed.
Coordinating Brd.,
Coll. Student Loan
Rev.,
A 1,810 7.45%, 10/1/06........ 1,978,059
Texas Wtr. Res. Fin.
Auth. Rev.,
A $ 12,000 7.625%, 8/15/08....... $ 13,420,440
Univ. Texas Univ.
Rev.,
Fin. Sys.,
Aa 2,500 7.00%, 8/15/07, Ser.
A................... 2,856,375
Aa 3,000 6.75%, 8/15/13........ 3,370,320
------------
83,042,132
------------
U. S. Virgin Islands--1.1%
Virgin Islands Pub.
Fin.
Auth. Rev., Matching
Fund Loan Notes,
N.R. 3,900 7.25%, 10/1/18, Ser.
A................... 4,393,740
Virgin Islands Wtr. &
Pwr.
Auth., Wtr. Sys.
Rev.,
N.R. 4,600 8.50%, 1/1/10, Ser.
A................... 5,219,712
------------
9,613,452
------------
Utah--1.1%
Intermountain Pwr.
Agcy.,
Pwr. Sup. Rev.,
Aa 10,000 5.00%, 7/1/23......... 9,371,000
------------
Virginia--2.8%
Fairfax Cnty. Ind.
Dev. Auth.,
Inova Hlth. Sys.
Proj.,
Aa 8,000 5.00%, 8/15/23........ 7,517,840
Henrico Cnty. Ind.
Dev. Auth.
Rev., Secours Hlth.
Sys.,
St. Mary's Proj.,
A1 10,500 7.50%, 9/1/07, Ser.
B................... 12,227,565
Roanoke Cnty. Wtr.
Sys. Rev., F.G.I.C.,
Aaa 4,500 5.00%, 7/1/26, Ser.
B................... 4,305,195
------------
24,050,600
------------
</TABLE>
See Notes to Financial Statements.
B-28
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Washington--3.6%
Seattle Mun. Met. Swr.
Sys. Rev.,
Aaa $ 7,085 6.30%, 1/1/33,
M.B.I.A............. $ 7,623,885
Tacoma Dept. Pub.
Util. &
Lt. Div., Lt. & Pwr.
Rev.,
A1 4,450 9.375%, 1/1/15........ 5,005,045
Washington St. Pub.
Pwr. Supply Sys.
Rev.,
Nuclear Proj. No. 1,
Aa 5,000 7.25%, 7/1/09, Ser.
B................... 5,992,250
Nuclear Proj. No. 2,
Aaa 6,000 Zero Coupon, 7/1/06,
M.B.I.A., Ser. A.... 3,131,580
Aa 2,000 7.25%, 7/1/06, Ser.
A................... 2,377,460
Aa 4,000 7.00%, 7/1/12, Ser.
B................... 4,487,800
Nuclear Proj. No. 3,
Aaa 5,000 Zero Coupon, 7/1/06,
F.G.I.C., Ser. B.... 2,609,650
------------
31,227,670
------------
Total long-term
investments
(cost $782,202,036)... 844,964,547
------------
SHORT-TERM INVESTMENTS--1.8%
Florida--0.5%
Sarasota Cnty. Pub.
Hosp.
Dist. Rev., Sarasota
Memorial Hosp.,
T.E.C.P.,
P-1 4,850 2.70%, 1/4/94, Ser.
85B................. 4,850,000
------------
Illinois--0.2%
Chicago O'Hare Int'l.
Arpt.,
American Airlines
Inc.,
F.R.D.D., Ser. 84B,
P-2 $ 2,000 4.00%, 1/3/94......... $ 2,000,000
------------
Louisiana--0.7%
Louisiana Offshore
Term. Auth.,
Loop Inc. Proj.,
T.E.C.P.,
P-1 5,000 2.65%, 1/6/94, Ser.
86.................. 5,000,000
St. Charles Parish,
Poll. Ctrl. Rev.,
Shell Oil Co. Proj.,
F.R.D.D.,
VMIG1 900 4.25%, 1/3/94, Ser.
92A................. 900,000
------------
5,900,000
------------
New York
New York City, Gen.
Oblig.,
F.R.D.D., Ser.
94A-4,
VMIG1 300 4.00%, 1/3/94......... 300,000
------------
Pennsylvania--0.1%
Schuylkill Cnty. Ind.
Dev.
Auth., Westwood
Energy,
F.R.D.D., Ser. 85,
P-1 625 3.80%, 1/3/94......... 625,000
------------
South Carolina--0.3%
So. Carolina Jobs
Econ. Dev.
Auth. Rev., Wellman
Inc. Proj.,
F.R.D.D.,
Aa2 1,900 4.65%, 1/3/94, Ser.
90.................. 1,900,000
Aa2 500 4.65%, 1/3/94, Ser.
92.................. 500,000
------------
2,400,000
------------
Total short-term
investments
(cost $16,075,000).... 16,075,000
------------
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
<TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
<CAPTION>
Value
Description (a) (Note 1)
<C> <C> <S> <C>
Total Investments--99.8%
(cost $798,277,036; Note
4).................... $861,039,547
Other assets in excess
of liabilities--0.2%.. 1,427,136
------------
Net Assets--100%........ $862,466,683
------------
------------
- ---------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
B.I.G.--Bond Investors Guaranty Insurance Company
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate Daily Demand Note
M.B.I.A.--Municipal Bond Insurance Association
T.E.C.P.--Tax Exempt Commercial Paper
+ Prerefunded issues are secured by escrowed cash and
direct U.S. guaranteed obligations.
N.R.--Not Rated by Moody's or Standard & Poor's.
* Standard and Poor's Rating.
The Fund's current Statement of Additional Information
contains a description of Moody's and Standard & Poor's
ratings.
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets December 31, 1993
-----------------
<S> <C>
Investments, at value (cost $798,277,036)............................................ $ 861,039,547
Interest receivable.................................................................. 14,437,080
Receivable for Fund shares sold...................................................... 459,775
Receivable for investments sold...................................................... 450,000
Deferred expenses and other assets................................................... 208,236
-----------------
Total assets..................................................................... 876,594,638
-----------------
Liabilities
Bank overdraft....................................................................... 2,079
Payable for Fund shares reacquired................................................... 8,504,574
Payable for investments purchased.................................................... 4,154,882
Dividends payable.................................................................... 594,965
Distribution fee payable............................................................. 363,299
Management fee payable............................................................... 347,198
Accrued expenses..................................................................... 160,958
-----------------
Total liabilities................................................................ 14,127,955
-----------------
Net Assets........................................................................... $ 862,466,683
-----------------
-----------------
Net assets were comprised of:
Common stock, at par............................................................... $ 528,169
Paid-in capital in excess of par................................................... 793,939,362
-----------------
794,467,531
Accumulated undistributed net realized gain on investments......................... 5,236,641
Net unrealized appreciation on investments......................................... 62,762,511
-----------------
Net assets, December 31, 1993........................................................ $ 862,466,683
-----------------
-----------------
Class A:
Net asset value and redemption price per share ($14,167,379 (divided by) 869,114
shares of common stock issued and outstanding)................................... $16.30
Maximum sales charge (4.5% of offering price)...................................... .77
-----------------
Maximum offering price to public................................................... $17.07
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share ($848,299,304
(divided by) 51,947,815 shares of common stock issued and outstanding)........... $16.33
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31,
Net Investment Income 1993
------------
<S> <C>
Income
Interest............................. $ 53,526,003
------------
Expenses
Distribution fee--Class A............ 11,786
Distribution fee--Class B............ 4,274,596
Management fee....................... 4,087,672
Transfer agent's fees and expenses... 650,000
Custodian's fees and expenses........ 133,000
Registration fees.................... 51,000
Audit fee............................ 51,000
Trustees' fees....................... 37,700
Insurance expense.................... 26,000
Reports to shareholders.............. 25,000
Legal fees........................... 20,000
Miscellaneous........................ 5,844
------------
Total expenses..................... 9,373,598
------------
Net investment income.................. 44,152,405
------------
Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions.............. 39,745,284
Financial futures contracts.......... (1,232,530)
------------
38,512,754
------------
Net change in unrealized
appreciation......................... 16,778,159
------------
Net gain on investments................ 55,290,913
------------
Net Increase in Net Assets
Resulting from Operations.............. $ 99,443,318
------------
------------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL NATIONAL MUNICIPALS FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) ------------------------------
in Net Assets 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment
income.............................. $ 44,152,405 $ 45,067,045
Net realized gain on
investment
transactions........................ 38,512,754 26,180,331
Net change in unrealized
appreciation of investments......... 16,778,159 (2,514,851)
------------- -------------
Net increase in net
assets
resulting from
operations.......................... 99,443,318 68,732,525
------------- -------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment
income
Class A............................. (645,048) (312,545)
Class B............................. (43,507,357) (44,754,500)
------------- -------------
(44,152,405) (45,067,045)
------------- -------------
Distributions to
shareholders from
net realized gains
on investment
transactions
Class A............................. (563,957) (217,185)
Class B............................. (34,572,412) (25,206,090)
------------- -------------
(35,136,369) (25,423,275)
------------- -------------
Fund share transactions
(Note 5)
Net proceeds from
shares subscribed..................... 201,764,486 227,588,260
Net asset value of
shares issued in
reinvestment of
dividends and
distributions....................... 50,661,082 43,097,188
Cost of shares
reacquired.......................... (246,514,570) (310,683,037)
------------- -------------
Net increase
(decrease) in net
assets from Fund
share
transactions........................ 5,910,998 (39,997,589)
------------- -------------
Total increase
(decrease)............................ 26,065,542 (41,755,384)
Net Assets
Beginning of year....................... 836,401,141 878,156,525
------------- -------------
End of year............................. $ 862,466,683 $ 836,401,141
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
Notes to Financial Statements
Prudential-Bache National Municipals Fund, Inc., doing business as Prudential
National Municipals 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 seek a high level of current income
exempt from federal income taxes by investing substantially all of its total
assets in carefully selected long-term municipal bonds of medium quality. The
ability of the issuers of debt 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 Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a "when-issued" basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, which approximates market value.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the "initial margin". Subsequent payments, known as "variation
margin", are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss.
The Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities or securities the Fund intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should market conditions move unexpectedly, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets. As of December 31, 1993, there were no open
financial futures contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on an identified cost basis. Interest income is
recorded on an accrual basis. The Fund amortizes premiums and accretes original
issue discount on portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: It is the intent of the Fund 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 of the Fund's gross income consists of
tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
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 statement amounts and distributions determined in
accordance with income tax regulations. The effect caused by adopting this
statement was to increase paid-in capital and decrease accumulated undistributed
net realized gains on investments by $10,952 compared to amounts previously
reported through December 31, 1992.
B-33
<PAGE>
Net investment income, net realized gains, and net assets were not affected by
this change.
Note 2. The Fund has a management
Agreements 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 The 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 at an
annual rate of .50% of the Fund's average daily net assets up to and including
$250 million, .475% of the next $250 million, .45% of the next $500 million,
.425% of the next $250 million, .40% of the next $250 million and .375% of the
Fund's average daily net assets in excess of $1.5 billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated ("PSI"), which
acts as distributor of the Class B shares of the Fund (collectively the
"Distributors"). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net assets of the Class A shares. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended December 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation ("Prusec"), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B Shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Fund under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $251,600 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended December 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant to
the Class B Plan. PSI has advised the Fund that for the fiscal year ended
December 31, 1993, it received approximately $510,600 in contingent deferred
sales charges imposed upon certain redemptions by shareholders. PSI, as
distributor, has also advised the Fund that at December 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $18,588,600.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned sudsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser
Transactions vices, Inc. ("PMFS"), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the fiscal year ended December 31, 1993, the Fund incurred fees of
approximately $483,900 for the services of PMFS. As of December 31, 1993,
$40,000 of such fees were due to PMFS. Transfer
B-34
<PAGE>
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of invest
Securities ment securities, other than
short-term investments, for the fiscal year ended
December 31, 1993, were $693,356,139 and $733,397,281, respectively.
The federal income tax basis of the Portfolio's investments at December 31,
1993 was $798,349,186 and, accordingly, net unrealized appreciation for federal
income tax purposes was $62,690,361 (gross unrealized appreciation--$64,026,490;
gross unrealized depreciation-- $1,336,129).
Note 5. Capital The Fund offers both Class A
and Class B shares. Class A shares are sold with a
front-end sales charge of up to 4.5%. Class B shares are sold with a contingent
deferred sales charge which declines from 5% to zero depending on the period of
time the shares are held. Both classes of shares have equal rights as to
earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
There are 500 million shares of common stock, $.01 par value, per share,
divided into two classes, designated Class A and Class B common stock, each of
which consists of 250 million authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31,
1993:
Shares sold.................... 801,949 $ 13,267,418
Shares issued in reinvestment
of dividends and
distributions................ 52,588 854,996
Shares reacquired.............. (468,357) (7,812,061)
----------- -------------
Net increase in shares
outstanding.................. 386,180 $ 6,310,353
----------- -------------
----------- -------------
Year ended December 31,
1992:
Shares sold.................... 279,113 $ 4,503,147
Shares issued in reinvestment
of dividends and
distributions................ 24,236 387,787
Shares reacquired.............. (59,083) (954,955)
----------- -------------
Net increase in shares
outstanding.................. 244,266 $ 3,935,979
----------- -------------
----------- -------------
<CAPTION>
Class B Shares Amount
- ------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31,
1993:
Shares sold.................... 11,392,790 $ 188,497,068
Shares issued in reinvestment
of dividends and
distributions................ 3,054,242 49,806,086
Shares reacquired.............. (14,390,713) (238,702,509)
----------- -------------
Net increase in shares
outstanding.................. 56,319 $ (399,355)
----------- -------------
----------- -------------
Year ended December 31,
1992:
Shares sold.................... 13,941,355 $ 223,085,113
Shares issued in reinvestment
of dividends and
distributions................ 2,664,473 42,709,401
Shares reacquired.............. (19,285,550) (309,728,082)
----------- -------------
Net decrease in shares
outstanding.................. (2,679,722) $ (43,933,568)
----------- -------------
----------- -------------
</TABLE>
Note 6. Capital On February 7, 1994 the
Gain Distribution Board of Directors of the
Fund declared a distribution of long-term capital
gains of $0.10 per share payable February 25, 1994 to shareholders of record on
February 18, 1994.
B-35
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A
---------------------------------------------- Class B
January 22, -----------------------------------------------------------
Years Ended 1990+
December 31, through Years Ended December 31,
PER SHARE OPERATING ------------------------------- December 31, -----------------------------------------------------------
PERFORMANCE: 1993 1992 1991 1990 1993 1992 1991 1990 1989
------------ ------ ------ ------------ ------------ -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 15.94 $16.00 $15.09 $14.98 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
Income from
investment
operations
Net investment
income........... .90 .94 .97 .90 .84 .88 .91 .90 .96
Net realized and
unrealized gain
(loss) on
investment
transactions..... 1.05 .43 .91 .11 1.05 .44 .91 (.04) .11
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
Total from
investment
operations..... 1.95 1.37 1.88 1.01 1.89 1.32 1.82 .86 1.07
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
Less distributions
Dividends from net
investment
income........... (.90) (.94) (.97) (.90) (.84) (.88) (.91) (.90) (.96)
Distributions from
net realized
gains............ (.69) (.49) -- -- (.69) (.49) -- -- --
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
Total
distributions... (1.59) (1.43) (.97) (.90) (1.53) (1.37) (.91) (.90) (.96)
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
Net asset value,
end of period.... $ 16.30 $15.94 $16.00 $15.09 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
------------ ------ ------ ------ ------------ -------- -------- -------- ----------
TOTAL RETURN#: 12.60% 8.88% 12.94% 6.88% 12.15% 8.50% 12.42% 5.96% 7.43%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)..... $ 14,167 $7,700 $3,819 $1,846 $848,299 $828,702 $874,338 $882,212 $1,033,173
Average net assets
(000)............ $ 11,786 $5,401 $2,697 $1,161 $854,919 $829,830 $862,249 $940,215 $1,027,726
Ratios to average
net assets:
Expenses,
including
distribution
fees........... .69% .72% .75% .75%* 1.09% 1.12% 1.15% 1.13% 1.01%
Expenses,
excluding
distribution
fees........... .59% .62% .65% .65%* .59% .62% .65% .64% .66%
Net investment
income......... 5.49% 5.79% 6.27% 6.43%* 5.09% 5.39% 5.87% 6.03% 6.45%
Portfolio turnover
rate............. 82% 114% 59% 110% 82% 114% 59% 110% 198%
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudential National Municipals 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 financial highlights present fairly, in all material
respects, the financial position of Prudential National Municipals 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 17, 1994
B-37
<PAGE>
APPENDIX A
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
CORPORATE AND TAX-EXEMPT BOND RATINGS
The four highest ratings of Moody's Investors Service ("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
rate 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
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1993.
Statement of Assets and Liabilities at December 31, 1993.
Statement of Operations for the year ended December 31, 1993.
Statement of Changes in Net Assets for the years ended December 31,
1992 and December 31, 1993.
Notes to Financial Statements.
Financial Highlights with respect to each of the five years in the
period ended December 31, 1993.
Report of Independent Accountants.
(B) EXHIBITS:
1.(a) Articles of Incorporation, as amended, of the Registrant,
incorporated by reference to Exhibit 1 to Pre-Effective Amendment No.
1 to Registration Statement on Form N-1 (File No. 2-66407).
(b) Amendment to Articles of Incorporation, filed April 30, 1987,
incorporated by reference to Exhibit 1(b) to Post-Effective Amendment
No. 11 to Registration Statement on Form N-1A (File No. 2-66407).
(c) Amendment to Articles of Incorporation filed on January 17, 1990,
incorporated by reference to Exhibit 1(c) to Post-Effective Amendment
No. 16 to Registration Statement on Form N-1A (File No. 2-66407).
2.Amended and restated By-Laws.*
4.Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits 1 and 2 above.
5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 13 to Registration Statement on Form N-
1A (File No. 2-66407).
(b) Management Agreement, as amended, between the Registrant and
Prudential Mutual Fund Management, Inc., incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 16 to Registration
Statement on Form N-1A.
(c) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and the Prudential Investment Corporation, incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 13 to
Registration Statement on Form N-1A (File No. 2-66407).
6.(a) Selected Dealer Agreement, incorporated by reference to Exhibit
6(b) to Pre-Effective Amendment No. 1 to Registration Statement on
Form N-1 (File No. 2-66407).
(b) Distribution and Service Agreement between the Registrant and
Prudential Mutual Fund Distributors, Inc. for Class A shares, dated
July 1, 1993.*
(c) Distribution and Service Agreement between the Registrant and
Prudential Securities Incorporated for Class B shares, dated July 1,
1993.*
C-1
<PAGE>
8.(a) Custodian Agreement dated July 13, 1984, between the Registrant
and State Street Bank and Trust Company, incorporated by reference to
Exhibit 8(a) to Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A (File No. 2-66407).
(b) Revised Custodian Agreement between the Registrant and State
Street Bank and Trust Company, incorporated by reference to Exhibit
8(b) to Post-Effective Amendment No. 17 to Registration Statement on
Form N-1A (File No. 2-66407).
9.Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9(b) to Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A (File No. 2-66407).
10.(a) Opinion of Sullivan & Cromwell. Incorporated by reference to Exhibit
10 to Registration Statement on Form N-1 (File No. 2-66407).
(b) Opinion of Sullivan & Cromwell.*
11.Consent of Independent Accountants.*
13.Letter of Bache Halsey Stuart Shields Incorporated. Incorporated by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-1 (File No. 2-66407).
15.(a) Distribution and Service Plan for Class A shares dated July 1,
1993.*
(b) Distribution and Service Plan for Class B shares dated July 1,
1993.*
16.(a) Schedule of Calculation of Average Annual Total Return (Class B
Shares), incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 13 to Registration Statement on Form N-1A (File No. 2-
66407).
(b) Schedule of Calculation of Average Annual Total Return (Class A
Shares), incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 17 to Registration Statement on Form N-1A (File No. 2-
66407).
(c) Schedule of Calculation of Aggregate Total Return for Class A and
Class B shares, incorporated by reference to Exhibit 16(c) to Post-
Effective Amendment to Registration Statement on Form N-1A (File No.
2-66407).
Other Exhibits
Power of Attorney for:
Lawrence C. McQuade**
Michael J. Downey**
Delayne D. Gold**
Arthur Hauspurg**
Harry A. Jacobs, Jr.**
Thomas J. McCormack**
- ---------
*Filed herewith.
**Executed copies filed under Other Exhibits to Post-Effective Amendment No.
13 to the Registration Statement on Form N-1A (File No. 2-66407).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 11, 1994 there were 2,260 and 41,380 record holders of Class
A and Class B shares of common stock, respectively, $.01 par value per share,
of the Registrant.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibits 6(b)
and 6(c) to the Registration Statement), each Distributor of the Registrant
may be indemnified against liabilities which it may incur, except liabilities
arising from bad faith, gross negligence, willful misfeasance or reckless
disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant intends to purchase an insurance policy insuring its officers
and directors against liabilities, and certain costs of defending claims
against such officers and directors, to the extent such officers and directors
are not found to have committed conduct constituting willful misfeasance, bad
faith, gross negligence or reckless disregard in the performance of their
duties. The insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i) of
such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed-Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed in October, 1993).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
C-3
<PAGE>
<TABLE>
<CAPTION>
NAME AND
ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- -------- ----------------- ---------------------
<S> <C> <C>
Maureen Executive Vice Executive Vice President, PMF; Senior Vice President,
Behning- President Prudential Securities Incorporated (Prudential
Doyle Securities)
John D. Director Senior Vice President, PIC; Senior Vice President, The
Brookmeyer, Prudential Insurance Company of America (Prudential)
Jr.
Two Gateway
Center
Newark, NJ
07102
Susan C. Senior Vice President Senior Vice President, PMF; Senior Vice President,
Cote Prudential Securities
Fred A. Executive Vice Executive Vice President, Chief Operating Officer and
Fiandaca President, Chief Director, PMF; Chairman, Chief Operating Officer and
Raritan Operating Officer Director, Prudential Mutual Fund Services, Inc.,
Plaza One and Director Senior Vice President, Prudential Securities
Edison, NJ
08847
Stephen P. Senior Vice President Senior Vice President, PMF; Senior Vice President,
Fisher Prudential Securities
Frank W. Executive Vice Executive Vice President, General Counsel and
Giordano President, General Secretary, PMF; Senior Vice President, Prudential Securities
Counsel and Secretary
Robert F. Executive Vice Executive Vice President, Chief Administrative
Gunia President, Chief Officer, Chief Financial Officer and Director, PMF; Senior Vice President,
Administrative
Officer, Chief Prudential Securities
Financial Officer and
Director
Eugene B. Director Senior Vice President, Prudential
Heimburg
Prudential
Plaza
Newark, NJ
07101
Lawrence C. Vice Chairman Vice Chairman, PMF
McQuade
Leland B. Director Executive Vice President and Director, Prudential
Paton Securities; Director, Prudential Securities Group,
Inc. ("PSG")
Richard A. President, Chief President, Chief Executive Officer and Director, PMF;
Redeker Executive Officer Executive Vice President, Director and Member of
and Director Operating Committee, Prudential Securities; Director,
PSG
S. Jane Senior Vice President, Senior Vice President, Senior Counsel and Assistant
Rose Senior Counsel and Secretary, PMF; Senior Vice President and Senior
Assistant Secretary Counsel, Prudential Securities
Donald G. Director Senior Vice President, Prudential; Director, PSG
Southwell
210 Wash-
ington
Street
Newark, NJ
07102
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Subadviser" in the Prospectus constituting Part
A of this Registration Statement and "Subadviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.
C-4
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice President, Senior Vice President, Chief Financial and Compliance
Chief Financial and Officer, PIC; Vice President, Prudential
Compliance Officer
William M. Bethke Senior Vice President Senior Vice President, Prudential
Two Gateway Center
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice
Two Gateway Center President, PIC
Newark, NJ 07102
Eugene B. Heimberg Senior Vice President Senior Vice President, Prudential
and Director
Garnett L. Keith, Jr. President and Director Vice Chairman and Director, Prudential
William P. Link Executive Vice President Executive Vice President, Prudential
Four Gateway Center
Newark, NJ 07102
Gerald Loev Senior Vice President Senior Vice President, Prudential
Robert E. Riley Executive Vice President Executive Vice President, Prudential; Director, PSG
800 Boylston Ave
Boston, MA 02199
James W. Stevens Executive Vice President Executive Vice President, Prudential; Director, PSG
Four Gateway Center
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer,
Prudential; Chairman of the Board and Director, PSG
Claude J. Zinngrabe, Jr. Vice President Vice President, Prudential
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series) and for Class B shares of Prudential
Adjustable Rate Securities Fund, Inc., Prudential California Municipal Fund
(California Series), Prudential Equity Fund, Inc., Prudential Equity Income
Fund, Prudential FlexiFund, Prudential Global Fund, Inc., Prudential-Bache
Global Genesis Fund, Inc. (d/b/a Prudential Global Genesis Fund), Prudential-
Bache Global Natural Resources Fund, Inc. (d/b/a Prudential Global Natural
Resources Fund), Prudential-Bache GNMA Fund, Inc. (d/b/a Prudential GNMA
Fund), Prudential-Bache Government Plus Fund, Inc. (d/b/a Prudential
Government Plus Fund), Prudential Growth Fund, Inc., Prudential-Bache Growth
Opportunity Fund, Inc. (d/b/a Prudential Growth Opportunity Fund), Prudential-
Bache High Yield Fund, Inc. (d/b/a Prudential High Yield Fund), Prudential
IncomeVertible (R) Fund, Prudential Intermediate Global Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund (except Connecticut Money Market Series, Massachusetts
Money Market Series, New York Money Market Series, New Jersey Money Market
Series and Florida Series), Prudential-Bache National Municipals Fund, Inc.
(d/b/a Prudential National Municipals Fund), Prudential Pacific Growth Fund,
Inc., Prudential Short-Term Global Income Fund, Inc., Prudential U.S.
Government Fund, Prudential-Bache Utility Fund, Inc. (d/b/a Prudential Utility
Fund), Global Utility Fund, Inc., The BlackRock Government Income Trust,
Nicholas-Applegate Fund, Inc. (Nicholas-
C-5
<PAGE>
Applegate Growth Equity Fund) and The Target Portfolio Trust. Prudential
Securities is also a depositor for the following unit investment trusts:
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Incorporated is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series and California
Income Series and Class A Shares of the California Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money
Market Series), Prudential-Bache MoneyMart Assets (d/b/a Prudential MoneyMart
Assets), Prudential Municipal Series Fund (Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series, New Jersey
Money Market Series and Florida Series), Prudential Institutional Liquidity
Portfolio, Inc., Prudential-Bache Special Money Market Fund, Inc. (d/b/a
Prudential Special Money Market Fund), Prudential-Bache Structured Maturity
Fund, Inc. (d/b/a Prudential Structured Maturity Fund), Prudential-Bache Tax-
Free Money Fund, Inc. (d/b/a Prudential Tax-Free Money Fund), and for Class A
shares of Prudential Adjustable Rate Securities Fund, Inc., Prudential
California Municipal Fund (California Series), Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential FlexiFund, Prudential Global Fund,
Inc., Prudential-Bache Global Genesis Fund, Inc. (d/b/a Prudential Global
Genesis Fund) Prudential-Bache Global Natural Resources Fund, Inc. (d/b/a
Prudential Global Natural Resources Fund), Prudential-Bache GNMA Fund, Inc.
(d/b/a Prudential GNMA Fund), Prudential-Bache Government Plus Fund, Inc.
(d/b/a Prudential Government Plus Fund), Prudential Growth Fund, Inc.,
Prudential-Bache Growth Opportunity Fund, Inc. (d/b/a Prudential Growth
Opportunity Fund), Prudential-Bache High Yield Fund, Inc. (d/b/a Prudential
High Yield Fund), Prudential IncomeVertible(R) Fund, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Arizona
Series, Georgia Series, Maryland Series, Massachusetts Series, Michigan
Series, Minnesota Series, New Jersey Series, North Carolina Series, Ohio
Series and Pennsylvania Series), Prudential-Bache National Municipals Fund,
Inc. (d/b/a Prudential National Municipals Fund), Prudential Pacific Growth
Fund, Inc., Prudential Short-Term Global Income Fund, Inc., Prudential U.S.
Government Fund and Prudential-Bache Utility Fund, Inc. (d/b/a Prudential
Utility Fund), Global Utility Fund, Inc., and Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), The BlackRock Government Income Trust
and the Target Portfolio Trust.
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
Alan D. Hogan........... Executive Vice President, Chief Administrative None
Officer and Director
Howard A. Knight........ Executive Vice President, Director, Corporate None
Strategy and New Business Development
George A. Murray........ Executive Vice President and Director None
John P. Murray.......... Executive Vice President and Director of Risk None
Management
Leland B. Paton......... Executive Vice President and Director None
Richard A. Redeker...... Director Director
Hardwick Simmons........ Chief Executive Officer, President and Director None
Lee Spencer............. Interim General Counsel None
</TABLE>
C-6
<PAGE>
(ii) Information concerning the directors and officers of Prudential Mutual
Fund Distributors, Inc. is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
Joanne Accurso-Soto..... Vice President None
Dennis Annarumma........ Vice President, Assistant Treasurer and Assistant None
Comptroller
Phyllis J. Berman....... Vice President None
Fred A. Fiandaca........ President, Chief Executive Officer and Director None
Raritan Plaza One
Edison, NJ 08847
Stephen P. Fisher....... Vice President None
Frank W. Giordano....... Executive Vice President, General Counsel, None
Secretary and Director
Robert F. Gunia......... Executive Vice President, Treasurer, Comptroller Vice President
and Director
Andrew J. Varley........ Vice President None
Anita L. Whelan......... Vice President and Assistant Secretary None
</TABLE>
- ---------
(/1/)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New
York, New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1 (b) (5), (6), (7), (9),
(10) and (11) and 31a-1 (f) will be kept at Three Gateway Center, documents
required by Rules 31a-1 (b) (4) and (11) and 31a-1 (d) at One Seaport Plaza
and the remaining accounts, books and other documents required by such other
pertinent provisions of Section 31(a) and the Rules promulgated thereunder
will be kept by State Street Bank and Trust Company and Prudential Mutual Fund
Services. Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of New York, and
State of New York, on the 24th day of February, 1994.
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
(doing business as Prudential National Municipals
Fund)
/s/ Lawrence C. McQuade
---------------------------------
(LAWRENCE C. MCQUADE, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Lawrence C. McQuade President and Director February 24, 1994
-------------------------------------------
LAWRENCE C. MCQUADE
/s/ Delayne D. Gold Director February 24, 1994
-------------------------------------------
DELAYNE D. GOLD
/s/ Arthur Hauspurg Director February 24, 1994
-------------------------------------------
ARTHUR HAUSPURG
/s/ Harry A. Jacobs, Jr. Director February 24, 1994
-------------------------------------------
HARRY A. JACOBS, JR.
/s/ Thomas J. McCormack Director February 24, 1994
-------------------------------------------
THOMAS J. MCCORMACK
/s/ Stephen P. Munn Director February 24, 1994
-------------------------------------------
STEPHEN P. MUNN
/s/ Louis A. Weil, III Director February 24, 1994
-------------------------------------------
LOUIS A. WEIL, III
/s/ Susan C. Cote Treasurer and Principal February 24, 1994
------------------------------------------- Financial and
SUSAN C. COTE Accounting Officer
</TABLE>
<PAGE>
EXHIBIT INDEX
1. (a) Articles of Incorporation, as amended, of the Registrant, incorporated
by reference to Exhibit 1 to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-1 (File No. 2-66407).
(b) Amendment to Articles of Incorporation, filed April 30, 1987,
incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 11
to Registration Statement on Form N-1A (File No. 2-66407).
(c) Amendment to Articles of Incorporation filed on January 17, 1990,
incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 16
to Registration Statement on Form N-1A (File No. 2-66407).
2. Amended and restated By-Laws.*
4. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibits 1 and 2 above.
(b) Specimen stock certificate of the Registrant's Class A shares,
incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 16
to Registration Statement on Form N-1A.
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc, incorporated by reference to Exhibit 5(a) to Post-
Effective Amendment No. 13 to Registration Statement on Form N-1A (File
No. 2-66407).
(b) Management Agreement, as amended, between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit 5(b) to
Post-Effective Amendment No. 16 to Registration Statement on Form N-1A.
(c) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and the Prudential Investment Corporation, incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 13 to Registration Statement on
Form N-1A (File No. 2-66407).
6. (a) Selected Dealer Agreement, incorporated by reference to Exhibit 6(b)
to Pre-Effective Amendment No. 1 to Registration Statement on Form N-1
(File No. 2-66407).
(b) Distribution and Service Agreement between the Registrant and Prudential
Mutual Fund Distributors, Inc. for Class A shares dated July 1, 1993.*
(c) Distribution and Service Agreement between the Registrant and Prudential
Securities Incorporated for Class B shares dated July 1, 1993.*
8. (a) Custodian Agreement dated July 13, 1984, between the Registrant and
State Street Bank and Trust Company, incorporated by reference to Exhibit
8(a) to Post-Effective Amendment No. 17 to Registration Statement on Form
N-1A (File No. 2-66407).
(b) Revised Custodian Agreement between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit 8(b) to Post-
Effective Amendment No. 17 to Registration Statement on Form N-1A (File No.
2-66407).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9(b) to Post-Effective Amendment No. 12 to Registration Statement
on Form N-1A (File No. 2-66407).
10(a). Opinion of Sullivan & Cromwell. Incorporated by reference to Exhibit 10
to Registration Statement on Form N-1 (File No. 2-66407).
(b). Opinion of Sullivan & Cromwell.*
11. Consent of Independent Accountants.*
13. Letter of Bache Halsey Stuart Shields Incorporated. Incorporated by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-1 (File No. 2-66407).
15. (a) Distribution and Service Plan for Class A shares dated July 1, 1993.*
(b) Distribution and Service Plan for Class B shares dated July 1, 1993.*
<PAGE>
16. (a) Schedule of calculation of Average Annual Total Return (Class B
Shares), incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 13 to Registration Statement on Form N-1A (File No. 2-
66407).
(b) Schedule of Calculation of Average Annual Total Return (Class A Shares),
incorporated by reference to Exhibit 16(b) to Post-Effective Amendment No.
17 to Registration Statement on Form N-1A (File No. 2-66407).
(c) Schedule of Calculation of Aggregate Total Return for Class A and Class
B shares, incorporated by reference to Exhibit 16(C) to Post-Effective
Amendment No. 19 to Registration Statement on Form N-1A (File No. 2-66407).
Other Exhibits
Power of Attorney for:
Lawrence C. McQuade**
Michael J. Downey**
Delayne D. Gold**
Arthur Hauspurg**
Harry A. Jacobs, Jr.**
Thomas J. McCormack**
- -----------
*Filed herewith.
**Executed copies filed under Other Exhibits to Post-Effective Amendment No.
13 to the Registration Statement on Form N-1A (File No. 2-66407).
<PAGE>
<TABLE> EXHIBIT 10(b)
<CAPTION>
SULLIVAN & CROMWELL
<S> <C>
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC) 125 Broad Street, New York 10004-2498
CABLE ADDRESS: LADYCOURT, NEW YORK __________
FACSIMILE: (212) 558-3588 (125 Broad Street) 250 PARK AVENUE, NEW YORK 10177-0021
(212) 558-3792 (250 Park Avenue) 1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805
444 SOUTH FLOWER STREET, LOS ANGELES 90071-2901
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
GLOUCESTER TOWER, 11 PEDDER STREET, HONG KONG
February 24, 1994
</TABLE>
Prudential-Bache National Municipals Fund, Inc.,
One Seaport Plaza,
New York, New York 10292.
Dear Sirs:
You have requested our opinion in connection with your filing of Post-
Effective Amendment No.20 to the Regis-tration Statement on Form N-1A under the
Securities Act of 1933 and your registration in connection therewith of
2,119,514 shares of your Common Stock, $.01 par value (the "Shares") pursuant to
Rule 24e-2 under the Investment Compa-ny Act of 1940.
As your counsel, we are familiar with your organi-zation and corporate
status and the validity of your Common Stock.
We advise you that, in our opinion, the Shares, when duly issued and
sold, for not less than the par value thereof, will be duly authorized and
validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Laws
<PAGE>
-2-
Prudential-Bache National Municipals Fund, Inc.
of the State of Maryland, and we are expressing no opinion as to the effect by
the laws of any other jurisdiction.
We have relied as to certain matters on information obtained from
public officials, your officers and other sources believed by us to be
responsible.
We consent to the filing of this opinion with the Securities and
Exchange Commission in connection with the notice referred to above. In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
Sullivan & Cromwell
<PAGE>
Exhibit 2
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
By-Laws
ARTICLE I
Stockholders
------------
Section 1. Place of Meeting. All meetings of the stockholders shall be
----------------
held at the principal office of the Corporation in the State of Maryland or at
such other place within the United States as may from time to time be designated
by the Board of Directors and stated in the notice of such meeting.
Section 2. Annual Meeting. The annual meeting of the stockholders of the
--------------
Corporation shall be held in the month of April of each year on such date and at
such hour as may from time to time be designated by the Board of Directors and
stated in the notice of such meeting, for the transaction of such business as
may properly be brought before the meeting; provided, however, that an annual
meeting is not required to be held in any year in which the election of
directors is not required to be acted upon by stockholders pursuant to the
Investment Company Act of 1940.
Section 3. Special or Extraordinary Meetings. Special or extraordinary
---------------------------------
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, the President or a majority of the Board of Directors,
and shall be called by the Secretary upon receipt of the request in writing
signed by stockholders holding not less than 25% of the common stock issued and
outstanding and entitled to vote thereat. Such request shall state the purpose
or purposes of the proposed meeting. The
<PAGE>
Secretary shall inform such stockholders of the reasonably estimated costs of
preparing and mailing such notice of meeting and upon payment to the Corporation
of such costs, the Secretary shall give notice stating the purpose or purposes
of the meeting as required in this Article and by-law to all stockholders
entitled to notice of such meeting. No special meeting need be called upon the
request of the holders of shares entitled to cast less than a majority of all
votes entitled to be cast at such meeting to consider any matter which is
substantially the same as a matter voted upon at any special meeting of
stockholders held during the preceding twelve months.
Section 4. Notice of Meetings of Stockholders. Not less that ten days'
----------------------------------
and not more than ninety days' written or printed notice of every meeting of
stockholders, stating the time and place thereof (and the general nature of the
business proposed to be transacted at any special or extraordinary meeting),
shall be given to each stockholder entitled to vote thereat by leaving the same
with him or at his residence or usual place of business or by mailing it,
postage prepaid, and addressed to him at his address as it appears upon the
books of the Corporation. If mailed, notice shall be deemed to be given when
deposited in the United States mail addressed to the stockholder as aforesaid.
No notice of the time, place or purpose of any meeting of stockholders need
be given to any stockholder who attends in person or by proxy or to any
stockholder who, in writing executed and filed with the records of the meeting,
either before or after the holding thereof, waives such notice.
2
<PAGE>
Section 5. Record Dates. The Board of Directors may fix, in advance, a
------------
date not exceeding ninety days preceding the date of any meeting of
stockholders, any dividend payment date or any date for the allotment of rights,
as a record date for the determination of the stockholders entitled to notice of
and to vote at such meeting or entitled to receive such dividends or rights, as
the case may be; and only stockholders of record on such date shall be entitled
to notice of and to vote at such meeting or to receive such dividends or rights,
as the case may be. In the case of a meeting of stockholders, such date shall
not be less than ten days prior to the date fixed for such meeting.
Section 6. Quorum, Adjournment of Meetings. The presence in person or by
-------------------------------
proxy of the holders of record of a majority of the shares of the common stock
of the Corporation issued and outstanding and entitled to vote thereat shall
constitute a quorum at all meetings of the stockholders except as otherwise
provided in the Articles of Incorporation. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the holders of a
majority of the stock present in person or by proxy shall have power to adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until the requisite number of stockholders entitled to vote at such
meeting shall be present. At such adjourned meeting at which the requisite
amount of stock entitled to vote thereat shall be represented any business may
be transacted which might have been transacted at the meeting as originally
notified.
3
<PAGE>
Section 7. Voting and Inspectors. At all meetings, stockholders of record
---------------------
entitled to vote thereat shall have one vote for each share of common stock
standing in his name on the books of the Corporation (and such stockholders of
record holding fractional shares, if any, shall have proportionate voting
rights) on the date for the determination of stockholders entitled to vote at
such meeting, either in person or by proxy appointed by instrument in writing
subscribed by such stockholder or his duly authorized attorney.
All elections shall be had and all questions decided by a majority of the
votes cast at a duly constituted meeting, except as otherwise provided by
statute or by the Articles of Incorporation or by these By-Laws.
At any election of Directors, the Chairman of the meeting may, and upon the
request of the holders of ten percent (10%) of the stock entitled to vote at
such election shall, appoint two inspectors of election who shall first
subscribe an oath or affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of Director shall be appointed such
Inspector.
Section 8. Conduct of Stockholders' Meetings. The meetings of the
---------------------------------
stockholders shall be presided over by the Chairman of the Board, or if he is
not present, by the President, or if he is not present, by a Vice-President, or
if none of them is present
4
<PAGE>
by a Chairman to be elected at the meeting. The Secretary of the Corporation,
if present, shall act as a Secretary of such meetings, or if he is not present,
an Assistant Secretary shall so act; if neither the Secretary nor the Assistant
Secretary is present, then the meeting shall elect its Secretary.
Section 9. Concerning Validity of Proxies, Ballots, etc. At every meeting
--------------------------------------------
of the stockholders, all proxies shall be received and taken in charge of and
all ballots shall be received and canvassed by the Secretary of the meeting, who
shall decide all questions concerning the qualification of voters, the validity
of the proxies and the acceptance or rejection of votes, unless inspectors of
election shall have been appointed by the Chairman of the meeting, in which
event such inspectors of election shall decide all such questions.
ARTICLE II
Board of Directors
------------------
Section 1. Number and Tenure of Office. The business and affairs of the
---------------------------
Corporation shall be conducted and managed by a Board of Directors of not less
than three nor more than nine Directors, as may be determined from time to time
by vote of a majority of the Directors then in office. Directors need not be
stockholders.
Section 2. Vacancies. In case of any vacancy in the Board of Directors
---------
through death, resignation or other cause, other than an increase in the number
of Directors, a majority of the remaining Directors, although a majority is less
than a quorum, by
5
<PAGE>
an affirmative vote, may elect a successor to hold office until the next annual
meeting of stockholders or until his successor is chosen and qualifies.
Section 3. Increase or Decrease in Number of Directors. The Board of
-------------------------------------------
Directors, by the vote of a majority of the entire Board, may increase the
number of Directors and may elect Directors to fill the vacancies created by any
such increase in the number of Directors until the next annual meeting or until
their successors are duly chosen and qualified. The Board of Directors, by the
vote of a majority of the entire Board, may likewise decrease the number of
Directors to a number not less than three.
Section 4. Place of Meeting. The Directors may hold their meetings, have
----------------
one or more offices, and keep the books of the Corporation, outside the State of
Maryland, at any office or offices of the Corporation or at any other place as
they may from time to time by resolution determine, or in the case of meetings,
as they may from time to time by resolution determine or as shall be specified
or fixed in the respective notices or waivers of notice thereof.
Section 5. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held at such time and on such notice as the Directors may from time to
time determine.
The annual meeting of the Board of Directors shall be held as soon as
practicable after the annual meeting of the stockholders for the election of
Directors.
6
<PAGE>
Section 6. Special Meetings. Special meetings of the Board of Directors
----------------
may be held from time to time upon call of the Chairman of the Board, the
President, the Secretary or two or more of the Directors, by oral or telegraphic
or written notice duly served on or sent or mailed to each Director not less
than one day before such meeting. No notice need be given to any Director who
attends in person or to any Director who, in writing executed and filed with the
records of the meeting either before or after the holding thereof, waives such
notice. Such notice or waiver of notice need not state the purpose or purposes
of such meeting.
Section 7. Quorum. One-third of the Directors then in office shall
------
constitute a quorum for the transaction of business, provided that a quorum
shall in no case be less than two Directors. If at any meeting of the Board
there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum shall be obtained. The act
of the majority of the Directors present at any meeting at which there is a
quorum shall be the act of the Directors, except as may be otherwise
specifically provided by statute or by the Articles of Incorporation or by these
By-Laws.
Section 8. Executive Committee. The Board of Directors may, by the
-------------------
affirmative vote of a majority of the entire Board, appoint from the Directors
an Executive Committee to consist of such number of Directors (not less than
three) as the Board may from time to time determine. The Chairman of the
Committee shall be elected by the Board of Directors. The Board of Directors by
7
<PAGE>
such affirmative vote shall have power at any time to change the members of such
Committee and may fill vacancies in the Committee by election from the
Directors. When the Board of Directors is not in session, to the extent
permitted by law the Executive Committee shall have and may exercise any or all
of the powers of the Board of Directors in the management of the business and
affairs of the Corporation. The Executive Committee may fix its own rules of
procedure, and may meet when and as provided by such rules or by resolution of
the Board of Directors, but in every case the presence of a majority shall be
necessary to constitute a quorum. During the absence of a member of the
Executive Committee, the remaining members may appoint a member of the Board of
Directors to act in his place.
Section 9. Other Committees. The Board of Directors, by the affirmative
----------------
vote of a majority of the whole Board, may appoint from the Directors other
committees which shall in each case consist of such number of Directors (not
less than two) and shall have and may exercise such powers as the Board may
determine in the resolution appointing them. A majority of all the members of
any such committee may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to change the members and powers of any
such committee, to fill vacancies and to discharge any such committee.
Section 10. Telephone Meetings. Members of the Board of Directors or a
------------------
committee of the Board of Directors may participate
8
<PAGE>
in a meeting by means of a conference telephone or similiar communications
equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by these means constitutes presence in
person at the meeting.
Section 11. Action Without a Meeting. Any action required or permitted to
------------------------
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board or of such committee, as the case may be, and such written
consent if filed with the minutes of the proceedings of the Board or committee.
Section 12. Compensation of Directors. No Director shall receive any
-------------------------
stated salary or fees from the Corporation for his services as such if such
Director is, otherwise than by reason of being such Director, an interested
person (as such term is defined by the Investment Company Act of 1940) of the
Corporation or of its investment adviser, administrator or principal
underwriter. Except as provided in the preceding sentence, Directors shall be
entitled to receive such compensation from the Corporation for their services as
may from time to time be voted by the Board of Directors.
Section 13. Nominating Committee. The Board of Directors may be the
--------------------
affirmative vote of a majority of the entire Board appoint from its members a
Nominating Committee composed of two or more directors who are not "interested
persons" (as defined
9
<PAGE>
in the Investment Company Act of 1940) of the Corporation, as the Board may from
time to time determine. The Nominating Committee shall be empowered to elect
its own chairman who may call, or direct the Secretary of the Corporation to
call meetings in accordance with the notice provisions of these By-laws
otherwise applicable to meetings of the Board of Directors. The Nominating
Committee shall recommend to the Board a slate of persons who are not
"interested person" (as defined in the Investment Company Act of 1940) of the
Corporation, which may include members of the Nominating Committee, to be
nominated for election as directors by the stockholders at each annual meeting
of stockholders and to fill any vacancy occurring for any reason among the
directors who are not such interested persons.
ARTICLE III
Officers
--------
Section 1. Executive Officers. The executive officers of the Corporation
------------------
shall be chosen by the Board of Directors as soon as may be practicable after
the annual meeting of the stockholders. These may include a Chairman of the
Board of Directors (who shall be a Director) or a Chairman of the Fund and shall
include a President, one or more Vice-Presidents (the number thereof to be
determined by the Board of Directors), a Secretary and a Treasurer. The Board
of Directors or the Executive Committee may also in its discretion appoint
Assistant Secretaries, Assistant Treasurers and other officers, agents and
employees, who shall have such authority and perform such duties as the Board or
the
10
<PAGE>
Executive Committee may determine. The Board of Directors may fill any vacancy
which may occur in any office. Any two officers, except those of President and
Vice-President, may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law or these By-Laws to be executed, acknowledge or
verified by two or more officers.
Section 2. Term of Office. The term of office of all officers shall be
--------------
one year and until their respective successors are chosen and qualified. Any
officer may be removed from office at any time with or without cause by the vote
of a majority of the whole Board of Directors.
Section 3. Powers and Duties. The officers of the Corporation shall have
-----------------
such powers and duties as generally pertain to their respective offices, as well
as such powers and duties as may from time to time be conferred by the Board of
Directors or the Executive Committee.
ARTICLE IV
Capital Stock
-------------
Section 1. Certificates for Shares. Each stockholder of the Corporation
-----------------------
shall be entitled to a certificate or certificates for the full shares of stock
of the Corporation owned by him in such form as the Board may from time to time
prescribe.
Section 2. Transfer of Shares. Shares of the Corporation shall be
------------------
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney
11
<PAGE>
or legal representative, upon surrender and cancellation of certificates, if
any, for the same number of shares, duly endorsed or accompanied by proper
instruments of assignment and transfer, with such proof of the authenticity of
the signature as the Corporation or his agents may reasonably require; in the
case of shares not represented by certificates, the same or similar requirements
may be imposed by the Board of Directors.
Section 3. Stock Ledgers. The stock ledgers of the Corporation,
-------------
containing the name and address of the stockholders and the number of shares
held by them respectively, shall be kept at the principal office of the
Corporation or, if the Corporation employs a Transfer Agent, at the office of
the Transfer Agent of the Corporation.
Section 4. Lost, Stolen or Destroyed Certificates. The Board of Directors
--------------------------------------
or the Executive Committee may determine the conditions upon which a new
certificate of stock of the Corporation of any class may be issued in place of a
certificate which is alleged to have been lost, stolen or destroyed; and may, in
its discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety, to the Corporation and each
Transfer Agent, if any, and to indemnify it and each Transfer Agent against any
and all loss or claims which may arise by reason of the issue of a new
certificate in the place of the one so lost, stolen or destroyed.
12
<PAGE>
ARTICLE V
Corporate Seal
--------------
The Board of Directors may provide for a suitable corporate seal, in such
form and bearing such inscriptions as it may determine.
ARTICLE VI
Fiscal Year
-----------
The fiscal year of the Corporation shall begin on the first day of January
and shall end on the thirty-first day of December in each year.
ARTICLE VII
Indemnification
---------------
The Corporation shall indemnify directors, officers, employees and agents
of the Corporation against judgments, fines, settlements and expenses to the
fullest extent authorized and in the manner permitted, by applicable federal and
state law.
ARTICLE VIII
Checks, Notes, Etc.
-------------------
All check and drafts on the Corporation's bank account and all bills of
exchange and promissory notes, and all acceptances, obligations and other
instruments for the payment of money, shall be signed by such officer or
officers, or agents, as shall be thereunto authorized from time to time by the
Board of Directors.
13
<PAGE>
ARTICLE IX
Amendment of By-Laws
--------------------
The By-Laws of the Corporation may be altered, amended, added to or
repealed by the stockholders or by majority vote of the entire Board of
Directors; but any such alteration, amendment, addition or repeal of the By-Laws
by action of the Board of Directors may be altered or repealed by stockholders.
As amended on 5/3/93
14
<PAGE>
Exhibit 6(b)
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
Distribution Agreement
(Class A Shares)
--------------
Agreement made as of January 22, 1990, as amended and restated on July 1,
1993, between Prudential-Bache National Municipals Fund, Inc. a Maryland
Corporation (the Fund) and Prudential Mutual Fund Distributors, Inc., a Delaware
Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its Class A
shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Class A shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Class A shares; and
WHEREAS, upon approval by the Class A shareholders of the Fund it is
contemplated that the Fund will adopt a plan of distribution pursuant to Rule
12b-1 under the Investment Company Act (the Plan) authorizing payments by the
Fund to the Distributor with respect to the distribution of Class A shares of
the Fund.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Class A shares of the Fund to sell Class A shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of
<PAGE>
the Fund to act as principal underwriter and distributor of the Fund's Class A
shares, except that:
2.1 The exclusive rights granted to the Distributor to purchase Class A
shares from the Fund shall not apply to Class A shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class A shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class A shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class A Shares from the Fund
----------------------------------------
3.1 The Distributor shall have the right to buy from the Fund the Class A
shares needed, but not more than the Class A shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class A shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers). The price which the
Distributor shall pay for the Class A shares so purchased from the Fund shall be
the net asset value, determined as set forth in the Prospectus.
3.2 The Class A shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Board of
Directors. The Fund shall also have the right to suspend the sale of its Class
A shares if a
2
<PAGE>
banking moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class A shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class A shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts for such Class A shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class A Shares by the Fund
------------------------------------------------------
4.1 Any of the outstanding Class A shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class A shares so
tendered in accordance with its Articles of Incorporation as amended from time
to time, and in accordance with the applicable provisions of the Prospectus.
The price to be paid to redeem or repurchase the Class A shares shall be equal
to the net asset value determined as set forth in the Prospectus. All payments
by the Fund hereunder shall be made in the manner set forth in Section 4.2
below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh calendar day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class A shares
shall be paid by the Fund to or for the account of the redeeming shareholder, in
each case in accordance with applicable provisions of the Prospectus.
4.3 Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of
3
<PAGE>
Class A shares as provided herein, the Fund agrees to sell its Class A shares so
long as it has Class A shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Board of Directors and the shareholders, all necessary action to
fix the number of authorized Class A shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class A shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class A shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its Class
A shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. Sales of the Class A shares shall be on the
terms described in the
4
<PAGE>
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Class A shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Class A shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Class A shares only to such selected dealers as
are members in good standing of the NASD. Class A shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
The Distributor shall receive and may retain any portion of any front-end
sales charge which is imposed on sales of Class A shares and not reallocated to
selected dealers as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. Reimbursement of the Distributor under the Plan
-----------------------------------------------
8.1 The Fund shall reimburse the Distributor for costs incurred by it in
performing its duties under the Distribution and Service Plan and this Agreement
including amounts paid on a reimbursement basis to Prudential Securities
Incorporated (Prudential Securities) and Pruco Securities Corporation (Prusec),
affiliates of the Distributor, under the selected dealer agreements between the
Distributor and Prudential Securities and Prusec, respectively, amounts paid to
other securities dealers or financial institutions under selected dealer
agreements between the Distributor and such dealers and institutions and amounts
paid for
5
<PAGE>
personal service and/or the maintenance of shareholder accounts. Amounts
reimbursable under the Plan shall be accrued daily and paid monthly or at such
other intervals as the Board of Directors may determine but shall not be paid at
a rate that exceeds .30 of 1%, which amount includes a service fee of up to .25
of 1%, per annum of the average daily net assets of the Class A shares of the
Fund. Payment of the distribution and service fee shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees to be paid by the Distributor to account executives of the
Distributor and to broker-dealers and financial institutions which have dealer
agreements with the Distributor. So long as the Plan (or any amendment thereto)
is in effect, at the request of the Board of Directors or any agent or
representative of the Fund, the Distributor shall provide such additional
information as may reasonably be requested concerning the activities of the
Distributor hereunder and the costs incurred in performing such activities.
8.3 Costs of the Distributor subject to reimbursement hereunder are costs
of performing distribution activities with respect to the Class A shares of the
Fund and may include, among others:
(a)amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in performing services under a
selected dealer agreement between Prudential Securities and the
Distributor for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
distribution activities, including central office and branch expenses;
(b)amounts paid to Prusec in reimbursement of costs incurred by
Prusec in performing services under a selected dealer agreement
between Prusec and the Distributor for sale of Class A shares of the
Fund, including sales commissions and trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
distribution activities;
(c)sales commissions and trailer commissions paid to, or on
account of, broker-dealers and
6
<PAGE>
financial institutions (other than Prudential Securities and Prusec)
which have entered into selected dealer agreements with the
Distributor with respect to Class A shares of the Fund.
(d)amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(e)advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
Prospectuses, and periodic financial reports and sales literature to
persons other than current shareholders of the Fund.
Indirect and overhead costs referred to in clauses (a) and (b) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. Allocation of Expenses
----------------------
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class A shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class A shares, so long as the
Plan is in effect.
9.2 If the Plan is terminated or discontinued, the costs previously
incurred by the Distributor in performing the duties set forth in Section 6
hereof shall be borne by the Distributor and
7
<PAGE>
will not be subject to reimbursement by the Fund.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Distributor, its officers and directors or trustees
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors or trustees, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issue and sale of any Class A
shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the
8
<PAGE>
Securities Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
against such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Fund, its officers and Directors or any such
controlling person may incur under the Securities Act or under common law or
otherwise, but only to the extent that such liability or expense incurred by the
Fund, its Directors or officers or such controlling person resulting from such
claims or demands shall arise out of or be based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
the Distributor to the Fund for use in the Registration Statement or Prospectus
or shall arise out of or be based upon any alleged omission to state a material
fact in connection with such information required to be stated in the
Registration Statement or Prospectus or necessary to make such information not
misleading. The Distributor's agreement to indemnify the Fund, its officers and
Directors and any such controlling person as aforesaid, is expressly conditioned
upon the Distributor's being promptly notified of any action brought against the
Fund, its officers and Directors or any such controlling person, such
notification being given to the Distributor at its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class A shares of the
Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding
voting securities", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
9
<PAGE>
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class A shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Directors cast in
person at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: /s/ Robert F. Gunia
-----------------------
Name: Robert F. Gunia
Title: Executive Vice President
Prudential-Bache National
Municipals Fund, Inc.
By: /s/ Lawrence C. McQuade
---------------------------
Name: Lawrence C. McQuade
Title: President
10
<PAGE>
Exhibit 6(c)
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
Distribution Agreement
(Class B Shares)
--------------
Agreement made as of April 9, 1981, as amended on June 26, 1985, and as
amended and restated on January 22, 1990 and July 1, 1993, between Prudential-
Bache National Municipals Fund, Inc., a Maryland Corporation (the Fund) and
Prudential Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its Class B
shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Class B shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Class B shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant to
Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments by
the Fund to the Distributor with respect to the distribution of Class B shares
of the Fund and the maintenance of Class B shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Class B shares of the Fund to sell Class B shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class B shares of the Fund to the Distributor on the terms and conditions set
forth below.
1
<PAGE>
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Class B shares, except that:
2.1 The exclusive rights granted to the Distributor to purchase Class B
shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class B shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class B shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class B Shares from the Fund
----------------------------------------
3.1 The Distributor shall have the right to buy from the Fund the Class B
shares needed, but not more than the Class B shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class B shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers). The price which the
Distributor shall pay for the Class B shares so purchased from the Fund shall be
the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the
2
<PAGE>
Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Board of
Directors. The Fund shall also have the right to suspend the sale of its Class
B shares if a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class B shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class B shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts for such Class B shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class B Shares by the Fund
------------------------------------------------------
4.1 Any of the outstanding Class B shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class B shares so
tendered in accordance with its Articles of Incorporation as amended from time
to time, and in accordance with the applicable provisions of the Prospectus.
The price to be paid to redeem or repurchase the Class B shares shall be equal
to the net asset value determined as set forth in the Prospectus. All payments
by the Fund hereunder shall be made in the manner set forth in Section 4.2
below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class B shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class B shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of
3
<PAGE>
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or during any other period when the Securities and
Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Class B shares as
provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Board of Directors and the shareholders, all necessary action to
fix the number of authorized Class B shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Class B shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class B shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class B shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its Class
B shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and
4
<PAGE>
activities as may be required by the Fund in connection with such
qualifications.
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Class B shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Class B shares only to such selected dealers as
are members in good standing of the NASD. Class B shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
The Distributor shall receive and may retain any contingent deferred sales
charge which is imposed with respect to repurchases and redemptions of Class B
shares as set forth in the Prospectus, subject to the limitations of Article
III, Section 26 of the NASD Rules of Fair Practice. Payment of these amounts to
the Distributor is not contingent upon the adoption or continuation of the Plan.
Section 8. Reimbursement of the Distributor under the Plan
-----------------------------------------------
8.1 The Fund shall reimburse the Distributor for all
5
<PAGE>
costs incurred by it in performing its duties under the Distribution and Service
Plan and this Agreement including amounts paid on a reimbursement basis to Pruco
Securities Corporation (Prusec), an affiliate of the Distributor, under the
selected dealer agreement between the Distributor and Prusec, amounts paid to
other securities dealers or financial institutions under selected dealer
agreements between the Distributor and such dealers and institutions and amounts
paid for personal service and/or the maintenance of shareholder accounts.
Reimbursement shall only be made to the extent that payments by investors
pursuant to Section 7 hereof are not sufficient to cover such costs. Amounts
reimbursable under the Plan shall be accrued daily and paid monthly or at such
other intervals as the Board of Directors may determine but shall not be paid at
a rate that exceeds .50 of 1%, which amount includes a service fee of up to .25
of 1% per annum of the average daily net assets of the Class B shares of the
Fund. Amounts reimbursable under the Plan that are not paid because they exceed
.50 of 1% per annum of the average daily net assets of the Class B shares (Carry
Forward Amounts) shall be carried forward and paid by the Fund as permitted
within such payment limitation so long as the Plan, including any amendments
thereto, is in effect, subject to the limitations of Article III, Section 26 of
the NASD Rules of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions (including
trailer commissions) and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor. So
long as the Plan (or any amendment thereto) is in effect, at the request of the
Board of Directors or any agent or representative of the Fund, the Distributor
shall provide such additional information as may reasonably be requested
concerning the activities of the Distributor hereunder and the costs incurred in
performing such activities.
8.3 Costs of the Distributor subject to reimbursement hereunder are all
costs of performing distribution activities with respect to the Class B shares
of the Fund and include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of distribution activities, including central office and
branch expenses;
(c) amounts paid to Prusec in reimbursement of all
6
<PAGE>
costs incurred by Prusec in performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
B shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with distribution activities;
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions (other than
Prusec) which have entered into selected dealer agreements with the
Distributor with respect to Class B shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial institutions for
personal service and/or the maintenance of shareholder accounts;
(f) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund Prospectuses,
and periodic financial reports and sales literature to persons other
than current shareholders of the Fund;
(g) to the extent permitted by applicable law, interest on unreimbursed
Carry Forward Amounts as defined in Section 8.1 at a rate not to
exceed that permitted under Article III, Section 26, of the NASD Rules
of Fair Practice; and
(h) to the extent permitted by applicable law, unreimbursed distribution
expenses incurred with respect to the sale of Class B shares that have
been exchanged into the Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. Allocation of Expenses
----------------------
9.1 The Fund shall bear all costs and expenses of the
7
<PAGE>
continuous offering of its Class B shares, including fees and disbursements of
its counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and preparing and mailing annual and periodic
reports and proxy materials to shareholders (including but not limited to the
expense of setting in type any such Registration Statements, Prospectuses,
annual or periodic reports or proxy materials). The Fund shall also bear the
cost of expenses of qualification of the Class B shares for sale, and, if
necessary or advisable in connection therewith, of qualifying the Fund as a
broker or dealer, in such states of the United States or other jurisdictions as
shall be selected by the Fund and the Distributor pursuant to Section 5.4 hereof
and the cost and expense payable to each such state for continuing qualification
therein until the Fund decides to discontinue such qualification pursuant to
Section 5.4 hereof. As set forth in Section 8 above, the Fund shall also bear
the expenses it assumes pursuant to the Plan with respect to Class B shares, so
long as the Plan is in effect.
9.2 Although the Fund is not liable for unreimbursed distribution
expenses, in the event of termination of the Plan, the Board of Directors of the
Fund may consider the appropriateness of having the Class B shares of the Fund
reimburse the Distributor for the then outstanding balance of all unreimbursed
distribution expenses plus interest thereon to the extent permitted by
applicable law from the date of this Agreement.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, Director or controlling person unless a court of competent
jurisdiction shall determine in a final
8
<PAGE>
decision on the merits, that the person to be indemnified was not liable by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties, or by reason of its reckless disregard of its obligations under
this Agreement (disabling conduct), or, in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that the indemnified
person was not liable by reason of disabling conduct, by (a) a vote of a
majority of a quorum of Directors who are neither "interested persons" of the
Fund as defined in Section 2(a)(19) of the Investment Company Act nor parties to
the proceeding, or (b) an independent legal counsel in a written opinion. The
Fund's agreement to indemnify the Distributor, its officers and Directors and
any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or Directors, or any such controlling person, such notification to
be given in writing addressed to the Fund at its principal business office. The
Fund agrees promptly to notify the Distributor of the commencement of any
litigation or proceedings against it or any of its officers or Directors in
connection with the issue and sale of any Class B shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Directors and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification to be given to the Distributor in
writing at its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years
9
<PAGE>
from the date hereof and thereafter, but only so long as such continuance is
specifically approved at least annually by (a) the Board of Directors of the
Fund, or by the vote of a majority of the outstanding voting securities of the
Class B shares of the Fund, and (b) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of any such parties
and who have no direct or indirect financial interest in this Agreement or in
the operation of the Fund's Plan or in any agreement related thereto (Rule 12b-1
Directors), cast in person at a meeting called for the purpose of voting upon
such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class B shares of the
Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class B shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Robert F. Gunia
-----------------------
Name: Robert F. Gunia
Title: Senior Vice President
Prudential-Bache National
Municipals Fund, Inc.
By: /s/ Lawrence C. McQuade
--------------------------
Name: Lawrence C. McQuade
Title: President
11
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 20 to the registration
statement (the "Registration Statement") of our report dated February 17, 1994,
relating to the financial statements and financial highlights of Prudential
National Municipals Fund, which appears in such Statement of Additional
Information and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian and Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
February 24, 1994
1
<PAGE>
Exhibit 15(a)
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
Distribution and Service Plan
(Class A Shares)
---------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential-Bache National Municipals Fund, Inc.,
(the Fund) and by Prudential Mutual Fund Distributors, Inc., the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement (the Distribution
Agreement) pursuant to which the Fund will employ the Distributor to distribute
Class A shares issued by the Fund (Class A shares). Under the Distribution
Agreement, the Distributor will be entitled to receive payments from investors
of front-end sales charges with respect to the sale of Class A shares. Under
the Plan, the Fund intends to reimburse the Distributor for costs incurred by
the Distributor in distributing Class A shares of the Fund and to pay the
Distributor a service fee for the maintenance of Class A shareholder accounts.
A majority of the Board of Directors or Trustees of the Fund, including a
majority of those Directors or Trustees who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect
<PAGE>
financial interest in the operation of this Plan or any agreements related to it
(the Rule 12b-1 Directors or Trustees), have determined by votes cast in person
at a meeting called for the purpose of voting on this Plan that there is a
reasonable likelihood that adoption of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the
2
<PAGE>
Distributor may select. Services provided and activities undertaken to
distribute Class A shares of the Fund are referred to herein as "Distribution
Activities."
2. Payment of Service Fee
----------------------
The Fund shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate not
to exceed .25 of 1% per annum of the average daily net assets of the Class A
shares (service fee). The Fund shall calculate and accrue daily amounts
reimbursable by the Class A shares of the Fund hereunder and shall pay such
amounts monthly or at such other intervals as the Board of Directors or Trustees
may determine. Costs of the Distributor subject to reimbursement hereunder
include account servicing fees and indirect and overhead costs associated with
providing personal service and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall reimburse the Distributor for costs incurred by it in
performing Distribution Activities at a rate which, together with the service
fee (described in Section 2 hereof), shall not exceed .30% per annum of the
average daily net assets of the Class A shares of the Fund. The Fund shall
calculate and accrue daily amounts reimbursable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors or Trustees may determine.
Amounts paid to the Distributor by the Class A shares of the
3
<PAGE>
Fund will not be used to pay the distribution expenses incurred with respect to
the Class B shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors or Trustees. The allocation of distribution expenses among
Classes will be subject to the review of the Board of Directors or Trustees.
Payments hereunder will be applied to distribution expenses in the order in
which they are incurred, unless otherwise determined by the Board of Directors
or Trustees.
Costs of the Distributor subject to reimbursement hereunder are costs of
performing Distribution Activities and may include, among others:
(a) amounts paid to Prudential Securities in reimbursement of
costs incurred by Prudential Securities in performing services under a
selected dealer agreement between Prudential Securities and the
Distributor for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
Distribution Activities, including central office and branch expenses;
(b) amounts paid to Prusec in reimbursement of costs incurred by
Prusec in performing services under a selected dealer agreement
between Prusec and the Distributor for sale of Class A shares of the
Fund, including sales commissions and trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(c) advertising for the Fund in various forms through any available
medium, including the
4
<PAGE>
cost of printing and mailing Fund prospectuses, statements of
additional information and periodic financial reports and sales
literature to persons other than current shareholders of the Fund; and
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions (other than
Prudential Securities and Prusec) which have entered into selected
dealer agreements with the Distributor with respect to shares of the
Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
or Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors or Trustees of the Fund such
additional information as the Board or Trustees shall from time to time
reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors or Trustees of the Fund
of the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as
5
<PAGE>
defined in the Investment Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
7. Amendments
----------
The Plan may not be amended to change the distribution expenses to be paid
as provided for in Section 3 hereof so as to increase materially the amounts
payable under this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund. All material amendments of the
Plan, including the addition or deletion of categories of expenditures which are
reimbursable hereunder, shall be approved by a majority of the Board of
Directors or the Trustees of the Fund and a majority of the Rule 12b-1 Directors
6
<PAGE>
or Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. Non-interested Directors or Trustees
------------------------------------
While the Plan is in effect, the selection and nomination of the Directors
or Trustees who are not "interested persons" of the Fund (non-interested
Directors or Trustees) shall be committed to the discretion of the non-
interested Directors or Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: January 22, 1990
as amended and restated
on July 1, 1993
7
<PAGE>
Exhibit 15(b)
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
Distribution and Service Plan
(Class B Shares)
---------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential-Bache National Municipals Fund, Inc.,
(the Fund) and by Prudential Securities Incorporated (Prudential Securities),
the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement (the Distribution
Agreement) pursuant to which the Fund will continue to employ the Distributor to
distribute Class B shares issued by the Fund (Class B shares). Under the
Distribution Agreement, the Distributor will be entitled to receive payments
from investors of contingent deferred sales charges imposed with respect to
certain repurchases and redemptions of Class B shares. Under the Plan, the Fund
wishes to reimburse the Distributor for costs incurred by the Distributor in
distributing Class B shares of the Fund and to pay the Distributor a service fee
for the maintenance of Class B shareholder accounts.
A majority of the Board of Directors or Trustees of the Fund including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct
<PAGE>
or indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors or Trustees), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable likelihood that adoption of this Plan will benefit the
Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class B shares of the Fund within the meaning of paragraph (a)(2) of
Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and
2
<PAGE>
financial institutions as the Distributor may select, including Pruco Securities
Corporation (Prusec). Services provided and activities undertaken to distribute
Class B shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate not
to exceed .25 of 1% per annum of the average daily net assets of the Class B
shares (service fee). The Fund shall calculate and accrue daily amounts
reimbursable by the Class B shares of the Fund hereunder and shall pay such
amounts monthly or at such other intervals as the Board of Directors or Trustees
may determine. Costs of the Distributor subject to reimbursement hereunder
include account servicing fees and indirect and overhead costs associated with
providing personal service and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall reimburse the Distributor at a rate which, together with the
service fee (described in Section 2 hereof), shall not exceed .50 of 1% per
annum of the average daily net assets of the Class B shares of the Fund for
costs incurred by it in performing Distribution Activities. The Fund shall
calculate and accrue daily amounts reimbursable by the Class B shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors or Trustees may determine. Proceeds from contingent
deferred sales charges will be applied to
3
<PAGE>
reduce the costs incurred in performing Distribution Activities. The Fund shall
carry forward amounts reimbursable that are not paid because they exceed .50 of
1% per annum of the average daily net assets of the Class B shares of the Fund
(Carry Forward Amounts) and shall pay such amounts within the .50 of 1% per
annum payment rate limitation so long as this Plan, including any amendments
hereto, is in effect, subject to the limitations of Article III, Section 26 of
the NASD Rules of Fair Practice. Although the Fund is not liable for
unreimbursed distribution expenses, in the event of termination or
discontinuation of the Plan, the Board of Directors or Trustees may consider the
appropriateness of having the Class B shares of the Fund reimburse the
Distributor for the then outstanding Carry Forward Amounts plus interest thereon
to the extent permitted by applicable law or regulation from the effective date
of the Plan.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to the Class A
shares of the Fund except that distribution expenses attributable to the Fund as
a whole will be allocated to the Class B shares according to the ratio of the
sale of Class B shares to the total sales of the Fund's shares over the Fund's
fiscal year or such other allocation method approved by the Board of Directors
or Trustees. The allocation of distribution expenses among Classes will be
subject to the review of the Board of Directors or Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred,
4
<PAGE>
unless otherwise determined by the Board of Directors or Trustees.
Costs of the Distributor subject to reimbursement hereunder are all costs
of performing Distribution Activities and include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of distribution activities including central office and
branch expenses;
(c) amounts paid to Prusec in reimbursement of all costs incurred by
Prusec in performing services under a selected dealer agreement
between Prusec and the Distributor for sale of Class B shares of the
Fund, including sales commissions and trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund;
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to shares of the Fund;
(f) to the extent permitted by law, interest on unreimbursed Carry
Forward Amounts as defined in Section 3 at a rate equal to that paid
by Prudential Securities for bank borrowings as such rate may vary
from day to day, not to exceed that permitted under Article III,
Section 26, of the NASD Rules of Fair Practice; and
(g) unreimbursed distribution expenses incurred with respect to the
sale of Class B shares which have been exchanged into the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board
5
<PAGE>
of Directors or Trustees of the Fund for review, at least quarterly, a written
report specifying in reasonable detail the amounts expended for Distribution
Activities (including payment of the service fee) and the purposes for which
such expenditures were made in compliance with the requirements of Rule 12b-1.
The Distributor will provide to the Board of Directors or Trustees of the Fund
such additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors or Trustees of the Fund
of the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or Trustees by votes cast in
6
<PAGE>
person at a meeting called for the purpose of voting on the continuation of
the Plan.
6. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund.
7. Amendments
----------
The Plan may not be amended to change the distribution expenses to be paid
as provided for in Section 3 hereof so as to increase materially the amounts
payable under this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund. All material amendments of the
Plan, including the addition or deletion of categories of expenditures which are
reimbursable hereunder, shall be approved by a majority of the Board of
Directors or Trustees of the Fund and a majority of the Rule 12b-1 Directors or
Trustees by votes cast in person at a meeting called for the purpose of voting
on the Plan.
8. Non-interested Directors or Trustees
------------------------------------
While the Plan is in effect, the selection and nomination of the Directors
or Trustees who are not "interested persons" of the Fund (non-interested
Directors or Trustees) shall be committed to the discretion of the non-
interested Directors or Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related
7
<PAGE>
agreements and all reports made pursuant to Section 4 hereof, for a period of
not less than six years from the date of effectiveness of the Plan, such
agreements or reports, and for at least the first two years in an easily
accessible place.
Dated: June 26, 1985
as amended and restated
on January 22, 1990
and July 1, 1993
8
