<PAGE>
As filed with the Securities and Exchange Commission on September 18, 1995
Registration No. 33-61953
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
(Check appropriate box or boxes)
--------------
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
(Exact name of registrant as specified in charter)
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)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
NO FILING FEE IS REQUIRED BECAUSE, 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, PURSUANT
TO A REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 2-66407). PURSUANT TO RULE
429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS AND PROXY STATEMENT RELATES
TO SHARES PREVIOUSLY REGISTERED ON FORM N-1A (FILE NO. 2-66407).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a)UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-14 ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus.............................. Table of Contents
Item 3. Synopsis Information and Risk Factors... Synopsis; Principal Risk Factors
Item 4. Information about the Transaction....... Synopsis; The Proposed Transaction
Item 5. Information about the Registrant........ Information about Municipals Fund
Item 6. Information about the Company Being
Acquired................................ Information about the Series
Item 7. Voting Information...................... Voting Information
Item 8. Interest of Certain Persons and
Experts................................. Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
PART B
STATEMENT OF ADDITIONAL
INFORMATION CAPTION
----------------------------------------
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Cover Page
Item 12. Additional Information about the
Registrant.............................. Statement of Additional Information of
Prudential National Municipals Fund,
Inc. dated February 28, 1995;
Semi-Annual Report to Shareholders of
Prudential National Municipals Fund,
Inc. for the six months ended June 30,
1995.
Item 13. Additional Information about the Company
Being Acquired.......................... Not Applicable
Item 14. Financial Statements.................... Statement of Additional Information of
Prudential National Municipals Fund,
Inc. dated February 28, 1995;
Semi-Annual Report to Shareholders of
Prudential National Municipals Fund,
Inc. for the six months ended June 30,
1995; Annual Reports to Shareholders of
the Arizona Series, the Georgia Series
and the Minnesota Series of Prudential
Municipal Series Fund for the fiscal
year ended August 31, 1994; Semi-Annual
Reports to Shareholders of the Arizona
Series, the Georgia Series and the
Minnesota Series of Prudential Municipal
Series Fund for the six months ended
February 28, 1995; pro forma financial
statements included in the Statement of
Additional Information of Prudential
National Municipals Fund, Inc. dated
September 18, 1995 relating to the
acquisition of assets of the Arizona
Series, the Georgia Series and the
Minnesota Series of Prudential Municipal
Series Fund in exchange for shares of
Prudential National Municipals Fund,
Inc.
PART C
Information required to be included in Part C is set forth under the appropriate item,
so numbered, in Part C of this Registration Statement.
</TABLE>
<PAGE>
PRELIMINARY COPY
PRUDENTIAL MUNICIPAL SERIES FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
--------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of each of the
Arizona Series, Georgia Series and Minnesota Series (individually, a Series, and
collectively, the Series) of Prudential Municipal Series Fund (Series Fund) will
be held at 9:00 A.M. on October 16, 1995, at 199 Water Street, New York, N.Y.
10292, for the following purposes:
1. To approve an Agreement and Plan of Reorganization whereby all of the
assets of the Series will be transferred to Prudential National Municipals Fund,
Inc. (Municipals Fund) in exchange for shares of the Municipals Fund and
Municipals Fund will assume all of the liabilities, if any, of each Series.
2. To consider and act upon any other business as may properly come before
the Meeting or any adjournment thereof.
Only shares of beneficial interest of each Series of record at the close of
business on August 11, 1995, are entitled to notice of and to vote at this
Meeting or any adjournment thereof.
S. JANE ROSE
SECRETARY
Dated: September 18, 1995
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PROSPECTUS
AND
PRUDENTIAL MUNICIPAL SERIES FUND
PROXY STATEMENT
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
--------------
Prudential Municipal Series Fund (Series Fund) is an open-end, management
investment company comprised of seventeen separate series, three of which are
the Arizona Series, the Georgia Series and the Minnesota Series (individually, a
Series, and collectively, the Series), each of which is diversified. Prudential
National Municipals Fund, Inc. (Municipals Fund) is an open-end, diversified,
management investment company. Both Series Fund and Municipals Fund
(collectively, the Funds) are managed by Prudential Mutual Fund Management, Inc.
(PMF or the Manager) and have the same office address. The investment objective
of each Series is to provide the maximum amount of income that is exempt from
state (Arizona, Georgia or Minnesota, as appropriate) and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, each
Series may invest in debt securities with the potential for capital gain. The
investment objective of Municipals Fund is to seek a high level of current
income exempt from federal income taxes.
This Prospectus and Proxy Statement is being furnished to shareholders of
the Series in connection with an Agreement and Plan of Reorganization (the
Plan), whereby Municipals Fund will acquire all of the assets of each Series and
assume the liabilities, if any, of each Series. If the Plan is approved by a
Series' shareholders, all shareholders of that Series will be issued shares of
Municipals Fund in place of the shares of such Series held by them, and such
Series will be terminated. Shareholders of Municipals Fund are not being asked
to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Municipals Fund that prospective investors should know before investing. This
Prospectus and Proxy Statement is accompanied by the Prospectus of Municipals
Fund, dated February 28, 1995, which Prospectus is incorporated by reference
herein, the Annual Report to Shareholders of the applicable Series for the
fiscal year ended August 31, 1994 and the Semi-Annual Report to Shareholders of
the applicable Series for the six-month period ended February 28, 1995. The
Prospectus of each Series, dated December 30, 1994, including April 19, 1995,
May 5, 1995 and August 3, 1995 Supplements thereto, and the Statement of
Additional Information of Municipals Fund, dated February 28, 1995, including an
August 1, 1995 Supplement thereto, have been filed with the Securities and
Exchange Commission (SEC), are incorporated herein by reference and are
available without charge upon written request to Prudential Mutual Fund
Services, Inc., Raritan Plaza One, Edison, New Jersey 08837 or by calling the
toll-free number shown above. Additional information, contained in a Statement
of Additional Information, dated September 18, 1995, forming a part of
Municipals Fund's Registration Statement on Form N-14, has been filed with the
SEC, is incorporated herein by reference and is available without charge upon
request to the address or telephone number shown above.
This Prospectus and Proxy Statement will first be mailed to shareholders on
or about September 20, 1995.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is September 18, 1995.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRUDENTIAL MUNICIPAL SERIES FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
--------------
PROSPECTUS AND PROXY STATEMENT DATED SEPTEMBER 18, 1995
--------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization (the Plan) and is qualified by reference to the more complete
information contained herein as well as in the Prospectuses of the Arizona
Series, the Georgia Series and the Minnesota Series (individually, a Series, and
collectively, the Series) of Prudential Municipal Series Fund (Series Fund) and
the enclosed Prospectus of Prudential National Municipals Fund, Inc. (Municipals
Fund). Shareholders should read the entire Prospectus and Proxy Statement
carefully.
GENERAL
This Proxy Statement is furnished by the Trustees of Series Fund in
connection with the solicitation of Proxies for use at a Special Meeting of
Shareholders of each of the Series of Series Fund (the Meeting) to be held at
9:00 A.M. on October 16, 1995 at 199 Water Street, New York, New York 10292,
Series Fund's principal executive office. The purpose of the Meeting is to
approve the Plan whereby all of the assets of each Series will be acquired by,
and the liabilities of each Series, if any, will be assumed by, Municipals Fund
and such other business as may properly come before the Meeting or any
adjournment thereof. The Plan is attached to this Prospectus and Proxy Statement
as Appendix B. The transactions contemplated by the Plan are set forth herein
and in summary provide that Municipals Fund will acquire the assets, in exchange
solely for shares of common stock of Municipals Fund, and assume the
liabilities, if any, of the Series.
Approval of the Plan with respect to a Series requires the affirmative vote
of a majority of shares of such Series outstanding and entitled to vote.
Shareholders vote in the aggregate by Series and not by separate class within
each Series. Approval of the Plan by the shareholders of Municipals Fund is not
required and the Plan is not being submitted for their approval.
THE PROPOSED REORGANIZATIONS
The Board of Directors of Municipals Fund and the Board of Trustees of
Series Fund have approved the Plan, which provides for the transfer of all of
the assets of each Series in exchange solely for shares of common stock of
Municipals Fund and the assumption by Municipals Fund of the liabilities, if
any, of each Series. Following approval by a Series' shareholders, if obtained,
and the exchange, Class A, Class B and Class C shares of Municipals Fund will be
distributed to Class A, Class B and Class C shareholders, respectively, of such
Series, and such Series will be terminated. The reorganizations will become
effective as soon as practicable after the Meeting. Each Series' Class A, Class
B and Class C shareholders will receive the number of full and fractional Class
A, Class B and Class C shares of Municipals Fund equal in value (rounded to the
third decimal place) to such shareholder's Class A, Class B and Class C shares
of the applicable Series as of the closing date.
2
<PAGE>
For the reasons set forth below under "--Reasons for the Proposed
Reorganizations" and "The Proposed Transaction--Reasons for the
Reorganizations," the Board of Directors of Municipals Fund and the Trustees of
Series Fund, including those Directors or Trustees who are not "interested
persons" (Independent Directors or Trustees), as that term is defined in the
Investment Company Act of 1940, as amended (Investment Company Act), have
concluded that the reorganizations would be in the best interests of the
shareholders of Municipals Fund and each Series and that the interests of
shareholders of Municipals Fund and each Series will not be diluted as a result
of the proposed transaction. Accordingly, the Board of Directors of Municipals
Fund and the Trustees of Series Fund each recommends approval of the Plan. If
approved by a majority of the shareholders of a Series, the proposed
reorganization will be consummated for that Series, even if another Series'
shareholders do not approve a reorganization.
REASONS FOR THE PROPOSED REORGANIZATIONS
The Trustees of Series Fund have concluded, based on information presented
by Prudential Mutual Fund Management, Inc. (PMF or the Manager), that each
reorganization is in the best interests of each such Series' shareholders. There
are a number of similarities between the Series and Municipals Fund that led to
consideration of the Plan. The following are among the principal reasons for the
proposed reorganizations:
THE SERIES HAVE BEEN UNABLE TO ATTRACT SIGNIFICANT NEW ASSETS. The Series
have been in existence for some time yet have been unable to attract significant
new assets. As of June 30, 1995, assets have only grown to $57,031,088, in the
case of the Arizona Series, $18,365,700 in the case of the Georgia Series and
$22,488,264 in the case of the Minnesota Series, which had 1,713, 746 and 1,491
shareholders, respectively. As a result, since operations were commenced, the
Series have operated with relatively high expense ratios (necessitating that
their management fees be subsidized from time to time) and do not enjoy the
economies of scale of Municipals Fund. The Manager believes each Series'
situation is not likely to improve.
MUNICIPALS FUND AND EACH SERIES HAVE A SIMILAR INVESTMENT
OBJECTIVE. Municipals Fund and Series Fund are open-end, management investment
companies and Municipals Fund and each Series are diversified. Municipals Fund
and each Series invest primarily in long-term, investment grade debt securities
of municipal issuers, the investment income from which is exempt from federal
income taxes. Shareholders of the Series should recognize that if the
reorganizations occur, their investment in Municipals Fund will be subject to
state income taxes with respect to that portion of Municipals Fund's assets not
invested in obligations exempt from state income taxes of Arizona, Georgia or
Minnesota, as appropriate. See "--Certain Differences Between the Series and
Municipals Fund" and "--Investment Objectives and Policies" below.
Each Series and Municipals Fund are managed by PMF.
MUNICIPALS FUND OFFERS GREATER DIVERSIFICATION OF ASSETS AND REDUCES
CONCERNS RELATING TO INADEQUATE SUPPLY OF MUNICIPAL BONDS FROM SPECIFIC
STATES. Because each Series must invest at least 80% of its total assets in
municipal obligations of issuers located in the applicable state, and other
obligations of qualifying issuers, its portfolio is more susceptible to factors
adversely affecting issuers of such obligations than is a national municipal
bond fund such as Municipals Fund. In addition, the Series from time to time may
have difficulty obtaining suitable investments due to inadequate supply. A
national municipal fund such as Municipals Fund is not so constrained as to
potential purchases.
AFTER IMPLEMENTATION OF THE PLAN, THE FORMER SHAREHOLDERS OF THE SERIES AND
MUNICIPALS FUND'S SHAREHOLDERS SHOULD BENEFIT FROM REDUCED EXPENSES RESULTING
FROM GREATER ECONOMIES OF SCALE. The Trustees of Series Fund and the Board of
Directors of Municipals Fund believe that the reorganizations may achieve
certain economies of scale that each Series alone cannot realize because of its
small size, and that Municipals Fund
3
<PAGE>
would realize the benefits of a larger asset base in exchange for its shares of
common stock. The combination of the Series and Municipals Fund would eliminate
certain duplicate expenses, such as those incurred in connection with separate
audits and the preparation of separate financial statements for the Series and
Municipals Fund, and reduce other expenses, because their expenses would be
spread across a larger asset base.
The ratios of total expenses to average net assets for Class A, Class B and
Class C shares of Municipals Fund and the Series were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1994
-------------------- SIX MONTHS ENDED
JUNE 30, 1995
--------------------
(UNAUDITED)
<S> <C> <C>
MUNICIPALS FUND
Class A............................................... .77% .69%*
Class B............................................... 1.17% 1.08%*
Class C............................................... 1.51%* 1.34%*
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
AUGUST 31, 1994
------------------- SIX MONTHS ENDED
FEBRUARY 28, 1995
--------------------
(UNAUDITED)
<S> <C> <C>
ARIZONA SERIES
Class A............................................... .89% .95%*+
Class B............................................... 1.29% 1.34%*+
Class C............................................... 1.90%* 1.60%*+
GEORGIA SERIES
Class A............................................... 1.30% 1.38%*+
Class B............................................... 1.70% 1.78%*+
Class C............................................... 2.05%* 2.03%*+
MINNESOTA SERIES
Class A............................................... 1.25% 1.35%*+
Class B............................................... 1.65% 1.75%*+
Class C............................................... 2.15%* 2.00%*+
<FN>
------------------------
* Annualized
+ Net of management fee waiver
</TABLE>
MUNICIPALS FUND HAS ACHIEVED A HIGHER AFTER-TAX EQUIVALENT YIELD THAN HAVE
THE SERIES. The municipal obligations held by Municipals Fund have historically
had a higher gross yield than the obligations in each Series' portfolio, and
Municipals Fund has lower expense ratios than the Series due to its appreciably
larger size, resulting in a higher after-tax equivalent yield. The following
table presents the 30 day yield for each Series for the thirty-day period ended
June 30, 1995 on a pre-tax basis. The table also presents the 30 day yield for
Municipals Fund for the thirty-day period ended June 30, 1995 on a pre-tax basis
and on an after-tax basis after giving effect to, in each case, state income
taxes for the state listed.
4
<PAGE>
<TABLE>
<CAPTION>
MUNICIPALS MUNICIPALS
SERIES FUND FUND 30 DAY
30 DAY 30 DAY 30 DAY AFTER-TAX
PRE-TAX PRE-TAX AFTER-TAX YIELD
CLASS SEC YIELD SEC YIELD SEC YIELD DIFFERENCE
----- ------------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Arizona Series
A 4.34% 4.88% 4.61%* 0.27%
B 4.06% 4.60% 4.34%* 0.28%
C 3.82% 4.32% 4.08%* 0.26%
Georgia Series
A 4.44% 4.88% 4.59 %** 0.15%
B 4.17% 4.60% 4.32 %** 0.15%
C 3.83% 4.32% 4.06 %** 0.23%
Minnesota Series
A 3.83% 4.88% 4.47 *** 0.64%
B 3.55% 4.60% 4.21 *** 0.66%
C 3.29% 4.32% 3.95 *** 0.66%
<FN>
------------------------
* After application of Arizona state tax at the rate of 5.6%
** After application of Georgia state tax at the rate of 6.0%
*** After application of Minnesota state tax at the rate of 8.5%
</TABLE>
MUNICIPALS FUND HAS OFTEN OUTPERFORMED THE SERIES. Municipals Fund has
often achieved higher total returns than each Series. The following table,
derived from the "Financial Highlights" of Municipals Fund and each Series,
reflects their respective total returns on Class A, Class B and Class C shares
for the periods indicated. "Financial Highlights" for Municipals Fund are set
forth in Municipals Fund's Prospectus, which accompanies this Prospectus and
Proxy Statement, and below under "Information about Municipals Fund-- Financial
Information." "Financial Highlights" for each Series are set forth in such
Series' Annual Report and its Prospectus, which are available without charge
upon written request to Prudential Mutual Fund Services, Inc., Raritan Plaza
One, Edison, New Jersey 08837 or by calling toll free (800) 225-1852.
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------------------------------------- ----------------------------
JANUARY 22, SIX MONTHS YEAR ENDED
SIX MONTHS 1990** ENDED DECEMBER
ENDED JUNE 30, YEAR ENDED DECEMBER 31, THROUGH JUNE 30, 31,
1995 ----------------------------------------------- DECEMBER 31, 1995 -----------
(UNAUDITED) 1994 1993 1992 1991 1990 (UNAUDITED) 1994
--------------- ----------- ---------- ---------- ---------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
National
Municipals
Fund*........... 8.53% (6.04)% 12.60% 8.88% 12.94% 6.88% 8.30% (6.39)%
<CAPTION>
CLASS C
---------------------------------
SIX MONTHS
ENDED AUGUST 1,
JUNE 30, 1994*** THROUGH
1995 DECEMBER 31,
1993 1992 1991 1990 (UNAUDITED) 1994
---------- ---------- ---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
National
Municipals
Fund*........... 12.15% 8.50% 12.42% 5.96% 8.17% (2.63)%
</TABLE>
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------- CLASS B
JANUARY 22, ----------------------------
SIX MONTHS ENDED 1990** SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH FEBRUARY 28, AUGUST 31,
1995 ---------------------------------------------- AUGUST 31, 1995 ----------
(UNAUDITED) 1994 1993 1992 1991 1990 (UNAUDITED) 1994
---------------- ---------- ---------- ---------- ---------- --------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona
Series*......... 3.26% (.59)% 11.79% 11.23% 11.45% 2.01% 3.08% (1.08)%
Georgia
Series*......... 3.06 (1.58) 13.28 10.84 10.03 1.71 2.77 (1.98)
Minnesota
Series*......... 2.16 (.87) 10.45 9.38 9.93 2.00 1.97 (1.26)
<CAPTION>
CLASS C
-------------------------------
SIX MONTHS AUGUST 1,
ENDED 1994***
FEBRUARY 28, THROUGH
1995 AUGUST 31,
1993 1992 1991 1990 (UNAUDITED) 1994
---------- ---------- ---------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arizona
Series*......... 11.42% 10.68% 11.02% 4.49% 2.96% 0.10%
Georgia
Series*......... 12.83 10.40 9.57 4.18 2.58 (0.06)
Minnesota
Series*......... 9.99 8.83 9.64 4.20 1.76 (0.38)
</TABLE>
----------------------------------
* 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 reinvestments of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
** Commencement of offering of Class A shares.
*** Commencement of offering of Class C shares.
5
<PAGE>
The proposed transaction would give Municipals Fund the opportunity to
increase its assets by acquiring securities consistent with its investment
objective and policies in exchange for the issuance of its shares of common
stock.
The Trustees of Series Fund have determined that approval of the Plan would
be in the best interests of each Series and its shareholders for the reasons
discussed above. See, also, "The Proposed Transaction-- Reasons for the
Reorganizations" below.
CERTAIN DIFFERENCES BETWEEN THE SERIES AND MUNICIPALS FUND
There are a number of differences between Municipals Fund and the Series.
First, although similar, the investment objective of each is different. The
Series' investment objective is to provide the maximum amount of income that is
exempt from state (Arizona, Georgia or Minnesota, as appropriate) and federal
income taxes as is consistent with the preservation of capital and, in
conjunction therewith, each Series may invest in debt securities with the
potential for capital gain. Each Series invests at least 80% of the value of its
total assets in obligations of issuers located in the state after which such
Series is named, or in obligations of other qualifying issuers. Investors in a
Series who are residents of Arizona, Georgia or Minnesota and that have invested
in such Series bearing the name of their state of residence receive income that
is generally exempt from income taxation by their state of residence. In
contrast, Municipals Fund's investment objective is to seek a high level of
current income exempt from federal income taxes. In attempting to achieve this
objective, under normal circumstances, Municipals Fund intends to invest
substantially all, and in any event, at least 80% of its total assets in
municipal bonds and notes. Preservation of capital is not an objective. See
"Principal Risk Factors--Ratings" below. Investors in Municipals Fund who are
residents of Arizona, Georgia or Minnesota will be subject to state income taxes
with respect to that portion of Municipals Fund's income not earned from
obligations exempt from state income taxes of Arizona, Georgia or Minnesota,
respectively. Shareholders of each Series should be aware that if the Plan is
approved, it is likely that a greater portion of the income they receive will be
subject to state income tax following the reorganization.
Second, their management fees are different. The management fee for each
Series is an annual rate of .50 of 1% of such Series' average daily net assets;
currently, the Manager is waiving .05% of such fee. The management fee for
Municipals Fund is an annual rate of .50 of 1% of the first $250 million of
average daily net assets, .475 of 1% of the next $250 million of average daily
net assets, .45 of 1% of the next $500 million of average daily net assets, .425
of 1% of the next $250 million of average daily net assets, .40 of 1% of the
next $250 million of average daily net assets and .375 of 1% of the Fund's
average daily net assets in excess of $1.5 billion. The Manager is currently
waiving .05% of such fee. If the proposed reorganizations are approved, former
shareholders of each Series will be subject to a management fee that is less
than or equal to the management fee payable by each Series. See "Fees and
Expenses--Management Fees" below.
Third, the credit quality of the debt instruments in which Municipals Fund
and the Series may invest differs. Municipals Fund intends to invest its assets
primarily in carefully selected long-term municipal bonds of medium quality.
While the Municipals Fund's investment adviser will not be limited by the
ratings assigned by the rating services, the municipal bonds in Municipals
Fund's portfolio will principally be rated A or BBB by Standard & Poor's Ratings
Group (S&P) or A or Baa by Moody's Investors Service, Inc. (Moody's), or in
non-rated fixed-income securities of comparable quality. The Series may invest
in fixed-income securities rated in the four highest rating categories by S&P or
Moody's (I.E., BBB or Baa or higher) or in non-rated fixed-income securities of
comparable quality.
6
<PAGE>
STRUCTURE OF THE SERIES AND MUNICIPALS FUND
Each Series is authorized to issue an unlimited number of shares of
beneficial interest, $.01 par value per share, whereas Municipals Fund is
authorized to issue 750 million shares of common stock, $.01 par value per
share. Each Series and Municipals Fund have divided their shares into three
classes, designated Class A, Class B and Class C. Each class of shares
represents an interest in the same assets of a Series or Municipals Fund, as the
case may be, and is identical in all respects except that (i) each class bears
different distribution expenses, (ii) each class has exclusive voting rights
with respect to its distribution and service plan (except that each Fund has
agreed with the SEC, in connection with the conversion feature applicable to
Class B shares, to submit any amendment of the Class A distribution and service
plan to both Class A and Class B shareholders), (iii) each class has a different
exchange privilege and (iv) only Class B shares have a conversion feature. The
distribution systems for Class A, Class B and Class C shares of each Fund are
identical. Share certificates will be issued by Municipals Fund upon written
request to Prudential Mutual Fund Services, Inc., the Fund's Transfer Agent. See
"Shareholder Guide" in the Municipals Fund's Prospectus. Each Fund has received
an order from the SEC permitting the issuance and sale of multiple classes of
shares. Currently, each Fund is offering three classes, designated Class A,
Class B and Class C shares. Pursuant to Municipals Fund's Articles of
Incorporation and Series Fund's Declaration of Trust, each Fund's Board of
Directors/Trustees may authorize the creation of additional series of shares,
and classes within such series, with such preferences, privileges, limitations
and voting and dividend rights as that Fund's Board of Directors/Trustees may
determine.
The Board of Directors/Trustees of each Fund may increase or decrease the
number of authorized shares of its respective Fund without approval by the
shareholders. Shares of each 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 each Fund under certain circumstances. Except for
the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of each Fund is entitled to its portion of all of that
Fund's assets after all debt and expenses of that Fund have been paid. Since
Class B and Class C shares generally bear higher distribution expenses than
Class A shares, the liquidation proceeds to shareholders of those classes are
likely to be lower than to Class A shareholders. Neither Fund's shares have
cumulative voting rights for the election of Directors/Trustees.
INVESTMENT OBJECTIVES AND POLICIES
Municipals Fund's investment objective is to seek a high level of current
income exempt from federal income taxes. Municipals Fund seeks to achieve this
objective by investing primarily in long-term municipal bonds of medium quality,
obligations of municipalities possessing adequate but not outstanding capacities
to service their debt. There can be no assurance that such objective will be
achieved. In attempting to achieve its objective, under normal circumstances,
Municipals Fund intends to invest substantially all, and in any event, at least
80% of its total assets in municipal bonds and municipal notes. Municipals Fund
may also invest in municipal notes (E.G., tax revenue and bond anticipation
notes), as can each of the Series. Municipals Fund may invest in variable rate
securities and inverse floating rate obligations and may engage in various
hedging strategies, including the purchase and sale of derivatives. These
strategies include the purchase of put options and the purchase and sale of
financial futures contracts and options thereon. See "Principal Risk
Factors--Hedging Activities." Municipals Fund may invest up to 15% of its net
assets in illiquid securities and may borrow an amount equal to no more than 20%
of the value of its total assets from banks for temporary, extraordinary or
emergency purposes or for the clearance of transactions.
7
<PAGE>
The investment objective of each Series is to provide the maximum amount of
income that is exempt from state (Arizona, Georgia or Minnesota, as appropriate)
and federal income taxes as is consistent with the preservation of capital and,
in conjunction therewith, each Series may invest in debt securities with the
potential for capital gain. Under normal circumstances, each Series invests at
least 80% of the value of its total assets in obligations of issuers located in
the state after which such Series is named, or in obligations of other
qualifying issuers. Each Series seeks to achieve this objective by investing in
debt obligations rated Baa or BBB or better by Moody's or S&P, respectively, or,
if not rated, of substantially comparable quality as determined by the
investment adviser. There can be no assurance that the investment objective will
be achieved. Each Series invests primarily in state (Arizona, Georgia or
Minnesota, as appropriate), municipal and local government obligations and
obligations of other qualifying issuers which pay income exempt, in the opinion
of bond counsel, from regular personal income taxes of that state and federal
income taxes. Each Series may invest in floating rate and variable rate
securities, including participation interests therein and inverse floating rate
obligations. Each Series also may engage in various hedging strategies,
including the purchase and sale of derivatives. These strategies include the
purchase of put options and the purchase and sale of financial futures contracts
and options thereon. See "Principal Risk Factors--Hedging Activities" below.
Each Series may invest up to 15% of its net assets in illiquid securities and
may borrow an amount equal to no more than 20% of the value of its total assets
from banks for temporary, extraordinary or emergency purposes or for the
clearance of transactions.
FEES AND EXPENSES
MANAGEMENT FEES. PMF, the Manager of each Fund and a wholly-owned
subsidiary of The Prudential Insurance Company of America (Prudential), is
compensated, pursuant to a management agreement with Municipals Fund, at an
annual rate of .50 of 1% of the first $250 million of the average daily net
assets of Municipals Fund, .475 of 1% of the next $250 million of the average
daily net assets of Municipals Fund, .45 of 1% of the next $500 million of
Municipals Fund's average daily net assets, .425 of 1% of the next $250 million
of Municipals Fund's average daily net assets, .40 of 1% of the next $250
million of Municipals Fund's average daily net assets and .375 of 1% of the
average daily net assets of Municipals Fund in excess of $1.5 billion, and,
pursuant to a management agreement with Series Fund, at an annual rate of .50 of
1% of the average daily net assets of each Series. For the fiscal year ended
December 31, 1994, Municipals Fund paid PMF management fees of .47 of 1% of
Municipals Fund's average daily net assets. Effective January 1, 1995, PMF
voluntarily agreed to waive .05 of 1% of its management fee from Municipals
Fund. After the waiver, the management fee is .45 of 1% of Municipals Fund's
average daily net assets up to and including $250 million, .425 of 1% of the
next $250 million, .40 of 1% of the next $500 million, .375 of 1% of the next
$250 million, .35 of 1% of the next $250 million and .325 of 1% of Municipals
Fund's average daily net assets in excess of $1.5 billion. After the waiver, the
management fee is .45 of 1% of each Series' average daily net assets. The waiver
may be discontinued at any time.
For the fiscal year ended August 31, 1994, Series Fund paid PMF management
fees at an annual rate of .50 of 1% of the average daily net assets of each
Series. Effective January 1, 1995, PMF voluntarily agreed to waive .05 of 1% of
its management fee from each Series. The waiver may be discontinued at any time.
Under subadvisory agreements between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), the Subadviser provides investment advisory
services for the management of the respective Funds. Each subadvisory agreement
provides that PMF will reimburse PIC for its reasonable costs and expenses in
providing investment advisory services. PMF continues to have responsibility for
all investment advisory services pursuant to the management agreements for both
Funds and supervises the Subadviser's performance of its services on behalf of
each Fund.
8
<PAGE>
DISTRIBUTION FEES. Prudential Mutual Fund Distributors, Inc. (PMFD), a
wholly-owned subsidiary of PMF, serves as the distributor of the Class A shares
for both Funds. Prudential Securities Incorporated (Prudential Securities), a
wholly-owned subsidiary of Prudential, serves as the distributor of the Class B
and Class C shares for both Funds.
Under separate Distribution and Service Plans adopted by each Fund (the
Class A Plan, Class B Plan and Class C Plan, collectively, the Plans) pursuant
to Rule 12b-1 under the Investment Company Act, and approved by the shareholders
of the applicable class of Municipals Fund and each Series and under separate
distribution agreements, PMFD incurs the expenses of distributing the Class A
shares of Municipals Fund and each Series and Prudential Securities incurs the
expenses of distributing the Class B and Class C shares of Municipals Fund and
each Series. These expenses include (i) commissions and account servicing fees,
(ii) advertising expenses, (iii) the cost of printing and mailing prospectuses,
and (iv) indirect and overhead costs associated with the sale of each of
Municipals Fund's and each Series' shares.
Under the Funds' Class A Plans, each Fund may pay PMFD for distribution
expenses at an annual rate of up to .30 of 1% of the average daily net assets of
the Class A shares. PMFD has advised the Funds that distribution fees under the
Class A Plans will not exceed .10 of 1% of the average daily net assets of the
Class A shares for the fiscal year ending December 31, 1995 for Municipals Fund
and the fiscal year ending August 31, 1996 for each Series. For the fiscal year
ended December 31, 1994, PMFD received $14,116 under Municipals Fund's Class A
Plan and $92,500 in initial sales charges from sales of Municipals Fund's Class
A shares. For the fiscal year ended August 31, 1994 and the six-month period
ended February 28, 1995, PMFD received $7,141 and $4,856, respectively, from the
Arizona Series, $1,134 and $1,063, respectively, from the Georgia Series and
$1,179 and $1,074, respectively, from the Minnesota Series under Series Fund's
Class A Plan and approximately $63,200 and $65,900, respectively, in initial
sales charges from sales of Class A shares of the Arizona Series, $13,200 and
$4,400, respectively, from sales of Class A shares of the Georgia Series and
$20,000 and $600, respectively, from sales of Class A shares of the Minnesota
Series.
Under the Funds' Class B and Class C Plans, each Fund pays Prudential
Securities for distribution expenses at an annual rate of up to .50 of 1% and up
to 1% of the average daily net assets of the Class B and Class C shares,
respectively. Each Fund's Class B Plan provides for the payment of an
asset-based sales charge of up to .50 of 1% of the average daily net assets of
the Fund's Class B shares and a service fee of up to .25 of 1% of the average
daily net assets of the Fund's Class B shares; provided that the total
distribution-related fee does not exceed .50 of 1%. Each Fund's Class C Plan
provides for the payment to Prudential Securities of an asset-based sales charge
of up to .75 of 1% of the average daily net assets of the Class C shares and a
service fee of up to .25 of 1% of the average daily net assets of the Class C
shares. Prudential Securities has agreed to limit its distribution-related fees
payable under the Class C Plans to .75 of 1% of the average daily net assets of
the Class C shares for Municipals Fund's fiscal year ending December 31, 1995
and for the Series Fund's fiscal year ending August 31, 1996. For the fiscal
year ended December 31, 1994, Prudential Securities received $3,758,114 under
Municipals Fund's Class B Plan and approximately $976,100 in contingent deferred
sales charges from redemptions of Municipals Fund's Class B shares. For the
period August 1, 1994 (commencement of offering of Class C shares) through
December 31, 1994, Prudential Securities received $321 under Municipals Fund's
Class C Plan and did not receive any proceeds from contingent deferred sales
charges from redemptions of Municipals Fund's Class C shares. For the fiscal
year ended August 31, 1994, and the six-month period ended February 28, 1995,
Prudential Securities received $277,628 and $117,553, respectively, from the
Arizona Series, $102,458 and $41,213, respectively, from the Georgia Series and
$130,567 and $53,307, respectively, from the Minnesota Series under the Series
Fund's Class B Plan and approximately $76,800 and $34,900, respectively, in
contingent deferred sales charges from
9
<PAGE>
redemptions of Class B shares of the Arizona Series, $29,000 and $71,100,
respectively, in contingent deferred sales charges from redemptions of Class B
shares of the Georgia Series and $41,900 and $30,000, respectively, in
contingent deferred sales charges from redemptions of Class B shares of the
Minnesota Series. For the period August 1, 1994 (commencement of offering of
Class C shares) through February 28, 1995, Prudential Securities received $35,
$1 and $1, respectively, under the Series Fund's Class C Plan with respect to
the Arizona Series, Georgia Series and Minnesota Series, respectively, and did
not receive any proceeds from contingent deferred sales charges from redemptions
of any Series' Class C shares.
For the fiscal year ended December 31, 1994 for Municipals Fund and the
six-month period ended February 28, 1995 for each Series, the Fund and the
Series paid distribution expenses of .10%, .50% and .75% (annualized) of the
average daily net assets of their Class A, Class B and Class C shares,
respectively. With respect to the six-month period ended February 28, 1995, all
of the aforementioned expense ratios have been annualized. The Funds record all
payments made under the Plans as expenses in the calculation of net investment
income. Prior to August 1, 1994, the Class A and Class B Plans of each Fund
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
Under a reimbursement type plan, the distributor receives reimbursement for
expenditures made pursuant to the plan up to an agreed upon rate.
Effective August 1, 1994, the Class A and Class B Plans of each Fund became
"compensation" plans. The Class C Plan of each Fund is also a compensation plan.
Under each such compensation plan, each Fund is obligated to pay distribution
and/or service fees to its Distributor as compensation for distribution and
service activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, that Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit. The Class A Plan, Class B Plan and Class C Plan of Series
Fund is substantially identical to the Class A Plan, Class B Plan and Class C
Plan of Municipals Fund.
OTHER EXPENSES. Municipals Fund and each Series also pay certain other
expenses in connection with their operation, including accounting, custodian,
legal, audit, transfer agency and registration expenses. Although the basis for
calculating these fees and expenses is the same for Municipals Fund and each
Series, the per share effect on shareholder returns is affected by their
relative size. Combining the Municipals Fund with each Series, or any of them,
will reduce certain expenses. For example, only one annual audit of the combined
Fund will be required rather than separate audits of Municipals Fund, the
Arizona Series, the Georgia Series and the Minnesota Series as currently
required.
EXPENSE RATIOS. For its fiscal year ended December 31, 1994, total expenses
stated as a percentage of average net assets of Municipals Fund were .77%, 1.17%
and 1.51% (annualized) for the Class A, Class B and Class C shares,
respectively. For the fiscal year ended August 31, 1994, total expenses stated
as a percentage of average net assets of each Series were .89%, 1.29% and 1.90%
(annualized) for Class A, Class B and Class C shares, respectively, of the
Arizona Series, 1.30%, 1.70% and 2.05% (annualized) for Class A, Class B and
Class C shares, respectively, of the Georgia Series, and 1.25%, 1.65% and 2.15%
(annualized) for Class A, Class B and Class C shares, respectively, of the
Minnesota Series. For the six-month period ended February 28, 1995 (unaudited),
total expenses stated as a percentage of average net assets of each Series were
.95%, 1.34% and 1.60% (in each case annualized) for the Class A, Class B and
Class C shares, respectively, of the Arizona Series, 1.38%, 1.78% and 2.03% (in
each case annualized) for the Class A, Class B and Class C shares, respectively,
of the Georgia Series, and 1.35%, 1.75% and 2.00% (in each case annualized) for
the Class A, Class B and Class C shares, respectively, of the Minnesota Series.
10
<PAGE>
The following table provides the fees that an investor would be subject to
in connection with a purchase, redemption or exchange of shares of Municipals
Fund and the Series.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION
EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ---------------------------------------- -------------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price).................... 3% None None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends................. None None None
Deferred Sales Load (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)....... None 5% during the first year, decreasing 1% on redemptions made
by 1% annually to 1% in the fifth and within one year of purchase
sixth years and 0% the seventh year*
Redemption Fees............ None None None
Exchange Fees.............. None None None
<FN>
--------------------------
* 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 Municipals Fund and each Series may not exceed
6.25% of total gross sales, subject to certain exclusions. This 6.25%
limitation is imposed on each class of Municipals Fund and each Series rather
than on a per shareholder basis. Therefore, long-term shareholders of
Municipals Fund and each Series may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares.
</TABLE>
Following the reorganizations, the actual expense ratios of the combined
fund are expected to be lower than those of the Series for the fiscal year ended
August 31, 1994 and the six-month period ended February 28, 1995. Set forth
below is a comparison of Municipals Fund's and each Series' operating expenses
for, in the case of Municipals Fund, the fiscal year ended December 31, 1994
and, in the case of the Series, the fiscal year ended August 31, 1994. The
ratios are also shown on a pro forma (estimated) combined basis, giving effect
to each reorganization.
11
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND
OPERATING EXPENSES (AS A MUNICIPALS FUND ARIZONA SERIES GEORGIA SERIES
PERCENTAGE OF ------------------------------- ------------------------------- -------------------------------
AVERAGE NET ASSETS) CLASS A CLASS B CLASS C+ CLASS A CLASS B CLASS C+ CLASS A CLASS B CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees......... .47% .47% .47% .50% .50% .50% .50% .50% .50%
12b-1 Fees After Waiver
+++.................... .10 .50 .75 .10 .50 .75 .10 .50 .75
Other Expenses.......... .20 .20 .20 .29 .29 .29 .70 .70 .70
--- --- --- --- --- --- --- --- ---
Total Fund Operating
Expenses............... .77% 1.17% 1.42% .89% 1.29% 1.54% 1.30% 1.70% 1.95%
--- --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- --- ---
<CAPTION>
PRO FORMA
COMBINED (MUNICIPALS PRO FORMA
ANNUAL FUND FUND, ARIZONA SERIES AND COMBINED (ALL SERIES AND
OPERATING EXPENSES (AS A MINNESOTA SERIES MINNESOTA SERIES) MUNICIPALS FUND)
PERCENTAGE OF ------------------------------- ------------------------------- -------------------------------
AVERAGE NET ASSETS) CLASS A CLASS B CLASS C++ CLASS A CLASS B CLASS C++ CLASS A CLASS B CLASS C++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees......... .50% .50% .50% .47%* .47%* .47%* .47%* .47%* .47%*
12b-1 Fees After Waiver
+++.................... .10 .50 .75 .10 .50 .75 .10 .50 .75
Other Expenses.......... .65 .65 .65 .20 .20 .20 .21 .21 .21
--- --- --- --- --- --- --- --- ---
Total Fund Operating
Expenses............... 1.25% 1.65% 1.90% .77% 1.17% 1.42% .78% 1.18% 1.43%
--- --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- --- ---
<FN>
------------------------
+ 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 Municipals Fund and each Series may not exceed
6.25% of total gross sales, subject to certain exclusions. This 6.25%
limitation is imposed on each class of Municipals Fund and each Series
rather than on a per shareholder basis. Therefore, long-term shareholders of
Municipals Fund and each Series may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares.
++ Class C shares commenced being offered on August 1, 1994. The ratios for
Class C shares of the Series are estimated for the current fiscal year.
+++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to the Class A and Class C shares of the Funds to no more than .10
of 1% and .75 of 1% of the average daily net asset value of the Class A
shares and Class C shares, respectively, for each Fund's current fiscal
year.
* Without taking into account the current management fee waiver, which became
effective January 1, 1990.
</TABLE>
12
<PAGE>
The example set forth below shows the expenses that an investor in the
combined fund (assuming approval by shareholders of each Series) would pay on a
$1,000 investment, based upon the pro forma ratios set forth above.
<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.................................................................. $ 38 $ 54 $ 72 $ 124
Class B.................................................................. $ 62 $ 67 $ 75 $ 127
Class C.................................................................. $ 25 $ 45 $ 78 $ 171
You would pay the following expenses on the same investment,
assuming no redemption
Class A.................................................................. $ 38 $ 54 $ 72 $ 124
Class B.................................................................. $ 12 $ 37 $ 65 $ 127
Class C.................................................................. $ 15 $ 45 $ 78 $ 171
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
PURCHASES AND REDEMPTIONS
Purchases of shares of the Series and Municipals Fund are made through
Prudential Securities, Pruco Securities Corporation (Prusec) or directly from
the respective Fund, through their transfer agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), at the net asset value per share
next determined after receipt of a purchase order by the Transfer Agent or
Prudential Securities plus a sales charge which may be imposed either (i) at the
time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class
C shares).
The minimum initial investment for Class A and Class B shares of each Fund
is $1,000 per class and $5,000 for Class C shares and the minimum subsequent
investment is $100 for all classes. Class A shares of each Fund are sold with an
initial sales charge of up to 3.00% of the offering price. Class B shares of
each Fund are sold without an initial sales charge but are subject to a
contingent deferred sales charge (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. Although Class B shares are
subject to higher ongoing distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses) approximately seven years after
purchase. Class C shares of each Fund are sold without an initial sales charge
and, for one year after purchase, are subject to a 1% contingent deferred sales
charge on redemptions. Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares but do not convert to
another class.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after Prudential Securities or the Transfer Agent receives the sell
order. As indicated above, the proceeds of redemptions of Class B and Class C
shares may be subject to a contingent deferred sales charge. For purposes of
determining any applicable contingent deferred sales charges, Series Fund
shareholders receiving Class B or Class C shares of Municipals Fund pursuant to
the Plan will be credited with the time they held
13
<PAGE>
Class B or Class C shares of the Series, as the case may be, in calculating the
contingent deferred sales charge with respect to such shares of Municipals Fund
so received. No contingent deferred sales charges will be imposed in connection
with the reorganizations.
EXCHANGE PRIVILEGES
The exchange privileges available to shareholders of Municipals Fund are
identical to the exchange privileges of shareholders of the Series. Shareholders
of both Municipals Fund and the Series 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,
Class B and Class C shares of each Fund may be exchanged for Class A, Class B
and Class C shares, respectively, of another fund on the basis of relative net
asset value. No sales charge will be imposed at the time of the exchange. Any
applicable contingent deferred sales charge 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 and Class C shares of either Fund may not be exchanged into money market
funds other than Prudential Special Money Market Fund. For purposes of
calculating the holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will be
excluded. An exchange will be treated as a redemption and purchase for tax
purposes.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to declare daily and to pay dividends of net investment
income, if any, monthly and make distributions at least annually of any net
capital gains. Shareholders of Municipals Fund and the Series receive dividends
and other distributions in additional shares of Municipals Fund (and the
applicable Series), respectively, unless they elect to receive them in cash. A
Series shareholder's election with respect to reinvestment of dividends and
distributions in the Series will be automatically applied with respect to the
Municipals Fund shares he or she receives pursuant to the Plan.
FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATIONS
The Funds have received opinions of Gardner, Carton & Douglas to the effect
that each proposed reorganization will constitute a tax-free reorganization
within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986,
as amended (the Internal Revenue Code). Accordingly, no gain or loss will be
recognized to Municipals Fund or a Series upon the transfer of assets and
assumption of liabilities, if any, or to shareholders of each Series upon their
receipt of shares of Municipals Fund. The tax basis for the shares of Municipals
Fund received by each Series' shareholders will be the same as their tax basis
for the shares of such Series to be constructively surrendered in exchange
therefor. In addition, the holding period of the shares of Municipals Fund to be
received pursuant to the reorganization will include the period during which the
shares of the Series to be constructively surrendered in exchange therefor were
held, provided the latter shares were held as capital assets by the shareholders
on the date of the exchange. See "The Proposed Transaction--Tax Considerations."
PRINCIPAL RISK FACTORS
An investment in Municipals Fund is subject to certain risks.
RATINGS
While Municipals Fund's investment adviser will not be limited by the
ratings assigned by the ratings services, the municipal bonds in which
Municipals Fund's portfolio will be principally invested will be rated
14
<PAGE>
A or Baa by Moody's and A or BBB by 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 or Baa by Moody's lack outstanding investment characteristics
and in fact have speculative characteristics as well. Each Series may also
purchase municipal securities rated BBB by S&P or Baa by Moody's. In addition,
Municipals Fund may acquire municipal bonds which have been rated below medium
quality (below BBB/Baa) by the ratings services if, in the judgment of
Municipals Fund's investment adviser, the bonds have the characteristics of
medium quality obligations.
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 generally provide a higher yield than
high quality municipal bonds of similar maturities, medium quality obligations
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.
HEDGING ACTIVITIES
Municipals Fund may also engage in various portfolio strategies, including
the purchase and sale of derivatives, to reduce certain risks of its
investments. These strategies include the purchase of put or tender options on
municipal bonds and notes and the purchase and sale of financial futures
contracts and options thereon and municipal bond index futures contracts.
Municipals Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed.
Participation in the options and futures markets involves investment risks
and transaction costs to which Municipals Fund would not be subject absent the
use of these strategies. Municipals Fund's successful use of financial futures
contracts and options on futures contracts depends upon the ability of its
investment adviser to accurately predict movements in the direction of interest
rates and other factors affecting markets for securities. For example, if
Municipals Fund has hedged against the possibility of an increase in interest
rates which would adversely affect the price of securities in its portfolio and
prices of such securities increase instead, Municipals 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
Municipals Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. Municipals 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 before Municipals Fund is
able to invest its cash in an orderly fashion, it is possible that the market
may decline instead; if Municipals Fund then concludes not to invest in
securities at that time because of concern as to possible future market decline
or for other reasons, the Fund will realize a loss on the futures contract that
is not offset by a reduction in the price of the securities purchased.
Each Series may also engage in various portfolio strategies, including the
purchase and sale of derivatives. These strategies include the purchase of put
options and the purchase and sale of futures contracts and options thereon. Each
Series' participation in the options and futures markets subjects the Series to
the same types of risks as described above for Municipals Fund.
15
<PAGE>
TAX CONSIDERATIONS
Municipals Fund may purchase municipal obligations of any state, territory
or possession of the United States, or any political subdivision thereof. As a
result, upon consummation of the reorganizations, shareholders of the Series
that are resident in Arizona, Georgia and Minnesota, respectively, will be
subject to certain state income taxes with respect to that portion of Municipals
Fund's income not earned from municipal obligations whose income is exempt from
Arizona, Georgia or Minnesota, as the case may be, state income taxes.
Shareholders of each Series are advised to consult their own tax advisers
regarding specific questions as to federal, state or local taxes. Each of the
Series and Municipals Fund has elected to qualify and intends to remain
qualified as a regulated investment company under the Internal Revenue Code.
REALIGNMENT OF INVESTMENT PORTFOLIO
The portfolio manager of Municipals Fund anticipates selling certain
securities in the investment portfolio of the combined Fund following the
consummation of the transaction. The portfolio manager of Municipals Fund
expects that the sale of less than 50% of the assets acquired from each Series
and the purchase of other securities may affect the aggregate amount of taxable
gains and losses generated by Municipals Fund.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix B to this
Prospectus and Proxy Statement.
The Plan contemplates (i) Municipals Fund acquiring all of the assets of
each Series in exchange solely for Class A, Class B and Class C shares of
Municipals Fund and the assumption by Municipals Fund of the Series'
liabilities, if any, as of the Closing Date (hereafter defined) and (ii) the
constructive distribution on the date of the exchange, expected to occur on or
about October 20, 1995 (the Closing Date) of such Class A, Class B and Class C
shares of Municipals Fund to the Class A, Class B and Class C shareholders of
each Series, respectively, as provided for by the Plan.
The assets of each Series to be acquired by Municipals Fund shall include,
without limitation, all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by such Series and any deferred or prepaid assets shown as assets on the
books of such Series. Municipals Fund will assume from each Series all debts,
liabilities, obligations and duties of the Series of whatever kind or nature, if
any; provided, however, that each Series will utilize its best efforts, to the
extent practicable, to discharge all of its known debts, liabilities,
obligations and duties prior to the Closing Date. Municipals Fund will deliver
to each Series Class A, Class B and Class C shares in Municipals Fund, which
such Series will then distribute to its Class A, Class B and Class C
shareholders, respectively. Share certificates in Municipals Fund will only be
issued upon written request to Prudential Mutual Fund Services, Inc. See
"Shareholder Guide" in Municipals Fund's Prospectus. If approved by its
shareholders, the reorganization will occur for a Series, regardless of whether
the Plan is approved by the shareholders of any other Series.
16
<PAGE>
The value of each Series' assets to be acquired and liabilities to be
assumed by Municipals Fund and the net asset value of a share of Municipals Fund
will be determined as of 4:15 P.M., New York time, on the Closing Date in
accordance with the valuation procedures of the respective Fund's (or Series')
then current prospectus and statement of additional information.
As soon as practicable after the Closing Date, Series Fund will terminate
each Series and distribute PRO RATA to each Series' shareholders of record the
shares of Municipals Fund received by Series Fund in exchange for such
shareholders' interest in such Series evidenced by their shares of beneficial
interest of such Series. Such termination and distribution will be accomplished
by opening accounts on the books of Municipals Fund in the names of each Series'
shareholders and by transferring thereto the shares of Municipals Fund
previously credited to the account of the Series on those books. Each
shareholder account shall represent the respective PRO RATA number of Municipals
Fund shares of common stock due to such Series shareholder. Fractional shares of
Municipals Fund will be rounded to the third decimal place.
Accordingly, every shareholder of a Series will own Class A, Class B and
Class C shares of Municipals Fund immediately after the reorganization that,
except for rounding, will be equal to the value of that shareholder's Class A,
Class B or Class C shares of such Series immediately prior to the
reorganization. Moreover, because shares of Municipals Fund will be issued at
net asset value in exchange for net assets of each Series that, except for
rounding, will equal the aggregate value of those shares, the net asset value
per share of Municipals Fund will be unchanged. Thus, the reorganizations will
not result in a dilution of the value of any shareholder account. However, in
general, the reorganizations will substantially reduce the percentage of
ownership of each Series' shareholder below such shareholder's current
percentage of ownership of the Series because, while such shareholder will have
the same dollar amount invested initially in Municipals Fund that he or she had
invested in a Series, his or her investment will represent a smaller percentage
of the combined net assets of Municipals Fund and the Series.
Any transfer taxes payable upon issuance of shares of Municipals Fund in a
name other than that of the registered holder of the shares on the books of a
Series as of that time shall be paid by the person to whom such shares are to be
issued as a condition of such transfer. Any reporting responsibility of the
Series will continue to be the responsibility of the Series up to and including
the Closing Date and such later date on which the Series is terminated.
On the effective date of the reorganization, the name of Municipals Fund
will be unchanged.
The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Board of
Directors of Municipals Fund and the Trustees of Series Fund. The Plan may be
terminated and the proposed transaction abandoned at any time, before or after
approval by the shareholders of any Series, prior to the Closing Date. In
addition, the Plan may be amended in any mutually agreeable manner, except that
no amendment may be made subsequent to the Meeting of shareholders of the Series
that would detrimentally affect the value of Municipals Fund shares to be
distributed to the Series' shareholders.
REASONS FOR THE REORGANIZATIONS
The Board of Trustees of Series Fund, including a majority of the
Independent Trustees, has determined that the interests of each Series'
shareholders will not be diluted as a result of the proposed transaction and
that the proposed transaction is in the best interests of the shareholders of
the Series. In addition, the Board
17
<PAGE>
of Directors of Municipals Fund, including a majority of the Independent
Directors, has determined that the interests of Municipals Fund shareholders
will not be diluted as a result of the proposed transaction and that the
proposed transaction is in the best interests of the shareholders of Municipals
Fund.
The reasons for the proposed transaction are described above under
"Synopsis--Reasons for the Proposed Reorganizations." The Trustees of Series
Fund and the Directors of Municipals Fund based their decisions to approve the
Plan on an inquiry into a number of factors, including the following:
(1) the relative past growth in assets and investment performance and
future prospects of Municipals Fund and each Series including, in
particular, the pro forma after tax yield of the combined fund;
(2) the effect of the proposed transaction on the expense ratios of
Municipals Fund and each Series;
(3) the costs of the reorganization, which will be paid for by
Municipals Fund and each Series in proportion to their respective asset
levels;
(4) the tax-free nature of the reorganization to Municipals Fund, each
Series and their shareholders;
(5) the compatibility of the investment objectives, policies and
restrictions of Municipals Fund and each Series, and the fact that
Municipals Fund's portfolio is less susceptible to the risks associated with
investments concentrated in a single state; and
(6) other options to the reorganization, including a continuance of a
Series in its present form, a change of Manager or investment objective or a
termination of the Series with the distribution of the cash proceeds to
Series shareholders.
If the Plan is not approved by shareholders of a Series, the Series Fund's
Board of Trustees may consider other appropriate action, such as the termination
of that Series or a merger or other business combination with an investment
company other than Municipals Fund.
DESCRIPTION OF SECURITIES TO BE ISSUED
Municipals Fund's shares represent shares of common stock with $.01 par
value per share. Class A, Class B and Class C shares of Municipals Fund will be
issued to the Series shareholders on the Closing Date. Each share represents an
equal and proportionate interest in Municipals Fund with each other share of the
same class. Municipals Fund's authorized capital consists of 750 million shares
of common stock. Shares entitle their holders to one vote per full share and
fractional votes for fractional shares held. Each share of Municipals Fund has
equal voting, dividend and liquidation rights with other shares, except that
each class has exclusive voting rights with respect to its distribution plan, as
noted under "Synopsis--Structure of the Series and Municipals Fund" above.
Dividends paid by Municipals Fund with respect to each class of shares, to the
extent any 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, generally resulting in lower dividends for Class
B and Class C shares.
TAX CONSIDERATIONS
Series Fund has received opinions from Gardner, Carton & Douglas with
respect to each Series to the effect that (1) the proposed transaction described
above will constitute a reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code; (2) no gain or loss will be
recognized by shareholders
18
<PAGE>
of the Series upon liquidation of each Series and the distribution of shares of
Municipals Fund constructively in exchange for their shares of each Series
(Internal Revenue Code Section 354(a)(1)); (3) no gain or loss will be
recognized by the Series upon the transfer of each Series' assets to Municipals
Fund in exchange solely for shares of Municipals Fund and the assumption by
Municipals Fund of such Series' liabilities, if any, and the subsequent
distribution of those shares to its shareholders in liquidation thereof
(Internal Revenue Code Sections 361(a) and 357(a)); (4) no gain or loss will be
recognized by Municipals Fund upon the receipt of such assets in exchange solely
for Municipals Fund's shares and its assumption of each Series' liabilities, if
any (Internal Revenue Code Section 1032(a)); (5) Municipals Fund's basis for the
assets received pursuant to the reorganization will be the same as the basis
thereof in the hands of the Series immediately before the reorganization, and
the holding period of those assets in the hands of Municipals Fund will include
the holding period thereof in the Series' hands (Internal Revenue Code Sections
362(b) and 1223(2)); (6) each Series' shareholders' basis for the shares of
Municipals Fund to be received by them pursuant to the reorganization will be
the same as their basis for the shares of the Series to be constructively
surrendered in exchange therefor (Internal Revenue Code Section 358(a)(1)); and
(7) the holding period of the shares of Municipals Fund to be received by the
shareholders of each Series pursuant to the reorganization will include the
period during which the shares of such Series to be constructively surrendered
in exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange (Internal Revenue Code
Section 1223(1)).
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
Municipals Fund is a Maryland corporation and the rights of its shareholders
are governed by its Articles of Incorporation, By-Laws and the Maryland General
Corporation Law. Series Fund is a Massachusetts business trust and the rights of
its shareholders are governed by its Declaration of Trust, By-Laws, and
applicable Massachusetts law. Certain relevant differences between the two forms
of organization are summarized below.
CAPITALIZATION. Municipals Fund has issued shares of common stock, par
value $.01 per share. Its Articles of Incorporation authorize Municipals Fund to
issue 750 million shares of common stock divided into three classes, consisting
of 250 million authorized Class A shares, 250 million authorized Class B shares
and 250 million authorized Class C shares. Series Fund has issued shares of
beneficial interest, par value $.01 per share, currently divided into seventeen
series. Its Declaration of Trust authorizes Series Fund to issue an unlimited
number of shares of beneficial interest, divided into three classes, also
designated Class A, Class B and Class C. The Board of Directors of Municipals
Fund may authorize an increase in the number of authorized shares and the Board
of Directors/Trustees of each Fund may reclassify unissued shares to authorize
additional classes of shares having terms and rights determined by its Board of
Directors/Trustees, all without shareholder approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director/Trustee when requested in writing to do so by the holders of at
least 10% of the Fund's outstanding shares. In addition, each Fund is required
to call a meeting of shareholders for the purpose of electing Directors/Trustees
if, at any time, less than a majority of the Directors/Trustees holding office
at the time were elected by shareholders.
Under the Declaration of Trust, Series Fund shareholders are entitled to
vote only with respect to the following matters: (1) the election or removal of
Trustees if a meeting is called for such purpose; (2) the adoption of any
contract for which shareholder approval is required by the Investment Company
Act; (3) any
19
<PAGE>
amendment of the Declaration of Trust, other than amendments to change Series
Fund's name, authorize additional series of shares, supply any omission or cure,
correct or supplement any ambiguity or defective or inconsistent provision
contained therein; (4) any termination or reorganization of Series Fund to the
extent and as provided in the Declaration of Trust; (5) a determination as to
whether a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of Series Fund or its
shareholders, to the same extent as the shareholders of a Massachusetts business
corporation would be entitled to vote on such a determination; (6) with respect
to any plan of distribution adopted pursuant to Rule 12b-1 under the Investment
Company Act; and (7) such additional matters relating to Series Fund as may be
required by law, the Declaration of Trust, the Series Fund's By-Laws, or any
registration of Series Fund with the SEC or any state securities commission, or
as the Trustees may consider necessary or desirable. Series Fund shareholders
also vote upon changes in fundamental investment policies or restrictions.
The Declaration of Trust provides that a "Majority Shareholder Vote" of
Series Fund is required to decide any question. "Majority Shareholder Vote"
means the vote of the holders of a majority of shares, which shall consist of:
(i) a majority of shares represented in person or by proxy and entitled to vote
at a meeting of shareholders at which a quorum, as determined in accordance with
the By-Laws, is present; (ii) a majority of shares issued and outstanding and
entitled to vote when action is taken by written consent of shareholders; or
(iii) a "majority of the outstanding voting securities," as that phrase is
defined in the Investment Company Act, when action is taken by shareholders with
respect to approval of an investment advisory or management contract or an
underwriting or distribution agreement or continuance thereof.
Shareholders in Municipals Fund are entitled to one vote for each share on
all matters submitted to a vote of its shareholders under Maryland law. Approval
of certain matters, such as an amendment to the charter, a merger, consolidation
or transfer of all or substantially all assets, dissolution and removal of a
Director, requires the affirmative vote of a majority of the votes entitled to
be cast. A plurality of votes cast is required to elect Directors. Other matters
require the approval of the affirmative vote of a majority of the votes cast at
a meeting at which a quorum is present.
Series Fund's and Municipals Fund's By-Laws each provide that a majority of
the outstanding shares shall constitute a quorum for the transaction of business
at a shareholders' meeting. Matters requiring a larger vote by law or under the
organization documents for either Fund are not affected by such quorum
requirements.
SHAREHOLDER LIABILITY. Under Maryland law, Municipals Fund's shareholders
have no personal liability as such for Municipals Fund's acts or obligations.
Under Massachusetts law, Series Fund's shareholders, under certain
circumstances, could be held personally liable for Series Fund's obligations.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of Series Fund and requires that notice of such disclaimer be given
in each note, bond, contract, order, agreement, obligation or instrument entered
into or executed by Series Fund or its Trustees. The Declaration of Trust
provides for indemnification out of Series Fund's property for all losses and
expenses of any shareholder held personally liable for Series Fund's obligations
solely by reason of his or her being or having been a Series Fund shareholder
and not because of his or her acts or omissions or some other reason. Thus,
Series Fund considers the risk of a shareholder incurring financial loss on
account of shareholder liability to be remote since it is limited to
circumstances in which a disclaimer is inoperative or Series Fund itself would
be unable to meet its obligations.
20
<PAGE>
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND TRUSTEES. Under Maryland
law, a Director or officer of Municipals Fund is not liable to Municipals Fund
or its shareholders for monetary damages for breach of fiduciary duty as a
Director or officer except to the extent such exemption from liability or
limitation thereof is not permitted by law, including the Investment Company
Act. Municipals Fund's By-laws provide that its Directors and officers will not
be liable to Municipals Fund, and may be indemnified for liabilities, for any
action or failure to act, except for bad faith, willful misfeasance, gross
negligence or reckless disregard of duties.
Under Series Fund's Declaration of Trust, a Trustee is entitled to
indemnification against all liability and expenses reasonably incurred by him or
her in connection with the defense or disposition of any threatened or actual
proceeding by reason of his or her being or having been a Trustee, unless such
Trustee shall have been adjudicated to have acted with bad faith, willful
misfeasance, gross negligence or in reckless disregard of his or her duties.
Under the Investment Company Act, a Director of Municipals Fund and a
Trustee of Series Fund may not be protected against liability to Municipals Fund
or Series Fund, respectively, and their security holders to which he or she
would otherwise be subject as a result of his or her willful misfeasance, bad
faith or gross negligence in the performance of his or her duties, or by reason
of reckless disregard of his or her obligations and duties. The staff of the SEC
interprets the Investment Company Act to require additional limits on
indemnification of Directors, Trustees and officers.
21
<PAGE>
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of Municipals Fund and each
Series as of August 31, 1995 and the pro forma combined capitalization as if the
reorganizations had occurred on that date.
<TABLE>
<CAPTION>
MUNICIPALS FUND ARIZONA SERIES GEORGIA SERIES
----------------------------------- ----------------------------------- ---------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets..... $485,122,707 $191,445,270 $ 252,490 $28,043,678 $27,064,415 $ 11,257 $9,954,031 $7,529,507 $ 209
Net Asset Value
per share..... $15.37 $15.41 $15.41 $11.80 $11.80 $11.80 $11.43 $11.42 $11.42
Shares
Outstanding... 31,560,623 12,425,745 16,389 2,376,181 2,294,422 954 870,975 659,169 18
<CAPTION>
MINNESOTA SERIES PRO FORMA COMBINED
----------------------------------- -----------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C>
Net Assets..... $10,563,470 $11,721,065 $ 820 $533,683,886 $237,760,256 $ 264,776
Net Asset Value
per share..... $11.70 $11.70 $11.70 $15.37 $15.41 $15.41
Shares
Outstanding... 902,651 1,001,635 70 34,720,101 15,431,260 17,186
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Municipals Fund for
the six-month period ended June 30, 1995 (annualized) and of each Series for the
six-month period ended February 28, 1995 (annualized). The ratios are also shown
on a pro forma combined basis.
<TABLE>
<CAPTION>
MUNICIPALS FUND ARIZONA SERIES
------------------------------------- -------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets............ 0.69% 1.08% 1.34% 0.95% 1.34% 1.60%
Ratio of net investment income to average net
assets............................................ 5.64% 5.14% 5.00% 5.82% 5.25% 5.08%
<CAPTION>
GEORGIA SERIES MINNESOTA SERIES
------------------------------------- -------------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Ratio of expenses to average net assets............ 1.38% 1.78% 2.03% 1.35% 1.75% 2.00%
Ratio of net investment income to average net
assets............................................ 5.33% 4.93% 4.68% 5.22% 4.82% 4.57%
<CAPTION>
PRO FORMA COMBINED
-------------------------------------
CLASS A CLASS B CLASS C
Ratio of expenses to average net assets............ .76% 1.16% 1.41%
Ratio of net investment income to average net
assets............................................ 5.51% 5.11% 4.86%
</TABLE>
22
<PAGE>
INFORMATION ABOUT MUNICIPALS FUND
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(UNAUDITED)
For additional condensed financial information for Municipals Fund, see
"Financial Highlights" in the Municipals Fund Prospectus, which accompanies this
Prospectus and Proxy Statement. The following financial highlights contain
selected data for a Class A, Class B and Class C share outstanding, total
return, ratios to average net assets and other supplemental data for the period
presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1995
-----------------------------
CLASS A CLASS B CLASS C
-------- -------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 14.42 $ 14.45 $14.44
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .42 .39 .37
Net realized and unrealized gain on
investment transactions................ .81 .81 .82
-------- -------- -------
Total from investment operations.... 1.23 1.20 1.19
-------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.42) (.39) (.37)
-------- -------- -------
Net asset value, end of period.......... $ 15.23 $ 15.26 $15.26
-------- -------- -------
-------- -------- -------
TOTAL RETURN (B):....................... 8.53% 8.30% 8.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $482,614 $198,230 $ 251
Average net assets (000)................ $393,252 $299,836 $ 188
Ratios to average net assets (a):
Expenses, including distribution
fees................................. .69% 1.08% 1.34%
Expenses, excluding distribution
fees................................. .59% .58% .59%
Net investment income................. 5.64% 5.14% 5.00%
Portfolio turnover...................... 54% 54% 54%
</TABLE>
------------------------
(a) Annualized.
(b) 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.
23
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of Municipals Fund, see "General Information" and "Fund Highlights" in the
Municipals Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Municipals Fund's investment objective and policies and
risk factors associated with an investment in Municipals Fund, see "How the Fund
Invests" in the Municipals Fund Prospectus.
DIRECTORS
For a discussion of the responsibilities of Municipals Fund's Board of
Directors, see "How the Fund is Managed" in the Municipals Fund Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Municipals Fund's Manager and Subadviser and Municipals
Fund's portfolio manager, see "How the Fund is Managed--Manager" in the
Municipals Fund Prospectus.
PERFORMANCE
For a discussion of Municipals Fund's performance during the fiscal year
ended December 31, 1994, see Appendix A hereto.
MUNICIPALS FUND'S SHARES
For a discussion of Municipals Fund's Class A, Class B and Class C shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in the Municipals Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of Municipals Fund's Class A,
Class B and Class C shares is determined, see "How the Fund Values its Shares"
in the Municipals Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Municipals Fund's policy with respect to dividends and
distributions and the tax consequences of an investment in Class A, Class B or
Class C shares, see "Taxes, Dividends and Distributions" in the Municipals Fund
Prospectus.
OTHER CONSIDERATIONS
Municipals Fund is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the Securities and Exchange Commission. Proxy material, reports
and other information filed by Municipals Fund can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New
York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
24
<PAGE>
INFORMATION ABOUT THE SERIES
FINANCIAL INFORMATION
For condensed financial information for each Series, see "Financial
Highlights" in the Series' Prospectus and its Annual Report to Shareholders for
the fiscal year ended August 31, 1994 and in its Semi-Annual Report to
Shareholders for the six-months ended February 28, 1995, which accompanies this
Prospectus and Proxy Statement.
GENERAL
For a discussion of the organization, classification and sub-classification
of each Series, see "General Information" and "Fund Highlights" in each Series'
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of each Series' investment objective and policies and risk
factors associated with an investment in each Series, see "How the Fund Invests"
in each Series' Prospectus.
TRUSTEES
For a discussion of the responsibilities of Series Fund's Board of Trustees,
see "How the Fund is Managed" in each Series' Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of each Series' Manager and Subadviser and portfolio
manager, see "How the Fund is Managed--Manager" in each Series' Prospectus.
PERFORMANCE
For a discussion of a Series' performance during the fiscal year ended
August 31, 1994, see the Annual Report to Shareholders for the fiscal year ended
August 31, 1994, which accompanies this Prospectus and Proxy Statement.
SERIES FUND'S SHARES
For a discussion of each Series' Class A, Class B and Class C shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in each Series' Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of each Series' Class A, Class B
and Class C shares is determined, see "How the Fund Values its Shares" in each
Series' Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of each Series' policy with respect to dividends and
distributions and the tax consequences of an investment in Class A, Class B or
Class C shares, see "Taxes, Dividends and Distributions" in each Series'
Prospectus.
ADDITIONAL INFORMATION
Additional information concerning each Series is incorporated herein by
reference from each Series' current Prospectus dated December 30, 1994, and each
Series' Annual Report to Shareholders for the fiscal year ended August 31, 1994.
Copies of each Series' Prospectus and the Annual Report are available without
25
<PAGE>
charge upon oral or written request from Series Fund. To obtain a Series'
Prospectus and Annual Report, call (800) 225-1852 or write to Prudential Mutual
Fund Services, Inc., Raritan Plaza One, Edison, New Jersey 08837.
Reports and other information filed by the Series can be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the SEC's regional offices in New York (7 World Trade Center, Suite 1300,
New York, New York 10048) and Chicago (Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511). Copies of such material can also
be obtained at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of Series Fund or by
attendance at the Meeting. If sufficient votes to approve the proposal are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of Proxies. Any such adjournment will
require the affirmative vote of a majority of those shares present at the
Meeting or represented by proxy. When voting on a proposed adjournment, the
persons named as proxies will vote for the proposed adjournment all shares that
they are entitled to vote, unless directed to disapprove the proposal, in which
case such shares will be voted against the proposed adjournment. Any questions
as to an adjournment of the Meeting will be voted on by the persons named in the
enclosed Proxy in the same manner that the Proxies are instructed to be voted.
In the event that the Meeting is adjourned, the same procedures will apply at a
later Meeting date.
If a Proxy that is properly executed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a Proxy from a broker or nominee indicating that
such person has not received instructions from the beneficial owner or other
person entitled to vote shares on a particular matter with respect to which the
broker or nominee does not have discretionary power), the shares represented
thereby, with respect to matters to be determined by a majority of the votes
cast on such matters, will be considered present for purposes of determining the
existence of a quorum for the transaction of business but, not being cast, will
have no effect on the outcome of such matters. With respect to matters requiring
the affirmative vote of a majority of the total shares outstanding, an
abstention or broker non-vote will be considered present for purposes of
determining the existence of a quorum but will have the effect of a vote against
such matters.
The close of business on August 11, 1995 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at,
each Series' Meeting. On that date, the Arizona Series had 2,504,936 Class A
shares, 2,369,990 Class B shares and 950 Class C shares outstanding and entitled
to vote, the Georgia Series had 909,336 Class A shares, 683,339 Class B shares
and 18 Class C shares outstanding and entitled to vote, and the Minnesota Series
had 903,710 Class A shares, 1,035,542 Class B shares and 70 Class C shares
outstanding and entitled to vote.
Each share of each Series will be entitled to one vote at such Series'
Meeting. It is expected that the Notice of Special Meeting, Prospectus and Proxy
Statement and form of Proxy will be mailed to each Series' shareholders on or
about September 20, 1995.
26
<PAGE>
As of August 11, 1995, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of
each Series were:
Marjorie T. Bergan, Trustee for the Marjorie T. Bergan Living Trust, 2011 E.
Flynn Lane, Phoenix, AZ 85016-1133, who held 236,224 Class A shares of the
Arizona Series (9.4%); Gaylord Rubin & Beverly Rubin, Trustees for the Gaylord
and Beverly Rubin Family Trust, 4712 E. Palo Verde Drive, Phoenix, AZ
85018-1259, who held 158,347 Class A shares of the Arizona Series (6.3%); Madlyn
R. Schlosser, Trustee for the Schlosser Family Trust, 18170 N. 91st Ave, Apt
1156, Peoria AZ 85382-0868, who held 906 Class C shares of the Arizona Series
(95.3%); Howard C. Kauffmann and Suzanne M. Kauffmann, 12 Water Witch Crossing,
Savannah GA 31411-2813, who held 80,361 Class A shares of the Georgia Series
(8.8%); and Joel B. Jensen, 1970 Stagecoach Trail South, Afton, MN 55001-9778,
who held 52 Class C shares of the Minnesota Series (74.4%).
The expenses of reorganization and solicitation will be borne by each Series
and Municipals Fund in proportion to their respective assets and will include
reimbursement to brokerage firms and others for expenses in forwarding proxy
solicitation material to shareholders. The Trustees of Series Fund have retained
Shareholder Communications Corporation, a proxy solicitation firm, to assist in
the solicitation of Proxies for the Meeting. The fees and expenses of
Shareholder Communications Corporation are not expected to exceed $10,400,
excluding mailing and printing costs. The solicitation of Proxies will be
largely by mail but may include telephonic, telegraphic or oral communication by
regular employees of Prudential Securities and its affiliates, including
Prudential Mutual Fund Management, Inc. This cost, including specified expenses,
also will be borne by each Series and Municipals Fund in proportion to their
respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of a
Series arise, including any question as to an adjournment of the Meeting, the
persons named in the enclosed Proxy will vote thereon according to their best
judgment in the interests of such Series, taking into account all relevant
circumstances.
SHAREHOLDERS' PROPOSALS
A Series Fund shareholder proposal intended to be presented at any
subsequent meeting of the shareholders of such Series must be received by Series
Fund a reasonable time before the Trustees' solicitation relating to such
meeting is made in order to be included in such Series' Proxy Statement and form
of Proxy relating to that meeting. The mere submission of a proposal by a
shareholder does not guarantee that such proposal will be included in the proxy
statement because certain rules under the federal securities laws must be
complied with before inclusion of the proposal is required. In the event that
the Plan is approved at this Meeting with respect to a Series, it is not
expected that there will be any future shareholder meetings of such Series.
It is the present intent of the Boards of Directors of Municipals Fund and
the Trustees of Series Fund not to hold annual meetings of shareholders unless
the election of Directors/Trustees is required under the Investment Company Act
nor to hold special meetings of shareholders unless required by the Investment
Company Act or state law.
S. JANE ROSE
SECRETARY
Dated: September 18, 1995
27
<PAGE>
APPENDIX A
PERFORMANCE OVERVIEW
Letter to Shareholders
February 1, 1995
Dear Shareholder:
1994 was the best of times for the economy; the worst of times for the
bond market. The economy surged and interest rates rose, but tax-free
municipal bond prices fell sharply. (Bond prices move in the opposite
direction of interest rates.) We're pleased to report that the National
Municipals Fund performed better than the Lipper municipal bond fund
average, although unfortunately total return was negative. The good
news is that yields are substantially higher -- more than one and a
quarter percentage points from a year ago for Class A shares.
Our Objective.
The Prudential National Municipals Fund seeks a high level of current
income exempt from federal income taxes. Under normal circumstances,
the Fund intends to invest at least 80% of the portfolio's assets in
municipal bonds and notes. As of December 31, 1994, approximately 90%
of the portfolio's assets were so invested, and the remainder was in cash
and cash equivalents.
<TABLE>
<CAPTION> CUMULATIVE TOTAL RETURNS(1)
As of 12/31/94
1 Year 5 Years 10 Years Since Inception(2)
<S> <C> <C> <C> <C>
Class A -6.0% N/A N/A 39.0%
Class B -6.4 35.7% 124.2% 239.6
Class C N/A N/A N/A -2.6
Lipper Gen Muni. Avg.3 -6.5 36.0 136.1 255.2
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS(1)
As of 12/31/94
1 Year 5 Years 10 Years Since Inception(2)
<S> <C> <C> <C> <C>
Class A -8.9% N/A N/A 6.3%
Class B -11.4 6.1% 8.4% 8.7
Class C N/A N/A N/A -3.6
Past performance is not indicative of future results.
Principal and investment return will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
<FN>
(1) Source: Prudential Mutual Fund Management Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account
sales charges. The average annual returns do take into account applicable
sales charges. The Fund charges a maximum front-end sales load of 3% for
Class A shares and a contingent deferred sales charge of 5%, 4%, 3%, 2%,
1% and 1% for six years, for Class B shares. Class C shares have a 1%
CDSC for one year. Beginning in February 1995, Class B shares will
automatically convert to Class A shares on a quarterly basis, after
approximately seven years.
(2) Inception dates: 1/22/90 Class A; 4/25/80, Class B; 8/1/94 Class C.
(3) Lipper average returns are for 184 funds for one year, 88 funds for
five years, 31 funds for 10 years, and 31 funds since inception of the
Classs B shares on 4/25/80.
</TABLE>
A-1
<PAGE>
The Fed Tightened.
In 1994, the U.S. economy grew at a robust annual rate approximating 4%, a
pace stronger than many had anticipated as the year began. As a result, the
Federal Reserve raised short-term interest rates six times during the year by
increasing the federal funds interest rate (the interbank overnight lending
rate) by 2.5 percentage points to 5.5%. The central bank moved because it
believed the economy was growing so fast it might re-ignite inflation.
But if you've studied the Fund's returns, you might suspect that much more
was afoot than the Federal Reserve's activity. Bond market investors were
also worried that inflation would increase, so long-term interest rates rose
as well. This fear sent the yield of The Bond Buyer's Revenue Bond Index up
to 6.97% at year-end, from 5.52% in December, 1993. That's an extraordinary
increase of nearly one and a half percentage points. Why? Because
municipal bonds are more difficult to trade than U.S. Treasury
securities -- there are more than 1.5 million issues outstanding sold
by 300,000 different issuers and there is no central place to report
transactions. Because the municipal bond market is less liquid and more
complex than the Treasury market, falling bond prices hurt municipals more
than Treasuries in 1994.
Despite rising interest rates, the economy continued to surge all year long.
December unemployment fell to 5.4%, its lowest in four years as the economy
finished its best year for job creation in a decade. Consumer confidence
was at a four-year high. Skeptics argued that the economy was so robust
that shortages must surely follow, driving up the cost of labor and materials.
Yet inflation in 1994 was 2.7%, the same low
level as 1993. So, it was the fear of rising inflation that scared the
markets in 1994 -- the prospect, rather than the reality -- of an increase.
On the Hill:
In 1995, Congress is set to consider an initiative that would restore full
income tax deductibility for individual retirement account contributions
for middle-income wage earners. In addition, Congress will also debate
creation of a new tax-deferred savings account, called "the American Dream
Savings Account." Prudential Mutual Funds supports both of these proposals,
and we urge you to share your own opinion with your Congressional
representatives. We will keep you updated on the proposals as they
make their way through the legislative process.
Maintained Defensive Posture In A Most Difficult Market.
To defend against rising interest rates, we raised the portfolio's cash
and cash equivalents position. On December 31, 1993, we held only 2% of
assets in cash and cash equivalents, but by the end of the first
quarter, we had raised cash and cash equivalents to 11% of assets.
We ended 1994 with nearly 10% in cash and cash equivalents. By raising
our cash position we cushioned the Fund somewhat from falling bond prices
and also shortened our average maturity. In 1994, shorter maturities fared
better than longer maturities, which are more sensitive to interest rate
changes.
There were few opportunities for capital appreciation in the tax-free
municipal bond market this year. Prices sank in the first quarter,
changed little in the second and third quarters, and recovered only
slightly in December. We shortened maturities considerably by year end.
A-2
<PAGE>
We Emphasized Premium, Non-callable Bonds.
We believe that intermediate- and long-term interest rates could be near
their peak for this economic cycle. Interest rates should fall when
investors become convinced that the Federal Reserve has prospective
inflation under control. At that time, premium, non-callable bonds
should appreciate and may be in demand because they offer above-average
yields. We have invested about 25% of assets in premium, non-callable
bonds with coupons ranging from 6% to 7.5%.
We have also increased holdings in insured bonds, which now comprise 35%
of assets, up from 30% at the end of 1993. Of course, insurance does not
afford protection against price risk. The prices of these higher quality
insured bonds fell more than lower quality bonds in the first half of 1994,
making them more attractive investments in the fourth quarter. Conversely,
we will probably add more lower-quality securities to the Fund if yields
decline in the future.
Fund Update:
Beginning in February 1995, Class B shareholders should begin to notice
a change in their Fund holdings. That's when Class B shares will begin
to convert to Class A shares, on a quarterly basis, approximately seven
years after purchase. As you may know, Class A shares generally carry
lower annual distribution expenses than Class B shares. Accordingly,
after conversion, you will earn higher total returns on your investment
than you would have as a Class B shareholder. This conversion will be
processed automatically and won't require any further action on your part.
The Outlook: Rates Near Highs, Supply Is Falling.
For the first time in four years, cash was the investment of choice in
1994, performing better than stocks and bonds. We expect this year's
bond market performance to be much closer to the historic average. But
until the bond market becomes convinced that the Federal Reserve will
prevent inflation from accelerating, interest rates and bond prices will
remain volatile.
If the Federal Reserve's anti-inflationary campaign finally begins
to slow economic growth around mid-year, it could lead to stable to
slightly lower long-term yields by year-end.
It is important to emphasize here that the central bank directly controls
only short-term interest rates, not long-term rates. The market may
well take long-term interest rates higher, but we believe that the 30-year
U.S. Treasury yield at 8% may be closer to the top of the interest rate
cycle than the bottom. That's a five percentage point premium over the
present inflation rate, a very healthy premium by historic standards.
And it makes today's real, inflation-adjusted yields attractive.
At the same time, the supply of tax-free municipal bonds is contracting
sharply, and the zeal for austerity in government now sweeping the country
might further curtail borrowing. In 1994, issuance of municipal bonds fell
by 44%. A year from now, there should be far fewer bonds outstanding.
When interest rates stabilize and investors return to the market,
we might see better performance from the tax-exempt municipal bond market.
A-3
<PAGE>
As always, it is a pleasure to work for you. We appreciate the confidence
you have shown in us by choosing the Prudential National Municipals Fund.
Sincerely,
Lawrence C. McQuade
President
Patricia Dolan
Portfolio Manager
A-4
<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (Agreement) made as of the 18th day of
September, 1995, by and between Prudential Municipal Series Fund (Municipal
Series Fund) and Prudential National Municipals Fund, Inc. (National Municipals
Fund) (collectively, with Municipal Series Fund, the Funds and each
individually, a Fund). The Municipal Series Fund is a business trust organized
under the laws of the Commonwealth of Massachusetts and the National Municipals
Fund is a corporation organized under the laws of the State of Maryland and
maintains its principal place of business at One Seaport Plaza, New York, New
York 10292. Shares of each Fund are divided into three classes, designated Class
A, Class B and Class C. Municipal Series Fund consists of 17 series, three of
which are the Arizona Series, Georgia Series and Minnesota Series (collectively,
the Series and each individually, a Series).
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Each reorganization will comprise the
transfer of the assets of the Arizona Series, Georgia Series or Minnesota
Series, as appropriate, in exchange solely for shares of common stock of
National Municipals Fund, Class A shares for Class A shares, Class B shares for
Class B shares and Class C shares for Class C shares, and National Municipals
Fund's assumption of such Series' liabilities, if any, and the constructive
distribution, after the Closing Date hereinafter referred to, of such shares of
National Municipals Fund to the shareholders of the respective Series, and the
termination of the Series as provided herein, all upon the terms and conditions
as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE SERIES IN EXCHANGE FOR SHARES OF NATIONAL
MUNICIPALS FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF
THE SERIES
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Municipal Series Fund
agrees to sell, assign, transfer and deliver the assets of each Series, as set
forth in paragraph 1.2, to National Municipals Fund, and National Municipals
Fund agrees (a) to issue and deliver to each Series in exchange therefor (i) the
number of shares of Class A Common Stock in National Municipals Fund determined
by dividing the net asset value of the respective Series allocable to Class A
shares of beneficial interest (computed in the manner and as of the time and
date set forth in paragraph 2.1) by the net asset value allocable to a share of
National Municipals Fund Class A Common Stock (computed in the manner and as of
the time and date set forth in paragraph 2.2); (ii) the number of shares of
Class B Common Stock in National Municipals Fund determined by dividing the net
asset value of the respective Series allocable to Class B shares of beneficial
interest (computed in the manner and as of the time and date set forth in
paragraph 2.1) by the net asset value allocable to a share of National
Municipals Fund Class B Common Stock (computed in the manner and as of the time
and date set forth in paragraph 2.2); and (iii) the number of shares of Class C
Common Stock in National Municipals Fund determined by dividing the net asset
value allocable to Class C shares of beneficial interest (computed in the manner
and as of the time and date set forth in paragraph 2.1) by the net asset value
allocable to a share of
B-1
<PAGE>
National Municipals Fund Class C Common Stock (computed in the manner and as of
the time and date set forth in paragraph 2.2); and (b) to assume all of each
Series' liabilities, if any, as set forth in paragraph 1.3. Such transactions
shall take place at the closing provided for in paragraph 3 (Closing).
1.2 The assets of each Series to be acquired by National Municipals Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by such Series and any deferred or prepaid expenses shown as assets on the
books of such Series on the closing date provided in paragraph 3 (Closing Date).
National Municipals Fund has no plan or intent to sell or otherwise dispose of
any assets of the Series, other than in the ordinary course of business.
1.3 Except as otherwise provided herein, National Municipals Fund will assume
all debts, liabilities, obligations and duties of each Series of whatever kind
or nature, whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date and whether or not specifically referred to
in this Agreement; provided, however, that each Series agrees to utilize its
best efforts to cause such Series to discharge all of the known debts,
liabilities, obligations and duties of such Series prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, each Series will declare and
pay to its shareholders of record dividends and/or other distributions so that
it will have distributed substantially all (and in any event not less than
ninety-eight percent) of such Series' investment company taxable income
(computed without regard to any deduction for dividends paid), net tax-exempt
interest income, if any, and realized net capital gains, if any, for all taxable
years through its termination.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable, each Series will distribute PRO RATA to its Class A,
Class B and Class C shareholders of record, determined as of the close of
business on the Closing Date, the Class A, Class B and Class C shares of
National Municipals Fund, respectively, received by the Series pursuant to
paragraph 1.1 in exchange for their interest in such Series, and Municipal
Series Fund will file with the Secretary of State of the Commonwealth of
Massachusetts a Certificate of Termination terminating each Series. Such
distribution will be accomplished by opening accounts on the books of National
Municipals Fund in the names of each Series' shareholders and transferring
thereto the shares credited to the account of the respective Series on the books
of National Municipals Fund. Each account opened shall be credited with the
respective PRO RATA number of National Municipals Fund Class A, Class B and
Class C shares due such Series' Class A, Class B and Class C shareholders,
respectively. Fractional shares of National Municipals Fund shall be rounded to
the third decimal place.
1.6 National Municipals Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Series shareholder
holding Series receipts for shares of beneficial interest as of the Closing
Date, until National Municipals Fund is notified by Municipal Series Fund's
transfer agent that such shareholder has surrendered his or her outstanding
Series receipts for shares of beneficial interest or, in the event of lost,
stolen or destroyed receipts for shares of beneficial interest, posted adequate
bond or submitted a lost certificate form, as the case may be, National
Municipals Fund will not permit such shareholder to (1) receive dividends or
other distributions on National Municipals Fund shares in cash (although such
dividends and distributions shall be credited to the account of such shareholder
established on National Municipals Fund's books pursuant to paragraph 1.5, as
provided in the next sentence), (2) exchange National Municipals Fund shares
credited to such shareholder's account for shares of other Prudential Mutual
Funds, or (3) pledge or redeem such shares. In the event that a shareholder is
not permitted to receive dividends or other distributions on National Municipals
Fund shares in cash as provided in the preceding sentence, National Municipals
Fund shall pay such dividends or other distributions in additional
B-2
<PAGE>
National Municipals Fund shares, notwithstanding any election such shareholder
shall have made previously with respect to the payment of dividends or other
distributions on shares of the Series. Each Series will, at its expense, request
its shareholders to surrender their outstanding Series receipts for shares of
beneficial interest, post adequate bond or submit a lost certificate form, as
the case may be.
1.7 Ownership of National Municipals Fund shares will be shown on the books of
the National Municipals Fund's transfer agent. Shares of National Municipals
Fund will be issued in the manner described in National Municipals Fund's
then-current prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of National Municipals
Fund in exchange for shares of one of the Series in a name other than that of
the registered holder of the shares being exchanged on the books of that Series
as of that time shall be paid by the person to whom such shares are to be issued
as a condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission or
any state securities commission of Municipal Series Fund with respect to a
Series is and shall remain the responsibility of the Series up to and including
the Termination Date.
1.10 All books and records of each Series, including all books and records
required to be maintained under the Investment Company Act of 1940 (Investment
Company Act) and the rules and regulations thereunder, shall be available to
National Municipals Fund from and after the Closing Date and shall be turned
over to National Municipals Fund on or prior to the Termination Date.
2. VALUATION
2.1 The value of each Series' assets and liabilities to be acquired and
assumed, respectively, by National Municipals Fund shall be the net asset value
computed as of 4:15 p.m., New York time, on the Closing Date (such time and date
being hereinafter called the Valuation Time), using the valuation procedures set
forth in such Series' then-current prospectus and Municipal Series Fund's
statement of additional information.
2.2 The net asset value of a share of National Municipals Fund shall be the net
asset value per such share computed on a class-by-class basis as of the
Valuation Time, using the valuation procedures set forth in National Municipals
Fund's then-current prospectus and statement of additional information.
2.3 The number of National Municipals Fund shares to be issued (including
fractional shares, if any) in exchange for the Series' net assets shall be
calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Mutual Fund Management, Inc. (PMF) in accordance with its regular
practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be October 20, 1995 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of National
Municipals Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for each
Series, shall deliver to National Municipals Fund at the Closing a certificate
of an authorized officer of State Street stating that (a) the applicable Series'
portfolio securities, cash and any other assets have been transferred in proper
form to National Municipals Fund on the Closing Date and (b) all necessary
taxes, if any, have been paid, or provision for payment has been made, in
conjunction with the transfer of portfolio securities.
B-3
<PAGE>
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of the Series and of the net asset value per share
of National Municipals Fund is impracticable, the Closing Date shall be
postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
3.4 Municipal Series Fund shall deliver to National Municipals Fund on or prior
to the Termination Date the names and addresses of each of the shareholders of
each Series and the number of outstanding shares owned by each such shareholder,
all as of the close of business on the Closing Date, certified by the Secretary
or Assistant Secretary of Municipal Series Fund. National Municipals Fund shall
issue and deliver to Municipal Series Fund at the Closing a confirmation or
other evidence satisfactory to Municipal Series Fund that shares of National
Municipals Fund have been or will be credited to each Series' account on the
books of National Municipals Fund. At the Closing each party shall deliver to
the other such bills of sale, checks, assignments, share certificates, receipts
and other documents as such other party or its counsel may reasonably request to
effect the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Municipal Series Fund represents and warrants as follows:
4.1.1 Municipal Series Fund is a business trust duly organized and validly
existing under the laws of the State of Massachusetts and each of the Series has
been duly established in accordance with the terms of Municipal Series Fund's
Declaration of Trust as a separate Series of Municipal Series Fund;
4.1.2 Municipal Series Fund is an open-end, management investment company duly
registered under the Investment Company Act, and such registration is in full
force and effect;
4.1.3 Municipal Series Fund is not, and the execution, delivery and performance
of this Agreement will not, result in violation of any provision of the
Declaration of Trust or By-Laws of Municipal Series Fund or of any material
agreement, indenture, instrument, contract, lease or other undertaking to which
any Series is a party or by which any Series is bound;
4.1.4 All material contracts or other commitments to which any Series, or the
properties or assets of any Series, is subject, or by which any Series is bound
except this Agreement will be terminated on or prior to the Closing Date without
such Series or National Municipals Fund incurring any liability or penalty with
respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against Municipal Series Fund or any of the properties or
assets of any Series. Municipal Series Fund knows of no facts that might form
the basis for the institution of such proceedings, and, with respect to each
Series, Municipal Series Fund is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body that materially
and adversely affects its business or its ability to consummate the transactions
herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of each Series at August 31, 1994 and for the year then ended (copies
of which have been furnished to National Municipals Fund) have been audited by
Deloitte & Touche LLP, independent accountants, in accordance with generally
accepted auditing standards. Such financial statements are prepared in
accordance with generally accepted accounting principles and
B-4
<PAGE>
present fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of such Series as of
and for the period ended on such date, and there are no material known
liabilities of each such Series (contingent or otherwise) not disclosed therein;
4.1.7 Since August 31, 1994, there has not been any material adverse change in
any Series' financial condition, assets, liabilities or business other than
changes occurring in the ordinary course of business, or any incurrence by any
Series of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by
National Municipals Fund. For the purposes of this paragraph 4.1.7, a decline in
net assets or change in the number of shares outstanding shall not constitute a
material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of each Series required by law to have been filed on or
before such dates shall have been timely filed, and all federal and other taxes
shown as due on said returns and reports shall have been paid insofar as due, or
provision shall have been made for the payment thereof, and, to the best of
Municipal Series Fund's knowledge, all federal or other taxes required to be
shown on any such return or report have been shown on such return or report, no
such return is currently under audit and no assessment has been asserted with
respect to such returns;
4.1.9 For each past taxable year since it commenced operations, each Series has
met the requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and Municipal
Series Fund intends to cause such Series to meet those requirements for the
current taxable year; and, for each past calendar year since it commenced
operations, each Series has made such distributions as are necessary to avoid
the imposition of federal excise tax or have paid or provided for the payment of
any excise tax imposed;
4.1.10 All issued and outstanding shares of the Series are, and at the Closing
Date will be, duly and validly authorized, issued and outstanding, fully paid
and non-assessable. All issued and outstanding shares of each Series will, at
the time of the Closing, be held in the name of the persons and in the amounts
set forth in the list of shareholders submitted to National Municipals Fund in
accordance with the provisions of paragraph 3.4. No Series has outstanding any
options, warrants or other rights to subscribe for or purchase any shares, nor
is there outstanding any security convertible into any of its shares of any
Series, except for the Class B shares of each Series which have the conversion
feature described in such Series' Prospectus dated December 30, 1994;
4.1.11 At the Closing Date, the Municipal Series Fund will have good and
marketable title to the assets of each Series to be transferred to National
Municipals Fund pursuant to paragraph 1.1, and full right, power and authority
to sell, assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment for such
assets, National Municipals Fund will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been duly
authorized by the Trustees of the Municipal Series Fund and by all necessary
action, other than shareholder approval, on the part of each Series, and this
Agreement constitutes a valid and binding obligation of Municipal Series Fund
and, subject to shareholder approval, of each Series;
4.1.13 The information furnished and to be furnished by Municipal Series Fund
for use in applications for orders, registration statements, proxy materials and
other documents that may be necessary in connection
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with the transactions contemplated hereby is and shall be accurate and complete
in all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations; and
4.1.14 On the effective date of the registration statement filed with the
Securities and Exchange Commission (SEC) by National Municipals Fund on Form
N-14 relating to the shares of National Municipals Fund issuable hereunder, and
any supplement or amendment thereto (Registration Statement), at the time of the
meeting of the shareholders of such Series and on the Closing Date, the Proxy
Statement of such Series, the Prospectus of National Municipals Fund, and the
Statement of Additional Information of National Municipals Fund to be included
in the Registration Statement (collectively, Proxy Statement) (i) will comply in
all material respects with the provisions and regulations of the Securities Act
of 1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act) and the
Investment Company Act, and the rules and regulations under such Acts and (ii)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein in light of the circumstances under
which they were made or necessary to make the statements therein not misleading;
provided, however, that the representations and warranties in this paragraph
4.1.14 shall not apply to statements in or omissions from the Proxy Statement
and Registration Statement made in reliance upon and in conformity with
information furnished by National Municipals Fund for use therein.
4.2 National Municipals Fund represents and warrants as follows:
4.2.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 National Municipals Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is in
full force and effect;
4.2.3 National Municipals Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision of
the Articles of Incorporation or By-Laws of National Municipals Fund or of any
material agreement, indenture, instrument, contract, lease or other undertaking
to which National Municipals Fund is a party or by which National Municipals
Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against National Municipals Fund or any of its properties or assets, except as
previously disclosed in writing to the Municipal Series Fund. National
Municipals Fund knows of no facts that might form the basis for the institution
of such proceedings, and National Municipals Fund is not a party to or subject
to the provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of National Municipals Fund at December 31, 1994 and for the fiscal
year then ended (copies of which have been furnished to Municipal Series Fund)
have been audited by Price Waterhouse LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial statements
are prepared in accordance with generally accepted accounting principles and
present fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of National
Municipals Fund as of and for the period ended on such date, and there are no
material known liabilities of National Municipals Fund (contingent or otherwise)
not disclosed therein;
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4.2.6 Since December 31, 1994, there has not been any material adverse change
in National Municipal Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by National Municipals Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise disclosed
to and accepted by Municipal Series Fund. For the purposes of this paragraph
4.2.6, a decline in net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of National Municipals Fund required by law to have been
filed on or before such dates shall have been filed, and all federal and other
taxes shown as due on said returns and reports shall have been paid insofar as
due, or provision shall have been made for the payment thereof, and, to the best
of National Municipals Fund's knowledge, all federal or other taxes required to
be shown on any such return or report are shown on such return or report, no
such return is currently under audit and no assessment has been asserted with
respect to such returns;
4.2.8 For each past taxable year since it commenced operations, National
Municipals Fund has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year; and, for each
past calendar year since it commenced operations, National Municipals Fund has
made such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of National Municipals Fund are, and at
the Closing Date will be, duly and validly authorized, issued and outstanding,
fully paid and non-assessable. Except as contemplated by this Agreement,
National Municipals Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares nor is there
outstanding any security convertible into any of its shares, except for the
Class B shares which have the conversion feature described in National
Municipals Fund's Prospectus dated February 28, 1995;
4.2.10 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Directors of National Municipals Fund and by all
necessary corporate action on the part of National Municipals Fund, and this
Agreement constitutes a valid and binding obligation of National Municipals
Fund;
4.2.11 The shares of National Municipals Fund to be issued and delivered to
Municipal Series Fund for and on behalf of each Series pursuant to this
Agreement will, at the Closing Date, have been duly authorized and, when issued
and delivered as provided in this Agreement, will be duly and validly issued and
outstanding shares of National Municipals Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by National Municipals
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in all
material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of the
meeting of the shareholders of each Series and on the Closing Date, the Proxy
Statement and the Registration Statement (i) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the Investment
Company Act and the rules and regulations under such Acts, (ii) will not contain
any untrue statement of a material fact or
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omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and warranties
in this paragraph 4.2.13 shall not apply to statements in or omissions from the
Proxy Statement and the Registration Statement made in reliance upon and in
conformity with information furnished by the Series for use therein.
5. COVENANTS OF NATIONAL MUNICIPALS FUND AND MUNICIPAL SERIES FUND
5.1 Municipal Series Fund, with respect to each Series, and National Municipals
Fund each covenant to operate its respective business in the ordinary course
between the date hereof and the Closing Date, it being understood that the
ordinary course of business will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by the normal operations of the Funds, except as may otherwise be
required by paragraph 1.4 hereof.
5.2 Municipal Series Fund covenants to call a meeting of the shareholders of
each Series to consider and act upon this Agreement and to take all other action
necessary to obtain approval of the transactions contemplated hereby (including
the determinations of its Trustees as set forth in Rule 17a-8(a) under the
Investment Company Act).
5.3 Municipal Series Fund covenants that National Municipals Fund shares to be
received for and on behalf of each Series in accordance herewith are not being
acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4 Municipal Series Fund covenants that it will assist National Municipals
Fund in obtaining such information as National Municipals Fund reasonably
requests concerning the beneficial ownership of each Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Municipal Series Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each Act.
5.7 Municipal Series Fund covenants that it will, from time to time, as and
when requested by National Municipals Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
or cause to be taken such further action, as National Municipals Fund may deem
necessary or desirable in order to vest in and confirm to National Municipals
Fund title to and possession of all the assets of each Series to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
5.8 National Municipals Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 National Municipals Fund covenants that it will, from time to time, as and
when requested by Municipal Series Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
and cause to be taken such further action, as Municipal Series Fund may
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deem necessary or desirable in order to (i) vest in and confirm to the Municipal
Series Fund title to and possession of all the shares of National Municipals
Fund to be transferred to the shareholders of each Series pursuant to this
Agreement and (ii) assume all of the liabilities of each Series in accordance
with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF MUNICIPAL SERIES FUND
The obligations of Municipal Series Fund to consummate the transactions
provided for herein shall be subject to the performance by National Municipals
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of National Municipals Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 National Municipals Fund shall have delivered to Municipal Series Fund on
the Closing Date a certificate executed in its name by the President or a Vice
President of National Municipals Fund, in form and substance satisfactory to
Municipal Series Fund and dated as of the Closing Date, to the effect that the
representations and warranties of National Municipals Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other matters
as Municipal Series Fund shall reasonably request.
6.3 Municipal Series Fund shall have received on the Closing Date a favorable
opinion from Sullivan & Cromwell, counsel to National Municipals Fund, dated as
of the Closing Date, to the effect that:
6.3.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
National Municipals Fund and, assuming due authorization, execution and
delivery of the Agreement by Municipal Series Fund on behalf of each Series,
is a valid and binding obligation of National Municipals Fund enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
6.3.3 The shares of National Municipals Fund to be distributed to the
shareholders of each Series under this Agreement, assuming their due
authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of National Municipals Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with National Municipals Fund's Articles of Incorporation or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement dated
January 7, 1980 between National Municipals Fund and Prudential Mutual Fund
Management, Inc., (b) the Custodian Contract dated July 13, 1984 between
National Municipals Fund and State Street Bank and Trust Company, (c) the
Distribution Agreement (Class A shares) dated August 1, 1994 between
National Municipals Fund and Prudential Mutual Fund Distributors, Inc., (d)
the Distribution Agreement (Class B shares) dated August 1, 1994 between
National Municipals Fund and Prudential Securities
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Incorporated, (e) the Distribution Agreement (Class C shares) dated August
1, 1994 between National Municipals Fund and Prudential Securities
Incorporated and (f) the Transfer Agency and Service Agreement dated January
1, 1988; provided, however, that such counsel may state that they express no
opinion as to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by National Municipals Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the Investment Company Act and such as may be
required under state Blue Sky or securities laws;
6.3.6 National Municipals Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 To the knowledge of such counsel, (a) no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or threatened against National Municipals Fund or any of
its properties or assets, and (b) National Municipals Fund is not a party to
or subject to the provision of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business,
except as otherwise disclosed.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND
The obligations of National Municipals Fund to complete the transactions
provided for herein shall be subject to the performance by Municipal Series Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
7.1 All representations and warranties of Municipal Series Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Municipal Series Fund shall have delivered to National Municipals Fund on
the Closing Date a statement of the assets and liabilities of each Series, which
statements shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of the portfolio
securities of each Series showing the adjusted tax bases of such securities by
lot, as of the Closing Date, certified by the Treasurer of Municipal Series
Fund.
7.3 Municipal Series Fund shall have delivered to National Municipals Fund on
the Closing Date a certificate executed in its name by its President or one of
its Vice Presidents, in form and substance satisfactory to National Municipals
Fund and dated as of the Closing Date, to the effect that the representations
and warranties of Municipal Series Fund made in this Agreement are true and
correct at and as of the Closing Date except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
National Municipals Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Municipal Series Fund shall
have declared and paid to the shareholders of record of each Series one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of such
Series' investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt
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interest income, if any, and realized net capital gain, if any, of such Series
for all completed taxable years from the inception of such Series through August
31, 1994, and for the period from and after August 31, 1994 through the Closing
Date.
7.5 National Municipals Fund shall have received on the Closing Date a
favorable opinion from Gardner, Carton & Douglas, counsel to Municipal Series
Fund, dated as of the Closing Date, to the effect that:
7.5.1 Municipal Series Fund is duly organized and validly existing under
the laws of the Commonwealth of Massachusetts with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently conducted
and each of the Series has been duly established in accordance with the
terms of the Municipal Series Fund's Declaration of Trust as a separate
series of Municipal Series Fund;
7.5.2 This Agreement has been duly authorized, executed and delivered by
Municipal Series Fund and constitutes a valid and legally binding obligation
of Municipal Series Fund enforceable against the assets of each Series in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Municipal Series Fund of its obligations hereunder will not,
(i) violate Municipal Series Fund's Declaration of Trust or By-Laws or (ii)
result in a default or a breach of the Management Agreement, dated December
30, 1988, between Municipal Series Fund and Prudential Mutual Fund
Management, Inc., the Custodian Contract, dated August 1, 1990, between
Municipal Series Fund and State Street Bank and Trust Company, the
Distribution Agreement (Class A shares), dated August 1, 1994, between
Municipal Series Fund and Prudential Mutual Fund Distributors, Inc., the
Distribution Agreement (Class B shares), dated August 1, 1994, between
Municipal Series Fund and Prudential Securities Incorporated, the
Distribution Agreement (Class C shares), dated August 1, 1994, between
Municipal Series Fund and Prudential Securities Incorporated and the
Transfer Agency and Service Agreement, dated January 1, 1988, between
Municipal Series Fund and Prudential Mutual Fund Services, Inc.; provided,
however, that such counsel may state that insofar as performance by
Municipal Series Fund of its obligations under this Agreement is concerned
they express no opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Municipal Series Fund under the federal laws of the United
States and the laws of the Commonwealth of Massachusetts for the
consummation of the transactions contemplated by this Agreement have been
obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Municipal Series Fund, involving any
Series, that would be required to be disclosed in the Registration Statement
and is not so disclosed; and
7.5.6 Municipal Series Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration.
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Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND AND
MUNICIPAL SERIES FUND
The obligations of National Municipals Fund and Municipal Series Fund
hereunder are subject to the further conditions that on or before the Closing
Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Municipal Series Fund and
the Board of Directors of National Municipals Fund, as to the determinations set
forth in Rule 17a-8(a) under the Investment Company Act, (b) the Board of
Directors of National Municipals Fund as to the assumption by the National
Municipals Fund of the liabilities of each Series and (c) the holders of the
outstanding shares of each Series in accordance with the provisions of the
Municipal Series Fund's Declaration of Trust and By-Laws, and certified copies
of the resolutions evidencing such approvals shall have been delivered to
National Municipals Fund.
8.2 Any proposed change to National Municipals Fund's operations that may be
approved by the Board of Directors of National Municipals Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
National Municipals Fund shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of National Municipals Fund in accordance with
the Investment Company Act and the provisions of the General Corporation Law of
the State of Maryland, and certified copies of the resolution evidencing such
approval shall have been delivered to Municipal Series Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by National Municipals Fund or Municipal
Series Fund to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of National Municipals Fund
or any Series, provided, that either party hereto may for itself waive any part
of this condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 The Funds shall have received on or before the Closing Date an opinion of
Gardner, Carton & Douglas with respect to each Series satisfactory to each of
them, substantially to the effect that for federal income tax purposes:
8.6.1 The acquisition by National Municipals Fund of the assets of a Series
in exchange solely for voting shares of National Municipals Fund and the
assumption by National Municipals Fund of such Series' liabilities, if any,
followed by the distribution of National Municipals Fund's voting shares pro
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rata to such Series' shareholders, pursuant to its termination and
constructively in exchange for such Series' shares, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code, and each Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Internal Revenue Code;
8.6.2 Each Series' shareholders will recognize no gain or loss upon the
constructive exchange of all of their shares of such Series solely for
shares of National Municipals Fund in complete termination of such Series;
8.6.3 No gain or loss will be recognized to any Series upon the transfer of
its assets to National Municipals Fund in exchange solely for shares of
National Municipals Fund and the assumption by National Municipals Fund of
such Series' liabilities, if any, and the subsequent distribution of those
shares to such Series' shareholders in complete termination of such Series;
8.6.4 No gain or loss will be recognized to National Municipals Fund upon
the acquisition of any Series' assets in exchange solely for shares of
National Municipals Fund and the assumption of such Series' liabilities, if
any;
8.6.5 National Municipals Fund's basis for those assets will be the same as
the basis thereof when held by the respective Series immediately before the
transfer, and the holding period of such assets acquired by National
Municipals Fund will include the holding period thereof when held by such
Series;
8.6.6 The Series shareholders' basis for the shares of National Municipals
Fund to be received by them pursuant to the reorganization will be the same
as their basis for the shares of the respective Series to be constructively
surrendered in exchange therefor; and
8.6.7 The holding period of National Municipals Fund shares to be received
by each Series' shareholders will include the period during which the shares
of such Series to be constructively surrendered in exchange therefor were
held; provided such Series shares were held as capital assets by those
shareholders on the date of the exchange.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to National Municipals
Fund and each Series pro rata in a fair and equitable manner in proportion to
their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
National Municipals Fund or Municipal Series Fund as to any Series may at
its option terminate this Agreement at or prior to the Closing Date because of:
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11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Municipal Series Fund and National
Municipals Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of National Municipals Fund or any Trustee or officer of Municipal Series Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meetings called
by Municipal Series Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
National Municipals Fund to be distributed to any Series' shareholders under
this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Mutual Fund Management, Inc., One Seaport Plaza, New York, New York 10292,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF MUNICIPAL SERIES FUND;
AGREEMENT AN OBLIGATION ONLY OF THE RESPECTIVE SERIES, AND ENFORCEABLE ONLY
AGAINST ASSETS OF THE RESPECTIVE SERIES.
The name "Prudential Municipal Series Fund" is the designation of the
Trustees from time to time acting under an Amended and Restated Declaration of
Trust dated August 17, 1994, as the same may be from time to time amended, and
the names "Arizona Series", "Georgia Series" and "Minnesota Series" are the
designations of three separate portfolios of the assets of Municipal Series
Fund. The National Municipals Fund acknowledges that it must look, and agrees
that it shall look, solely to the assets of each Series for the enforcement of
any claims arising out of or based on the obligations of Municipal Series Fund
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hereunder, and with respect to obligations relating to any Series, only to the
assets of such Series, and in particular that (i) neither the Trustees,
officers, agents or shareholders of Municipal Series Fund assume or shall have
any personal liability for obligations of Municipal Series Fund hereunder, (ii)
none of the assets of Municipal Series Fund other than the portfolio assets of
the Series may be resorted to for the enforcement of any claim based on the
obligations of Municipal Series Fund hereunder, and (iii) none of the assets of
any Series shall be subject to any claim based on the obligations of Municipal
Series Fund hereunder which relate to any other Series.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential Municipal Series Fund
By __/s/ Richard A. Redeker_____________________
PRESIDENT
Prudential National Municipals Fund, Inc.
By __/s/ Robert F. Gunia________________________
VICE PRESIDENT
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TABLE OF CONTENTS
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PAGE
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SYNOPSIS................................................................................................... 2
General................................................................................................ 2
The Proposed Reorganizations........................................................................... 2
Reasons for the Proposed Reorganizations............................................................... 3
Certain Differences Between the Series and Municipals Fund............................................. 6
Structure of the Series and Municipals Fund............................................................ 7
Investment Objectives and Policies..................................................................... 7
Fees and Expenses...................................................................................... 8
Management Fees.................................................................................... 8
Distribution Fees.................................................................................. 9
Other Expenses..................................................................................... 10
Expense Ratios..................................................................................... 10
Purchases and Redemptions.............................................................................. 13
Exchange Privileges.................................................................................... 14
Dividends and Distributions............................................................................ 14
Federal Tax Consequences of Proposed Reorganizations................................................... 14
PRINCIPAL RISK FACTORS..................................................................................... 14
Ratings................................................................................................ 14
Hedging Activities..................................................................................... 15
Tax Considerations..................................................................................... 16
Realignment of Investment Portfolio.................................................................... 16
THE PROPOSED TRANSACTION................................................................................... 16
Agreement and Plan of Reorganization................................................................... 16
Reasons for the Reorganizations........................................................................ 17
Description of Securities to be Issued................................................................. 18
Tax Considerations..................................................................................... 18
Certain Comparative Information About the Funds........................................................ 19
Capitalization..................................................................................... 19
Shareholder Meetings and Voting Rights............................................................. 19
Shareholder Liability.............................................................................. 20
Liability and Indemnification of Directors and Trustees............................................ 21
Pro Forma Capitalization and Ratios.................................................................... 22
INFORMATION ABOUT MUNICIPALS FUND.......................................................................... 23
INFORMATION ABOUT THE SERIES............................................................................... 25
VOTING INFORMATION......................................................................................... 26
OTHER MATTERS.............................................................................................. 27
SHAREHOLDERS' PROPOSALS.................................................................................... 27
APPENDIX A--Performance Overview........................................................................... A-1
APPENDIX B--Agreement and Plan of Reorganization........................................................... B-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Prudential National Municipals Fund, Inc. dated February 28, 1995.
Annual Report of Arizona Series, Georgia Series or Minnesota Series for the Fiscal Year ended August
31, 1994.
Semi-Annual Reports of Arizona Series, Georgia Series or Minnesota Series for the six-months ended
February 28, 1995.
</TABLE>
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 18, 1995
ACQUISITION OF ASSETS OF
ARIZONA SERIES, GEORGIA SERIES AND MINNESOTA SERIES OF THE
PRUDENTIAL MUNICIPAL SERIES FUND
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
------------------------
BY AND IN EXCHANGE FOR THE SHARES OF
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all of the
liabilities, if any, of the Arizona Series, the Georgia Series and the Minnesota
Series of Prudential Municipal Series Fund (the Acquired Series) by Prudential
National Municipals Fund, Inc. (the Acquiring Fund) consists of this cover page,
the attached pro forma financial statements and the following described
documents, each of which is attached hereto and incorporated herein by
reference.
1. The Statement of Additional Information of the Acquiring Fund dated
February 28, 1995.
2. The Semi-Annual Report to Shareholders of the Acquiring Fund for the
six-month period ended June 30, 1995.
3. The Annual Reports to Shareholders of the Acquired Series for the fiscal
year ended August 31, 1994.
The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated September 18, 1995 relating to the above referenced
matter may be obtained from the Acquiring Fund without charge by writing or
calling Prudential National Municipals Fund, Inc. at the address or telephone
number listed above. This Statement of Additional Information relates to, and
should be read in conjunction with, the Prospectus and Proxy Statement.
1
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Municipal Series Fund:
Arizona Series, Georgia Series and Minnesota Series will be exchanged for shares
of Prudential National Municipals Fund, Inc. and Prudential National Municipals
Fund, Inc. will assume the liabilities, if any, of Prudential Municipal Series
Fund: Arizona Series, Georgia Series and Minnesota Series. Immediately
thereafter, the shares of Prudential National Municipals Fund, Inc. will be
distributed to the shareholders of Prudential Municipals Series Fund: Arizona
Series, Georgia Series and Minnesota Series in a total liquidation of Prudential
Municipal Series Fund: Arizona Series, Georgia Series and Minnesota Series which
will subsequently be terminated. The following pro forma financial statements
include a pro forma Portfolio of Investments at June 30, 1995, a pro forma
Statement of Assets and Liabilities at June 30, 1995 and a pro forma Statement
of Operations for the year ended June 30, 1995. In addition, a pro forma
Statement of Assets and Liabilities at June 30, 1995 and a Statement of
Operations for the year ended June 30, 1995 has been included giving effect to
the proposed transaction whereby all the assets of Prudential Municipal Series
Fund: Arizona Series and Minnesota Series will be exchanged for shares of
Prudential National Municipals Fund, Inc. and Prudential National Municipals
Fund, Inc. will assume the liabilities, if any, of Prudential Municipal Series
Fund: Arizona Series and Minnesota Series.
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
-----------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL -----------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baa1 $ 6,000 $ 6,000
Baa1 2,000 2,000
A $ 1,375 1,375
Aaa 700 700
Aaa 2,250 2,250
Aaa 2,000 2,000
Aaa 1,000 1,000
A1 1,500 1,500
Aaa 2,000 2,000
Aaa 500 500
BBB* 250 250
BBB* 1,780 1,780
Baa 450 450
Aaa 725 725
Aaa 285 285
Aaa 2,000 2,000
Aaa 1,500 1,500
Aaa 1,500 1,500
Aaa 1,500 1,500
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- ---------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
LONG TERM INVESTMENTS -- 91.8%
ALABAMA -- 1.1%
Baa1 Courtland Ind. Dev. Brd. Rev., 7.20%, 12/01/13 $ 6,414,360
Baa1 Courtland Ind. Dev. Brd. Rev., 5.90%, 02/01/17 1,892,640
------------ ----------- -----------
8,307,000 $ 0 $ 0
------------ ----------- -----------
ARIZONA -- 7.8%
A Arizona St. Edl. Loan Mkt. Corp., 7.00%, 03/01/05 1,469,724
Aaa Arizona St. Mun. Fin. Proj., 8.75%, 08/01/06, B.I.G 742,077
Aaa Arizona St. Mun. Fin. Proj., 7.875%, 08/01/14, A.M.B.A.C. 2,799,517
Aaa Arizona St. Trans. Brd. Hwy. Rev., 7.00%, 07/01/09 2,224,460
Aaa Arizona St. Univ. Sys. Rev., 7.00%, 07/01/10 1,135,420
A1 Central Arizona Wtr. Consv. Dist., 7.50%, 11/01/05 1,720,995
Aaa Chandler, Cap. Apprec. Ref., Zero Coupon, 07/01/02, F.G.I.C. 1,384,660
Aaa Chandler, Cap. Apprec. Ref., 4.375%, 07/01/13, F.G.I.C. 416,130
BBB* Guam Pwr. Auth. Rev., Ser. A, 6.625%, 10/01/14 253,230
BBB* Guam Pwr. Auth. Rev., 6.75%, 10/01/24 1,816,294
Baa La Paz Cnty., Unified Sch. Dist., 9.40%, 07/01/96, F.G.I.C. 471,744
Aaa Maricopa Cnty. Hosp. Dist. No. 1, Facs. Rev., East Valley Behavioral
Hlth. Fac. Proj., 7.80%, 06/01/13 787,959
Aaa Maricopa Cnty. Ind. Dev. Auth. Hosp. Fac. Rev., 12.00%, 01/01/08 323,751
Aaa Maricopa Cnty. Ind. Dev. Auth. Rev., 7.00%, 12/01/00, F.S.A. 2,163,160
Aaa Maricopa Cnty. Sch. Dist., Zero Coupon, 07/01/09, A.M.B.A.C. 648,405
Aaa Maricopa Cnty. Sch. Dist., Zero Coupon, 07/01/14, A.M.B.A.C. 460,665
Aaa Maricopa Cnty. Sch. Dist., Zero Coupon, 07/01/04, M.B.I.A. 917,925
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Baa1 $ 6,414,360
Baa1 1,892,640
----------- ------------
$ 0 8,307,000
----------- ------------
A 1,469,724
Aaa 742,077
Aaa 2,799,517
Aaa 2,224,460
Aaa 1,135,420
A1 1,720,995
Aaa 1,384,660
Aaa 416,130
BBB* 253,230
BBB* 1,816,294
Baa 471,744
Aaa
787,959
Aaa 323,751
Aaa 2,163,160
Aaa 648,405
Aaa 460,665
Aaa 917,925
</TABLE>
2
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aaa $ 2,810 $ 2,810
Aaa 1,140 1,140
Aaa 1,500 1,500
Aaa 1,330 1,330
Aaa 1,000 1,000
Aaa 1,050 1,050
Aaa 1,200 1,200
Aaa 1,000 1,000
Aaa 500 500
BBB* 465 465
Aaa 810 810
Aaa 3,000 3,000
Aaa 2,700 2,700
Aaa $ 3,000@ 3,000
Aaa 3,455 3,455
Aaa 895+ 895
Aaa 890+ 890
Aaa 105 105
Aaa 110 110
Aa 3,000 3,000
Aaa 770 770
Aaa 700 700
Aa1 500 500
Aa1 1,000 1,000
Aaa 2,100 2,100
Aa 500 500
Aaa 1,000 1,000
A1 1,000 1,000
A1 1,100 1,100
A1 4,500 4,500
A1 2,500 2,500
Aaa 1,000 1,000
Aaa 500 500
A1 1,000 1,000
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
ARIZONA (CONTINUED)
Aaa Maricopa Cnty. Sch. Dist., Zero Coupon, 07/01/04, A.M.B.A.C. $ 1,719,579
Aaa Maricopa Cnty. Sch. Dist., Zero Coupon, 07/01/04 697,623
Aaa Maricopa Cnty. Unified Sch. Dist., Zero Coupon, 07/01/07, F.G.I.C. 749,910
Aaa Maricopa Cnty. Unified Sch. Dist., Zero Coupon, 07/01/09, F.G.I.C. 574,919
Aaa Maricopa Cnty. Unified Sch. Dist., 6.25%, 07/01/11, F.G.I.C. 1,067,010
Aaa Maricopa County Arizona Unified School District Number 80, Zero
Coupon, 07/01/10, M.B.I.A. 420,714
Aaa Maricopa County Arizona Unified School District Number 80, Zero
Coupon, 07/01/11, M.B.I.A. 450,276
Aaa Navajo Cnty. Poll. Ctrl. Corp. Rev., 5.50%, 08/15/28 928,340
Aaa Nogales Mun. Dev. Auth. Rev., 8.00%, 06/01/08, M.B.I.A. 555,940
BBB* Peoria Bell Road Impvt. Dist., 7.20%, 01/01/11 495,788
Aaa Phoenix Arpt. Rev. Ref., 6.40%, 07/01/12, M.B.I.A. 846,434
Aaa Phoenix St. & Hwy. Rev., Zero Coupon, 07/01/12, F.G.I.C. 1,053,570
Aaa Pima Cnty. Ind. Dev. Auth. Rev., 7.25%, 07/15/10, F.S.A. 2,970,945
Aaa Pima Cnty. Unified Sch. Dist., 7.50%, 07/01/10, F.G.I.C. $ 3,580,230
Aaa Pima Cnty., Unified Sch. Dist. No. 16, Zero Coupon, 07/01/09,
F.G.I.C. 1,493,493
Aaa Pima Cnty. Ind. Dev. Auth. Hlth. Care, Carondelet Hosp., 7.90%,
07/01/05 1,001,944
Aaa Pima Cnty. Ind. Dev. Auth. Hlth. Care, Carondelet Hosp., 8.00%,
07/01/13 998,838
Aaa Pima Cnty. Ind. Dev. Auth. Hlth. Care, Carondelet Hosp., 7.90%,
07/01/05 114,036
Aaa Pima Cnty. Ind. Dev. Auth. Hlth. Care, Carondelet Hosp., 8.00%,
07/01/13 121,096
Aa Salt River Proj. Agric. Impvt. &, 5.00%, 01/01/30 2,545,920
Aaa Santa Cruz Cnty. Unified Sch. Dist., Zero Coupon, 01/01/06 424,532
Aaa Santa Cruz Cnty. Unified Sch. Dist., Zero Coupon, 07/01/06 375,151
Aa1 Scottsdale, Gen. Oblig., 5.50%, 07/01/09 494,710
Aa1 Scottsdale, Gen. Oblig., 4.00%, 07/01/13 782,580
Aaa Scottsdale Ind. Dev. Auth. Rev., 8.50%, 09/01/07, A.M.B.A.C. 2,306,661
Aa Tempe, Gen. Oblig., 5.25%, 07/01/13 467,405
Aaa Tempe Union High Sch. Dist., 7.00%, 07/01/08 1,153,190
A1 Tucson, 7.375%, 07/01/11, Series A 1,161,640
A1 Tucson, 7.375%, 07/01/12, Series A 1,287,033
A1 Tucson, 7.375%, 07/01/13, Series A 5,279,850
A1 Tucson Arizona. Gen. Oblig., 5.375%, 07/01/20 2,304,975
Aaa Tucson Wtr. Rev., 8.60%, 07/01/00, E.T.M. 1,174,510
Aaa Tucson Wtr. Rev., 7.00%, 07/01/10, M.B.I.A. 534,700
A1 Tucson Wtr. Rev., 5.50%, 07/01/09 978,990
------------ ----------- -----------
11,308,753 49,539,895 $ 0
------------ ----------- -----------
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Aaa $ 1,719,579
Aaa 697,623
Aaa 749,910
Aaa 574,919
Aaa 1,067,010
Aaa
420,714
Aaa
450,276
Aaa 928,340
Aaa 555,940
BBB* 495,788
Aaa 846,434
Aaa 1,053,570
Aaa 2,970,945
Aaa 3,580,230
Aaa
1,493,493
Aaa
1,001,944
Aaa
998,838
Aaa
114,036
Aaa
121,096
Aa 2,545,920
Aaa 424,532
Aaa 375,151
Aa1 494,710
Aa1 782,580
Aaa 2,306,661
Aa 467,405
Aaa 1,153,190
A1 1,161,640
A1 1,287,033
A1 5,279,850
A1 2,304,975
Aaa 1,174,510
Aaa 534,700
A1 978,990
----------- ------------
$ 0 60,848,648
----------- ------------
</TABLE>
3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BBB* $ 10,000 $ 10,000
Aaa 2,400 2,400
Aaa 5,000 5,000
Aaa 10,000 10,000
Aaa 5,000 5,000
Aaa 2,000 2,000
Aaa 2,450 2,450
Aaa 2,000 2,000
Aaa 3,650 3,650
Aaa 2,000 2,000
Ba 1,600 1,600
Aa 5,000 5,000
Aa 3,000 3,000
BBB* 3,700 3,700
BBB* 7,960 7,960
A1 2,000 2,000
A 13,645 13,645
Aa 195 195
Aa 1,260 1,260
Aa2 5,000 5,000
NR 4,655+ 4,655
NR $ 935 935
Aa 4,410 4,410
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
CALIFORNIA -- 4.9%
BBB* Foothill / Eastern Trans. Corr. Agcy., Zero Coupon, 01/01/20 $ 1,767,200
Aaa Glendale Redev. Agcy. Tax Alloc. Rev., 5.50%, 12/01/13, A.M.B.A.C. 2,282,568
Aaa Los Angeles Met. Trans. Auth., 5.00%, 07/01/21, F.G.I.C. 4,304,650
Aaa San Bernardino Cnty. California Cert. of Part., Med. Ctr. Fin. Proj.,
5.50%, 08/01/22, M.B.I.A. 9,196,400
Aaa San Jose Redev. Proj., 6.00%, 08/01/11, M.B.I.A. 5,124,400
Aaa Santa Margarita/Dana Point Auth., M.B.I.A., 7.25%, 08/01/09 2,301,520
Aaa Santa Margarita/Dana Point Auth., M.B.I.A., 7.25%, 08/01/10 2,822,596
Aaa Santa Margarita/Dana Point Auth., M.B.I.A., 7.25%, 08/01/14 2,306,640
Aaa So. Orange Cnty. Pub. Fin. Auth., 8.00%, 08/15/09, F.G.I.C. 4,472,746
Aaa So. Orange Cnty. Pub. Fin. Auth., 6.50%, 08/15/10, F.G.I.C. 2,158,460
Ba West Contra Costa Sch. Dist., 7.125%, 01/01/24 1,638,560
------------ ----------- -----------
38,375,740 $ 0 $ 0
------------ ----------- -----------
COLORADO -- 2.7%
Aa Colorado Hsg. Fin. Auth., 8.00%, 06/01/25 5,681,250
Aa Colorado Hsg. Fin. Auth., 7.90%, 12/01/25 3,382,890
BBB* Colorado Springs Arpt. Rev., 6.90%, 01/01/12, A.M.T. 3,803,674
BBB* Colorado Springs Arpt. Rev., 7.00%, 01/01/22, A.M.T. 8,182,004
------------ ----------- -----------
21,049,818 0 0
------------ ----------- -----------
CONNECTICUT -- 0.3%
A1 Connecticut St. Spec. Tax Oblig. Rev., Infrastructure, 7.125%,
6/01/10 2,283,680
------------ ----------- -----------
2,283,680 0 0
------------ ----------- -----------
FLORIDA -- 2.9%
A Broward Cnty. Res. Rec., 7.95%, 12/01/08 14,967,883
Aa Florida St. Brd. Ed., 9.125%, 06/01/14, E.T.M. 271,693
Aa Florida St. Brd. Ed., 9.125%, 06/01/14 1,719,371
Aa2 Hillsborough Cnty. Ind. Dev. Auth., Poll., 8.00%, 05/01/22 5,892,500
------------ ----------- -----------
22,851,447 0 0
------------ ----------- -----------
GEORGIA -- 5.1%
NR Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm., 9.25%,
6/01/10 5,620,214
NR Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ., 9.25%, 06/01/10 1,128,872
Aa Atlanta Wtr. & Swr. Rev., 6.00%, 01/01/11 4,494,804
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
BBB* $ 1,767,200
Aaa 2,282,568
Aaa 4,304,650
Aaa
9,196,400
Aaa 5,124,400
Aaa 2,301,520
Aaa 2,822,596
Aaa 2,306,640
Aaa 4,472,746
Aaa 2,158,460
Ba 1,638,560
----------- ------------
$ 0 38,375,740
----------- ------------
Aa 5,681,250
Aa 3,382,890
BBB* 3,803,674
BBB* 8,182,004
----------- ------------
0 21,049,818
----------- ------------
A1
2,283,680
----------- ------------
0 2,283,680
----------- ------------
A 14,967,883
Aa 271,693
Aa 1,719,371
Aa2 5,892,500
----------- ------------
0 22,851,447
----------- ------------
NR
5,620,214
NR 1,128,872
Aa 4,494,804
</TABLE>
4
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aa $ 500 $ 500
Aaa $ 5,000 5,000
Aaa 500 500
Aaa 425 425
Aaa 500 500
Aaa 750 750
Aaa 500 500
Aa 750 750
Aa3 500 500
Aaa 750 750
A1 500 500
Aa3 750 750
Baa1 750 750
Aa 250 250
Aa 1,325 1,325
Aa 750 750
A-* 600 600
A1 475 475
A1 250 250
Aaa 750 750
Aa 6,550 6,550
NR 635 635
AA* 250 250
A1 750 750
Aaa 500 500
Aaa 500 500
Aaa 500 500
Aaa 500 500
Baa 500 500
BBB* 500 500
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
GEORGIA (CONTINUED)
Aa Atlanta Wtr. & Swr. Rev., 4.75%, 01/01/23 $ 412,255
Aaa Burke Cnty. Dev. Auth., Oglethorpe Pwr. Corp., 1st Mtg., 8.00%,
01/01/22, M.B.I.A. $ 5,918,000
Aaa Burke Cnty. Dev. Auth., 6.625%, 10/01/24 520,260
Aaa Clarke Cnty. Sch. Dist., 5.50%, 07/01/08, F.G.I.C. 424,996
Aaa Clayton Cnty. Wtr. Auth., 6.65%, 05/01/12 562,425
Aaa Cobb Cnty. Kennestone Hosp., 5.00%, 04/01/24, M.B.I.A. 642,308
Aaa Columbus Hosp. Auth. Rev., Antic., 8.25%, 01/01/07, B.I.G. 539,650
Aa DeKalb Cnty. Wtr. & Swr. Rev., 5.25%, 10/01/23 674,745
Aa3 DeKalb Private Hosp. Auth. Rev., 8.25%, 09/01/15 526,555
Aaa Douglasville-Douglas Cnty., 5.625%, 06/01/15, A.M.B.A.C. 729,398
A1 Forsyth Cnty. Sch. Dist. Dev. Rev., 6.75%, 07/01/16 545,070
Aa3 Fulco Hosp. Auth. Rev., Antic. Cert., 7.75%, 10/01/08 788,235
Baa1 Fulco Hosp. Auth. Rev., Antic. Cert., 6.375%, 09/01/22 693,255
Aa Fulton Cnty. Bldg. Auth. Rev., 7.00%, 01/01/10 272,432
Aa Fulton Cnty. Bldg. Auth. Rev., Zero Coupon, 01/01/11 525,919
Aa Fulton Cnty. Sch. Dist. Rev., 6.375%, 05/01/17 793,342
A-* Georgia Mun. Gas Auth. Rev., 6.40%, 07/01/14 601,170
A1 Georgia Mun. Elec. Auth. Pwr., 6.25%, 01/01/17 479,489
A1 Georgia Mun. Elec. Auth. Pwr., 6.00%, 01/01/14 247,247
Aaa Georgia Municipal Electric Authority Power Revenue, 4.75%, 01/01/19,
A.M.B.A.C. 627,713
Aa Georgia St. Res. Fin. Auth., 8.00%, 12/01/16 7,073,738
NR Green Cnty. Dev. Auth., 6.875%, 02/01/04 685,514
AA* Hancock County Georgia, 6.70%, 04/01/15 257,695
A1 Henry Cnty. Sch. Dist. Dev. Rev., 6.45%, 08/01/11 790,028
Aaa Marietta Dev. Auth. Rev., 7.20%, 12/01/09, C.G.I.C. 545,950
Aaa Metro Atlanta Rapid Trnst Georgia Tax, 5.125%, 07/01/17, A.M.B.A.C. 448,615
Aaa Metropolitan Atlanta Rapid Transit Authority Georgia, 6.90%,
07/01/20, M.B.I.A. 546,350
Aaa Peach Cnty. Sch. Dist., 6.40%, 02/01/19, M.B.I.A. 515,230
Baa Savannah Hosp. Auth. Rev., 7.00%, 01/01/23 495,770
BBB* Toombs Cnty. Hosp., 7.00%, 12/01/17 488,905
------------ ----------- -----------
23,106,756 $ 0 16,509,393
------------ ----------- -----------
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Aa $ 412,255
Aaa
5,918,000
Aaa 520,260
Aaa 424,996
Aaa 562,425
Aaa 642,308
Aaa 539,650
Aa 674,745
Aa3 526,555
Aaa 729,398
A1 545,070
Aa3 788,235
Baa1 693,255
Aa 272,432
Aa 525,919
Aa 793,342
A-* 601,170
A1 479,489
A1 247,247
Aaa
627,713
Aa 7,073,738
NR 685,514
AA* 257,695
A1 790,028
Aaa 545,950
Aaa 448,615
Aaa
546,350
Aaa 515,230
Baa 495,770
BBB* 488,905
----------- ------------
$ 0 39,616,149
----------- ------------
</TABLE>
5
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aaa $ 3,055 $ 3,055
Aaa 1,600 1,600
Baa2 9,000 9,000
Baa2 4,250 4,250
Baa2 6,000 6,000
Aa2 5,700 5,700
Aaa 13,500 13,500
Aaa 5,780 5,780
Baa2 5,000 5,000
NR 4,000 4,000
Baa3 5,000 5,000
Aaa 5,000 5,000
Aaa 4,400 4,400
Baa 4,000 4,000
NR 4,096 4,096
Baa1 4,000 4,000
Aaa 4,000 4,000
AA* 5,185 5,185
AA* 3,130 3,130
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
ILLINOIS -- 0.2%
Aaa Kane & De Kalb Cntys. Illinois Cmnty. Unit Sch., A.M.B.A.C., Zero
Coupon, 12/01/10 $ 1,182,713
Aaa Kane & De Kalb Cntys. Illinois Cmnty. Unit Sch., A.M.B.A.C., Zero
Coupon, 12/01/14 473,440
------------ ----------- -----------
1,656,153 $ 0 $ 0
------------ ----------- -----------
INDIANA -- 1.7%
Baa2 Indianapolis Int'l Arpt. Auth. Rev., 7.10%, 01/15/17 9,319,860
Baa2 Indianapolis Int'l Arpt. Auth. Rev., 6.50%, 11/15/31 4,037,500
------------ ----------- -----------
13,357,360 0 0
------------ ----------- -----------
KENTUCKY -- 1.6%
Baa2 Henderson Cnty. Solid Waste Disp. Rev., Macmillan Bloedel Proj.,
7.00%, 03/01/25 6,222,060
Aa2 Jefferson Cnty. Poll. Ctrl. Rev., 7.75%, 02/01/19 6,194,247
------------ ----------- -----------
12,416,307 0 0
------------ ----------- -----------
LOUISIANA -- 3.6%
Aaa New Orleans, Louisiana Cap. Apprec., Zero Coupon, 09/01/09,
A.M.B.A.C. 5,777,730
Aaa Orleans Parish, Sch. Brd., 8.90%, 02/01/07, M.B.I.A., E.T.M. 7,575,673
Baa2 St. Charles Parish, Louisiana Pur. & Lt. Co., 6.875%, 07/01/24 5,114,150
NR St. Charles Parish, Poll. Ctrl. Rev., 8.25%, 06/01/14 4,412,680
Baa3 St. Charles Parish, Poll. Ctrl. Rev., 8.00%, 12/01/14 5,502,600
------------ ----------- -----------
28,382,833 0 0
------------ ----------- -----------
MARYLAND -- 2.0%
Aaa Maryland St. Hlth. & Higher Ed. Facs. Auth. Rev., 5.00%, 07/01/18,
F.G.I.C. 4,341,200
Aaa Maryland St. Hlth. & Higher Ed. Facs. Auth. Rev., 5.00%, 07/01/20,
F.G.I.C. 3,778,060
Baa Maryland St. Hlth. & Higher Ed. Facs. Auth. Rev., 5.50%, 07/01/24 3,180,880
NR Northeast Waste Disp. Auth., Baltimore City Sludge Proj., 7.25%,
07/01/07 4,181,484
------------ ----------- -----------
15,481,624 0 0
------------ ----------- -----------
MICHIGAN -- 2.1%
Baa1 Dickinson Cnty. Economic Dev. Auth., 5.85%, 10/01/18 3,726,040
Aaa Holland Sch. Dist., A.M.B.A.C., Zero Coupon, 05/01/12 1,419,240
AA* Michigan St. Hsg. Dev. Auth. Rev., 7.50%, 06/01/15 5,527,625
AA* Michigan St. Hsg. Dev. Auth. Rev., 7.75%, 12/01/19 3,331,165
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Aaa
$ 1,182,713
Aaa
473,440
----------- ------------
$ 0 1,656,153
----------- ------------
Baa2 9,319,860
Baa2 4,037,500
----------- ------------
0 13,357,360
----------- ------------
Baa2
6,222,060
Aa2 6,194,247
----------- ------------
0 12,416,307
----------- ------------
Aaa
5,777,730
Aaa 7,575,673
Baa2 5,114,150
NR 4,412,680
Baa3 5,502,600
----------- ------------
0 28,382,833
----------- ------------
Aaa
4,341,200
Aaa
3,778,060
Baa 3,180,880
NR
4,181,484
----------- ------------
0 15,481,624
----------- ------------
Baa1 3,726,040
Aaa 1,419,240
AA* 5,527,625
AA* 3,331,165
</TABLE>
6
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A* $ 1,000 $ 1,000
Aaa 1,100 1,100
Aaa 1,700 1,700
Aaa $ 1,575 1,575
Aaa 10 10
Aaa 500 500
Aaa 750 750
A 500 500
Aa 10 10
A1 820 820
A 800 800
AAA* 920 920
Aaa 1,000 1,000
Aaa 750 750
Aaa 1,000 1,000
Aaa 1,000 1,000
AA+* 650 650
AA+* 500 500
Aa1 500 500
Aa1 500 500
Aa 500 500
A1 300 300
A 370 370
Aaa 750 750
A 370 370
Aaa 500 500
Aaa 1,000 1,000
NR 500 500
Aaa 2,045 2,045
Aaa 800 800
Aaa 500 500
Aaa 1,000 1,000
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
MICHIGAN (CONTINUED)
A* Michigan St. Hsg. Dev. Auth. Rev., 7.55%, 04/01/23 $ 1,067,400
Aaa Okemos Pub. Sch. Dist., Zero Coupon, 05/01/12, M.B.I.A. 390,291
Aaa Okemos Pub. Sch. Dist., Zero Coupon, 05/01/13, M.B.I.A. 564,247
------------ ----------- -----------
16,026,008 $ 0 $ 0
------------ ----------- -----------
MINNESOTA -- 3.3%
Aaa Anoka Hennepin Minnesota Independent School District
Number 11, Zero Coupon, 02/01/12, C.G.I.C.
Aaa Dakota Cnty. Hsg. & Redev. Auth., 9.375%, 05/01/18, F.G.I.C.
Aaa Metropolitan Council of Minneapolis, 6.75%, 09/01/10
Aaa Metropolitan Council of Minneapolis, 6.25%, 12/01/06
A Metropolitan Council of Minneapolis, 6.00%, 10/01/09
Aa Minneapolis Cmnty. Dev. Agcy., 9.875%, 12/01/15
A1 Minneapolis Hosp. Rev., 8.70%, 12/01/02
A Minneapolis Hosp. Rev., 8.125%, 08/01/17
AAA* Minneapolis-St. Paul Hsg. Fin., 7.30%, 08/01/31, G.N.M.A.
Aaa Minneapolis-St. Paul Met. Arpts., 7.80%, 01/01/14
Aaa Minneapolis Cmnty. Dev. Agcy., Zero Coupon, 09/01/01, M.B.I.A.
Aaa Minneapolis Cmnty. Dev. Agcy., Zero Coupon, 03/01/06, M.B.I.A.
Aaa Minneapolis Cmnty. Dev. Agcy., Zero Coupon, 09/01/07, M.B.I.A.
AA+* Minnesota Pub. Facs. Auth., 7.00%, 03/01/09
AA+* Minnesota Pub. Facs. Auth., 6.90%, 03/01/03
Aa1 Minnesota St, Gen. Oblig., 6.00%, 10/01/13
Aa1 Minnesota St, 6.25%, 08/01/14
Aa Minnesota St. Higher Ed. Facs. Auth. Rev., 6.40%, 03/01/22
A1 Minnesota St. Higher Ed. Facs. Auth. Rev., 5.60%, 09/01/14
A Northern Mun. Pwr. Agcy., 7.25%, 01/01/16
Aaa Northern Mun. Pwr. Agcy., 5.50%, 01/01/18, A.M.B.A.C.
A Northfield Coll. Fac. Rev., 6.30%, 10/01/12
Aaa Ramsey Cnty., Gen. Oblig., 7.25%, 02/01/04
Aaa Robbinsdale Hosp. Rev., 5.55%, 05/15/19, A.M.B.A.C.
NR Rochester Hlth. Care Facs. Rev., 8.30%, 11/15/07
Aaa St. Louis Park Hlth. Care Facs. Rev., Hlth. Sys., 5.20%, 07/01/23,
A.M.B.A.C. 1,816,798
Aaa St. Louis Park Hosp. Rev., 7.25%, 07/01/18, A.M.B.A.C.
Aaa St. Paul Hsg. & Redev. Auth., 5.55%, 05/15/23, A.M.B.A.C.
Aaa St. Paul Hsg. & Redev. Auth., 5.25%, 09/01/05, A.M.B.A.C.
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
A* $ 1,067,400
Aaa 390,291
Aaa 564,247
----------- ------------
$ 0 16,026,008
----------- ------------
Aaa
573,001 573,001
Aaa 10,715 10,715
Aaa 528,205 528,205
Aaa 792,472 792,472
A 505,240 505,240
Aa 10,397 10,397
A1 920,352 920,352
A 878,368 878,368
AAA* 969,202 969,202
Aaa 1,100,390 1,100,390
Aaa 548,047 548,047
Aaa 549,570 549,570
Aaa 498,680 498,680
AA+* 697,996 697,996
AA+* 551,425 551,425
Aa1 507,025 507,025
Aa1 501,070 501,070
Aa 510,810 510,810
A1 283,794 283,794
A 400,943 400,943
Aaa 711,990 711,990
A 380,926 380,926
Aaa 534,445 534,445
Aaa 939,580 939,580
NR 569,925 569,925
Aaa
1,816,798
Aaa 904,984 904,984
Aaa 467,750 467,750
Aaa 998,360 998,360
</TABLE>
7
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baa $ 820 $ 820
AAA* 1,147 1,147
Aaa 3,250 3,250
Aaa $ 9,950 9,950
Aaa 195 195
Aaa 305 305
A1 1,000 1,000
A1 500 500
Baa3 5,000 5,000
Aaa 7,640 7,640
Aaa 4,695 4,695
Ba 2,600 2,600
BBB-* 7,000 7,000
Aaa 3,420 3,420
A 3,000 3,000
Aaa 10,000 10,000
Aaa 2,500 2,500
Aa 2,000 2,000
A-* 5,500 5,500
Baa1 5,000 $ 5,000
Baa1 3,500 3,500
Baa1 1,500 1,500
Baa1 2,000 2,000
Baa1 1,500 1,500
Baa1 5,000 5,000
Aaa 21,250 21,250
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
MINNESOTA (CONTINUED)
Baa St. Paul Port Auth., Energy Park, 8.00%, 12/01/07
AAA* St. Paul Science Museum, 7.50%, 12/15/01
Aaa Southern Minnesota Mun. Pwr. Agcy. Supply Sys., Zero Coupon,
01/01/20, M.B.I.A.
Aaa Southern Mun. Pwr. Agcy., Pwr. Supply Sys., Zero Coupon, 01/01/21,
M.B.I.A. $ 2,122,833
Aaa Southern Minnesota Municipal Power Agency Power Supply Systems,
5.50%, 01/01/15
Aaa Southern Minnesota Municipal Power Agency Power Supply Systems,
5.50%, 01/01/15, A.M.B.A.C.
A1 Univ. of Minnesota Rev., 6.00%, 02/01/11
A1 Western Mun. Pwr. Agcy., 5.50%, 01/01/15
------------ ----------- -----------
3,939,631 $ 0 $ 0
------------ ----------- -----------
NEVADA -- 0.6%
Baa3 Clark Cnty., 6.50%, 12/01/33 4,769,850
------------ ----------- -----------
4,769,850 0 0
------------ ----------- -----------
NEW JERSEY -- 5.6%
Aaa Bergen Cnty. Util. Auth., Wtr. Poll. Ctrl. Rev., Zero Coupon,
12/15/07, F.G.I.C. 3,886,162
Aaa Bergen Cnty. Util. Auth., Wtr. Poll. Ctrl. Rev., Zero Coupon,
12/15/09, F.G.I.C. 2,071,481
Ba Camden Cnty. Poll. Ctrl. Fin. Auth., 7.50%, 12/01/09 2,636,946
BBB-* Hudson Cnty. Impvt. Auth., 7.10%, 01/01/20 6,896,120
Aaa New Jersey St. Hsg. & Mtge. Fin. Agcy. 7.70%, 10/01/29, A.M.T.,
M.B.I.A. 3,627,218
A New Jersey St. Tpke. Auth. Rev., 6.75%, 01/01/08 3,230,910
Aaa New Jersey St. Tpke. Auth. Rev., 6.50%, 01/01/16, F.S.A. 10,820,500
Aaa New Jersey St. Tpke. Auth. Rev., 6.50%, 01/01/16, M.B.I.A. 2,705,125
Aa New Jersey Waste Wtr.Treat., 6.875%, 06/15/09 2,186,820
A-* Union Cnty. Utils. Auth., 7.10%, 06/15/06 5,668,575
------------ ----------- -----------
43,729,857 0 0
------------ ----------- -----------
NEW YORK -- 11.0%
Baa1 New York City, Gen. Oblig., 8.25%, 11/15/02 5,688,200
Baa1 New York City, Gen. Oblig., 8.00%, 08/01/03 3,921,190
Baa1 New York City, Gen. Oblig., 8.00%, 08/01/04 1,687,080
Baa1 New York City, Gen. Oblig., 7.75%, 08/15/04 2,225,060
Baa1 New York City, Gen. Oblig., 8.25%, 06/01/06 1,751,025
Baa1 New York City, Gen. Oblig., 7.65%, 02/01/07 5,437,000
Aaa New York City, Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys. Rev., 6.75%,
06/15/16, F.G.I.C. 22,838,437
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Baa $ 919,113 $ 919,113
AAA* 1,246,174 1,246,174
Aaa
745,517 745,517
Aaa
2,122,833
Aaa
187,779 187,779
Aaa
291,309 291,309
A1 1,006,990 1,006,990
A1 467,125 467,125
----------- ------------
21,709,669 25,649,300
----------- ------------
Baa3 4,769,850
----------- ------------
0 4,769,850
----------- ------------
Aaa
3,886,162
Aaa
2,071,481
Ba 2,636,946
BBB-* 6,896,120
Aaa
3,627,218
A 3,230,910
Aaa 10,820,500
Aaa 2,705,125
Aa 2,186,820
A-* 5,668,575
----------- ------------
0 43,729,857
----------- ------------
Baa1 5,688,200
Baa1 3,921,190
Baa1 1,687,080
Baa1 2,225,060
Baa1 1,751,025
Baa1 5,437,000
Aaa
22,838,437
</TABLE>
8
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baa1 $ 5,725 $ 5,725
Aa 5,000 5,000
A 6,750 6,750
A 5,500 5,500
Aaa 3,000 3,000
Aaa 3,000 3,000
A1 5,000 5,000
Aaa 8,500 8,500
Aaa 5,000 5,000
Aaa 8,000 8,000
Aaa 5,000 5,000
Aaa 2,685 2,685
Aaa 5,230 5,230
Aaa 13,500 13,500
Baa2 19,000 19,000
Aaa 8,535 8,535
A1 6,000 6,000
Aaa 4,840 4,840
Aaa 3,400 3,400
Aaa 2,500 2,500
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
NEW YORK (CONTINUED)
Baa1 New York St. Dorm. Auth. Rev., 5.50%, 05/15/13 $ 5,243,070
Aa New York St. Environmental, 5.75%, 06/15/12 4,883,500
A New York St. Local Gov't. Assist. Corp., Zero Coupon, 04/01/13 2,251,935
A New York St. Local Gov't. Assist. Corp., 6.00%, 04/01/14 5,733,200
Aaa New York St. Urban Dev. Corp. Rev., 5.50%, 01/01/14, F.S.A. 2,827,260
Aaa New York St. Urban Dev. Corp. Rev., 6.50%, 01/01/09, F.S.A. 3,256,380
A1 Port Auth. New York & New Jersey, 5.20%, 11/15/16 4,488,050
Aaa Triborough Bridge & Tunl. Auth., 6.625%, 01/01/12, M.B.I.A. 9,266,870
Aaa Triborough Bridge & Tunl. Auth., 5.00%, 01/01/15, M.B.I.A. 4,471,900
------------ ----------- -----------
85,970,157 $ 0 $ 0
------------ ----------- -----------
NORTH CAROLINA -- 0.9%
Aaa Charlotte, Cert. of Part., 5.00%, 12/01/21, A.M.B.A.C. 6,936,400
------------ ----------- -----------
6,936,400 0 0
------------ ----------- -----------
NORTH DAKOTA -- 0.7%
Aaa Mercer Cnty., 7.20%, 06/30/13, A.M.B.A.C. 5,745,200
------------ ----------- -----------
5,745,200 0 0
------------ ----------- -----------
OHIO -- 2.9%
Aaa Cleveland Pub. Pwr. Sys. Rev., Zero Coupon, 11/15/10, M.B.I.A. 1,080,310
Aaa Ohio Mun. Elec. Generation Agcy., A.M.B.A.C., 5.375%, 02/15/24 4,765,105
Aaa Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Fac. Rev., 7.80%, 11/01/14,
A.M.B.A.C. 16,507,395
------------ ----------- -----------
22,352,810 0 0
------------ ----------- -----------
OKLAHOMA -- 2.5%
Baa2 Tulsa Mun. Arpt. Trust Rev., 7.375%, 12/01/20 19,649,230
------------ ----------- -----------
19,649,230
------------ ----------- -----------
PENNSYLVANIA -- 3.4%
Aaa Allegheny Cnty. Arpt. Rev., Greater Pittsburgh Int'l. Arpt., 8.25%,
01/01/16, M.B.I.A. 9,397,376
A1 Pennsylvania St. Univ., Gen. Oblig., 5.50%, 08/15/16 5,615,580
Aaa Philadelphia Wtr. & Waste Auth. Rev., 6.25%, 08/01/07, M.B.I.A. 5,192,546
Aaa Philadelphia Wtr. & Waste Auth. Rev., 6.25%, 08/01/09, M.B.I.A. 3,599,512
Aaa Philadelphia Wtr. & Waste Auth. Rev., 6.25%, 08/01/11, M.B.I.A. 2,627,175
------------ ----------- -----------
26,432,189 0 0
------------ ----------- -----------
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Baa1 $ 5,243,070
Aa 4,883,500
A 2,251,935
A 5,733,200
Aaa 2,827,260
Aaa 3,256,380
A1 4,488,050
Aaa 9,266,870
Aaa 4,471,900
----------- ------------
$ 0 85,970,157
----------- ------------
Aaa 6,936,400
----------- ------------
0 6,936,400
----------- ------------
Aaa 5,745,200
----------- ------------
0 5,745,200
----------- ------------
Aaa 1,080,310
Aaa 4,765,105
Aaa
16,507,395
----------- ------------
0 22,352,810
----------- ------------
Baa2 19,649,230
----------- ------------
19,649,230
----------- ------------
Aaa
9,397,376
A1 5,615,580
Aaa 5,192,546
Aaa 3,599,512
Aaa 2,627,175
----------- ------------
0 26,432,189
----------- ------------
</TABLE>
9
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aaa $ 5,000 $ 5,000
Baa1 4,000 4,000
Baa1 4,460 4,460
Baa1 4,000 4,000
Aaa 2,900 2,900
Aaa 4,000 4,000
Aaa 1,400 1,400
Aaa 9,200 9,200
Baa1 5,000 5,000
Aaa 5,065 5,065
Baa1 2,500 2,500
Baa1 1,050 1,050
Aaa 1,500 1,500
Aaa 7,600 7,600
Aaa 8,200 8,200
Aaa 6,865 6,865
Aaa $ 2,000 2,000
Baa1 2,500 2,500
Baa1 490 490
Aaa $ 450 450
Aaa 750 750
Aaa 7,415 7,415
Aaa 4,300 4,300
Aaa 5,000 5,000
Baa1 5,000 5,000
Baa2 1,500 1,500
A 5,400 5,400
Aaa 3,500 3,500
Aaa 3,500 3,500
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
PUERTO RICO -- 9.4%
Aaa Puerto Rico Comnwlth., 5.25%, 07/01/18, M.B.I.A. $ 4,605,400
Baa1 Puerto Rico Hwy. & Trans. Auth. Rev., 6.625%, 07/01/12 4,160,640
Baa1 Puerto Rico Hwy. & Trans. Auth. Rev., 6.625%, 07/01/12 4,639,114
Baa1 Puerto Rico Hwy. & Trans. Auth. Rev., 5.25%, 07/01/20 3,534,000
Aaa Puerto Rico Hwy. & Trans. Auth. Rev., 5.25%, 07/01/20, F.S.A. 2,634,012
Aaa Puerto Rico Hwy. & Trans. Auth. Rev., 5.25%, 07/01/21, F.S.A. 3,646,560
Aaa Puerto Rico Hwy. & Trans. Auth. Rev., 5.00%, 07/01/22, F.S.A. 1,227,422
Aaa Puerto Rico Public Bldgs. Auth. Rev., 5.75%, 07/01/15, A.M.B.A.C. 9,060,252
Baa1 Puerto Rico Public Bldgs. Auth. Rev., 5.60%, 07/01/08 4,909,550
Aaa Puerto Rico Public Bldgs. Auth. Rev., 5.75%, 07/01/10, F.S.A. 5,125,932
Baa1 Puerto Rico Elec. Pwr. Auth., Pwr. Rev., 7.00%, 07/01/07 2,745,475
Baa1 Puerto Rico Elec. Pwr. Auth., Pwr. Rev., 6.125%, 07/01/08 1,065,508
Aaa Puerto Rico Elec. Pwr. Auth., Pwr. Rev., 6.125%, 07/01/08, C.G.I.C. 1,591,995
Aaa Puerto Rico Tel. Auth. Rev., 5.449%, 01/16/15, M.B.I.A. 7,352,848
Aaa Puerto Rico Tel. Auth. Rev., 5.25%, 01/25/07, M.B.I.A. 8,108,898
Aaa University of Puerto Rico Sys. Rev., Cap. Apprec., Zero Coupon,
06/01/11, M.B.I.A. 2,784,238
Aaa Puerto Rico Comnwlth., 5.782%, 07/01/08, M.B.I.A. $ 2,043,820
Baa1 Puerto Rico Hwy. & Trans. Auth. Rev., 5.50%, 07/01/15 2,328,000
Baa1 Puerto Rico Comnwlth., 7.70%, 07/01/03 565,955
Aaa Puerto Rico Comnwlth., 7.382%, 07/01/20 $ 429,188
Aaa Puerto Rico Comnwlth., 5.50%, 07/01/13 721,822
------------ ----------- -----------
67,191,844 4,937,775 1,151,010
------------ ----------- -----------
SOUTH CAROLINA -- 1.9%
Aaa Charleston Waterworks & Swr. Rev. 10.375%, 01/01/10, E.T.M. 9,901,769
Aaa Piedmont Mun. Pwr. Agcy., Elec. Rev. F.G.I.C., 6.75%, 01/01/19 4,697,793
------------ ----------- -----------
14,599,562 0 0
------------ ----------- -----------
TENNESSEE -- 1.4%
Aaa Bristol Tenn. Hlth. & Ed. Fac. Brd. Rev., 6.75%, 09/01/10, F.G.I.C. 5,538,600
Baa1 Mcminn Cnty. Ind. Dev. Rev., Bowater Inc., 7.40%, 12/01/22 5,298,500
------------ ----------- -----------
10,837,100 0 0
------------ ----------- -----------
TEXAS -- 6.5%
Baa2 Alliance Arpt. Auth. Inc, Spec. Facs Rev., 7.50%, 12/01/29 1,561,170
A Austin Combined Util. Sys., 7.75%, 11/15/08 5,927,688
Aaa Dallas Ft. Worth, Regl. Arpt. Rev., 7.375%, 11/01/08, F.G.I.C. 4,002,775
Aaa Dallas Ft. Worth, Regl. Arpt. Rev., 7.375%, 11/01/09, F.G.I.C. 3,989,510
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Aaa $ 4,605,400
Baa1 4,160,640
Baa1 4,639,114
Baa1 3,534,000
Aaa 2,634,012
Aaa 3,646,560
Aaa 1,227,422
Aaa 9,060,252
Baa1 4,909,550
Aaa 5,125,932
Baa1 2,745,475
Baa1 1,065,508
Aaa 1,591,995
Aaa 7,352,848
Aaa 8,108,898
Aaa
2,784,238
Aaa 2,043,820
Baa1 2,328,000
Baa1 565,955
Aaa 429,188
Aaa 721,822
----------- ------------
$ 0 73,280,619
----------- ------------
Aaa 9,901,769
Aaa 4,697,793
----------- ------------
0 14,599,562
----------- ------------
Aaa 5,538,600
Baa1 5,298,500
----------- ------------
0 10,837,100
----------- ------------
Baa2 1,561,170
A 5,927,688
Aaa 4,002,775
Aaa 3,989,510
</TABLE>
10
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aaa $ 3,000 $ 3,000
Aaa 4,100 4,100
Aaa 2,335 2,33
Aaa 2,365 2,365
Aaa 4,890 4,890
Aa 4,055 4,055
Aaa 5,000 5,000
Aaa 9,980 9,980
A 11,970 11,970
Aa 3,000 3,000
NR $ 600 600
NR 440 440
NR 500 500
NR $ 200 200
A1 10,100 10,100
A 4,570 4,570
Baa3 4,000 4,000
Aa 2,705 2,705
Aaa 4,000 4,000
Aaa 5,000 5,000
Aaa 6,000 6,000
Aaa 2,000 2,000
Aaa 5,000 5,000
Aa 5,500 5,500
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
TEXAS (CONTINUED)
Aaa Harris Cnty., Toll Rd., F.G.I.C., 5.00%, 08/15/16 $ 2,636,640
Aaa Harris Cnty. Hlth. Facs., 7.25%, 05/15/07, M.B.I.A. 4,535,543
Aaa New Braunfels Indpt. Sch. Dist., Gen. Oblig., Zero Coupon, 02/01/10 959,638
Aaa New Braunfels Indpt. Sch. Dist., Gen. Oblig., Zero Coupon, 02/01/11 910,360
Aaa Northwest Indpt. Sch. Dist., Cap. Apprec., Zero Coupon, 08/15/12,
A.M.B.A.C. 1,704,458
Aa San Antonio Texas Elec. & Gas Rev., 5.00%, 02/01/16 3,561,588
Aaa San Antonio Texas Elec. & Gas Rev., Zero Coupon, 02/01/09, F.G.I.C. 2,216,000
Aaa Texas Mun. Pwr. Agcy. Rev., Zero Coupon, 09/01/14, M.B.I.A. 3,033,321
A Texas Wtr. Res. Fin. Auth., 7.625%, 08/15/08 12,648,220
Aa Univ. Texas Univ. Rev., 6.75%, 08/15/13 3,238,860
------------ ----------- -----------
50,925,771 $ 0 $ 0
------------ ----------- -----------
U.S. VIRGIN ISLANDS -- .2%
NR Virgin Islands Pub. Fin. Auth. Rev., 7.25%, 10/01/18 618,222
NR Virgin Islands Terr., 7.75%, 10/01/06 476,331
NR Virgin Islands Wtr. & Pwr. Auth., 7.40%, 07/01/11 527,095
NR Virgin Islands Pub. Fin. Auth. Rev., 7.25%, 10/01/18 206,074
------------ ----------- -----------
0 1,621,648 206,074
------------ ----------- -----------
VIRGINIA -- 2.6%
A1 Henrico Cnty. Ind. Dev., 7.50%, 09/01/07 11,202,314
A Prince William Cnty. Va. Park Auth., 7.50%, 07/15/20 5,037,191
Baa3 West Point Ind. Dev., 6.25%, 03/01/19 3,874,840
------------ ----------- -----------
20,114,345 0 0
------------ ----------- -----------
WASHINGTON -- 2.8%
Aa Washington St. Gen. Oblig., 5.50%, 05/01/18 2,547,353
Aaa Washington St. Pub. Pwr. Supply Sys. Rev., 7.00%, 07/01/08, F.S.A. 4,461,240
Aaa Washington St. Pub. Pwr. Supply Sys. Rev., 7.25%, 07/01/09, F.S.A. 5,709,400
Aaa Washington St. Pub. Pwr. Supply Sys. Rev., Zero Coupon, 07/01/06,
M.B.I.A. 3,174,600
Aaa Washington St. Pub. Pwr. Supply Sys. Rev., 7.25%, 07/01/06, F.S.A. 2,271,900
Aaa Washington St. Pub. Pwr. Supply Sys. Rev., Zero Coupon, 07/01/06,
F.G.I.C. 2,645,500
Aa Washington St. Pub. Pwr. Supply Sys. Rev., Zero Coupon, 07/01/17 1,273,690
------------ ----------- -----------
22,083,683 0 0
------------ ----------- -----------
Total Long-Term Investments 619,881,108 56,099,318 17,866,477
------------ ----------- -----------
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Aaa $ 2,636,640
Aaa 4,535,543
Aaa 959,638
Aaa 910,360
Aaa
1,704,458
Aa 3,561,588
Aaa 2,216,000
Aaa 3,033,321
A 12,648,220
Aa 3,238,860
----------- ------------
$ 0 50,925,771
----------- ------------
NR 618,222
NR 476,331
NR 527,095
NR 206,074
----------- ------------
0 1,827,722
----------- ------------
A1 11,202,314
A 5,037,191
Baa3 3,874,840
----------- ------------
0 20,114,345
----------- ------------
Aa 2,547,353
Aaa 4,461,240
Aaa 5,709,400
Aaa
3,174,600
Aaa 2,271,900
Aaa
2,645,500
Aa 1,273,690
----------- ------------
0 22,083,683
----------- ------------
21,709,669 715,556,572
----------- ------------
</TABLE>
11
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
------------------------------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA MINNESOTA
RATING FUND, INC. SERIES SERIES SERIES TOTAL
--------- ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baa1 $ 100 $ 100
VMIG1 $ 2,000 2,000
MIG1 2,200 2,200
A1+* 6,000 6,000
Aaa 100 100
MIG1 5,800 5,800
MIG1 15,900 15,900
P-1 500 500
<CAPTION>
VALUE
--------------------------------------
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MOODY'S MUNICIPALS ARIZONA GEORGIA
RATING DESCRIPTION (A) FUND, INC. SERIES SERIES
--------- --------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 4.2%
ARIZONA -- 0.0%
Baa1 Goodyear Gen. Oblig., 10.00%, 07/01/95 $ 0 $ 100,000 $ 0
------------ ----------- -----------
DISTRICT OF COLUMBIA -- 0.2%
VMIG1 Dist. of Columbia Rev., Gen. Oblig., 4.40%, 07/03/95, F.R.D.D. 2,000,000 0 0
------------ ----------- -----------
FLORIDA -- 0.3%
MIG1 Manatee Cnty. Hsg. Fin. Auth., 3.87%, 07/17/95 2,200,000 0 0
------------ ----------- -----------
IOWA -- 0.8%
A1+* Iowa Fin. Auth. Solid Waste Disp. Rev., 4.45%, 07/03/95, F.R.D.D. 6,000,000 0 0
------------ ----------- -----------
PUERTO RICO -- 0.0%
Aaa Puerto Rico Comnwlth., 3.80%, 07/05/95 0 100,000 0
------------ ----------- -----------
TEXAS -- 2.8%
MIG1 Brazos River Auth., Poll. Ctrl. Rev., 4.35%, 07/03/95, F.R.D.D. 5,800,000
MIG1 Gulf Coast Ind. Dev. Auth., Citgo Petroleum, Ser. 95, 4.40%,
07/03/95, F.R.D.D. 15,900,000
------------ ----------- -----------
21,700,000 0 0
------------ ----------- -----------
WYOMING -- 0.1%
P-1 Lincoln Cnty. Poll. Ctrl. Rev., 4.35%, 07/03/95, F.R.D.D. 500,000 0 0
------------ ----------- -----------
Total Short-Term Investments 32,400,000 200,000 0
------------ ----------- -----------
TOTAL INVESTMENTS -- 96.0%
(cost $717,539,105) 652,281,108 56,299,318 17,866,477
Other assets in excess of liabilities -- 4.0% 28,812,941 738,735 499,424
------------ ----------- -----------
NET ASSETS -- 100% $681,094,049 $57,038,053 $18,365,901
------------ ----------- -----------
------------ ----------- -----------
<CAPTION>
MOODY'S MINNESOTA PRO FORMA
RATING SERIES COMBINED
--------- ----------- ------------
Baa1 $ 0 $ 100,000
----------- ------------
VMIG1 0 2,000,000
----------- ------------
MIG1 0 2,200,000
----------- ------------
A1+* 0 6,000,000
----------- ------------
Aaa 0 100,000
----------- ------------
MIG1 5,800,000
MIG1
15,900,000
----------- ------------
0 21,700,000
----------- ------------
P-1 0 500,000
----------- ------------
0 32,600,000
----------- ------------
21,709,669 748,156,572
788,279 30,839,379
----------- ------------
$22,497,948 $778,995,951
----------- ------------
----------- ------------
</TABLE>
(SEE FOOTNOTE ON FOLLOWING PAGE)
12
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 1995
(UNAUDITED)
------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C. -- American Municipal Bond Assurance Corporation
A.M.T. -- Alternative Minimum Tax
B.I.G. -- Bond Investors Guaranty Insurance Company
C.G.I.C. -- Capital Guaranty Insurance Corporation
E.T.M. -- Escrowed to Maturity
F.G.I.C. -- Financial Guaranty Insurance Company
F.R.D.D. -- Floating Rate Daily Demand Note
F.S.A. -- Financial Security Assurance
M.B.I.A. -- Municipal Bond Insurance Association
+ Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
* Standard & Poor's Rating.
@ Pledged as initial margin on financial futures contract.
NR -- Not Rated by Moody's or Standard & Poor's.
Each Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
13
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL MUNICIPAL SERIES FUND
NATIONAL -------------------------------------
MUNICIPALS ARIZONA GEORGIA MINNESOTA PRO FORMA PRO FORMA
FUND, INC. SERIES SERIES SERIES ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (cost
$627,080,171, $53,035,174, $17,213,899,
$20,209,861 and $717,539,105,
respectively).......................... $652,281,108 $56,299,318 $17,866,477 $21,709,669 $748,156,572
Cash.................................... 125,020 168,804 427,187 721,011
Interest receivable..................... 11,532,235 1,094,529 359,552 357,748 13,344,064
Receivable for investments sold......... 21,053,284 21,053,284
Receivable for Fund and Series shares
sold, respectively..................... 85,665 69,820 12 13,283 168,780
Due from broker - variation margin...... 50,000 50,000
Due from manager........................ 1,179 1,179
Deferred expenses and other assets...... 30,179 2,056 815 15,732 48,782
------------ ----------- ----------- ----------- ----------- ------------
Total assets........................ 685,157,491 57,465,723 18,396,839 22,523,619 -- 783,543,672
------------ ----------- ----------- ----------- ----------- ------------
LIABILITIES
Bank overdraft.......................... 13,298 13,298
Payable for investments purchased....... 1,634,527 1,634,527
Payable for Fund and Series shares
reacquired, respectively............... 1,343,834 297,119 1,640,953
Accrued expenses and other
liabilities............................ 41,470 40,732 11,003 93,205
Dividends payable....................... 674,725 39,073 12,838 13,621 740,257
Management fee payable.................. 244,773 22,996 7,696 275,465
Distribution fee payable................ 124,113 14,452 4,284 4,354 147,203
Due to broker - variation margin........ 2,813 2,813
------------ ----------- ----------- ----------- ----------- ------------
Total liabilities................... 4,063,442 427,670 30,938 25,671 -- 4,547,721
------------ ----------- ----------- ----------- ----------- ------------
NET ASSETS.............................. $681,094,049 $57,038,053 $18,365,901 $22,497,948 -- $778,995,951
------------ ----------- ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ----------- ------------
Net assets were comprised of:
Common stock/shares of beneficial
interest at par...................... $ 446,924 $ 49,004 $ 16,283 $ 19,459 $ (20,527)* $ 511,143
Paid in capital in excess of par...... 671,859,068 53,647,357 17,740,314 21,477,122 20,527* 764,744,388
------------ ----------- ----------- ----------- ----------- ------------
672,305,992 53,696,361 17,756,597 21,496,581 -- 765,255,531
Accumulated net realized gain (loss) on
investment............................. (16,254,380) 77,548 (50,774) (498,441) (16,726,047)
Net unrealized appreciation of
investments............................ 25,042,437 3,264,144 660,078 1,499,808 30,466,467
------------ ----------- ----------- ----------- ----------- ------------
Net assets, June 30, 1995............... $681,094,049 $57,038,053 $18,365,901 $22,497,948 -- $778,995,951
------------ ----------- ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ----------- ------------
Class A:
Net asset value and redemption price
per share............................ $ 15.23 $ 11.63 $ 11.28 $ 11.56 $ 15.23
Maximum sales charge (3.00% of
offering price)...................... 0.47 0.36 0.35 0.36 0.47
------------ ----------- ----------- ----------- ------------
Maximum offering price................ $ 15.70 $ 11.99 $ 11.63 $ 11.92 $ 15.70
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Class B:
Net asset value, offering price and
redemption price per share........... $ 15.26 $ 11.63 $ 11.28 $ 11.56 $ 15.26
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Class C
Net asset value, offering price and
redemption price per share........... $ 15.26 $ 11.63 $ 11.28 $ 11.56 $ 15.26
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
<FN>
------------------------------
* Adjustment to reflect the exchange of shares of beneficial interest of
Prudential Municipal Series Fund: Arizona Series, Georgia Series and Minnesota
Series for common stock of Prudential National Municipals Fund, Inc.
</TABLE>
14
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL MUNICIPAL SERIES FUND
NATIONAL ----------------------------------
MUNICIPALS ARIZONA GEORGIA MINNESOTA PRO FORMA PRO FORMA
FUND, INC. SERIES SERIES SERIES ADJUSTMENTS COMBINED
----------- ---------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest.............................. $44,341,072 $3,732,964 $1,241,736 $1,524,851 $ $50,840,623
----------- ---------- ---------- ---------- ------------- -----------
Expenses
Distribution Fee -- Class A........... 201,886 15,630 4,680 4,699 226,895
Distribution Fee -- Class B........... 2,538,258 211,051 71,869 95,804 2,916,982
Distribution Fee -- Class C........... 1,022 62 1 2 1,087
Management fee........................ 3,209,138 274,980 90,707 113,618 (50,390)(a) 3,638,053
Transfer agent's fees & expenses...... 614,000 29,000 13,040 30,000 666,040
Reports to shareholders............... 210,000 44,000 36,093 33,700 (92,793)(b) 231,000
Custodian's fees & expenses........... 133,000 73,000 68,161 71,100 (127,261)(b) 218,000
Taxes................................. 222,000 222,000
Registration fees..................... 82,000 38,000 32,245 36,300 (63,545)(b) 125,000
Directors'/Trustees' fees............. 37,700 2,879 2,100 2,671 (8,925)(b) 37,700
Legal fees............................ 63,000 14,000 16,076 13,500 (34,576)(b) 72,000
Audit fee............................. 50,500 12,400 10,339 9,700 (27,939)(b) 55,000
Miscellaneous......................... 25,117 8,240 2,259 2,464 (7,940)(b) 30,140
----------- ---------- ---------- ---------- ------------- -----------
Total Expenses...................... 7,387,621 723,241 348,141 414,262 (413,368) 8,459,897
Less: expense subsidy................... (9,453) 9,453(c) 0
----------- ---------- ---------- ---------- ------------- -----------
Net Expenses........................ 7,387,621 723,241 338,688 414,262 (403,915) 8,459,897
----------- ---------- ---------- ---------- ------------- -----------
Net investment income................... 36,953,451 3,009,723 903,048 1,110,589 403,915 42,380,726
----------- ---------- ---------- ---------- ------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investment transactions............... (4,181,264) 521,583 (6,361) (397,994) (4,064,036)
Financial futures contracts........... (2,455,311) (125,854) 28,275 81,008 (2,633,898)
----------- ---------- ---------- ---------- -----------
(6,636,575) 395,729 21,914 (479,002) (6,697,934)
----------- ---------- ---------- ---------- -----------
Net change in unrealized appreciation/
depreciation of:
Investment transactions............... 20,377,852 734,474 271,691 1,678,132 23,062,149
Financial futures contracts........... (955,375) (32,188) (50,437) (17,500) (1,055,500)
----------- ---------- ---------- ---------- -----------
19,422,477 702,286 221,254 1,660,632 22,006,649
----------- ---------- ---------- ---------- -----------
Net gain (loss) on investments.......... 12,785,902 1,098,015 243,168 1,181,630 15,308,715
----------- ---------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............. $49,739,353 $4,107,738 $1,146,216 $2,292,219 $403,915 $57,698,441
----------- ---------- ---------- ---------- ------------- -----------
----------- ---------- ---------- ---------- ------------- -----------
<FN>
------------------------
(a) Adjustment to reflect reduction in management fee rate of Prudential
National Municipals Fund, Inc.
(b) Adjustment to reflect reduction of duplicative expenses.
(c) Adjustment to reflect elimination of expense subsidy.
</TABLE>
15
<PAGE>
PRO FORMA STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL MUNICIPAL
PRUDENTIAL SERIES FUND
NATIONAL ------------------------
MUNICIPALS ARIZONA MINNESOTA PRO FORMA PRO FORMA
FUND, INC. SERIES SERIES ADJUSTMENTS COMBINED
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $627,080,171,
$53,035,174, $20,209,861 and $700,325,206,
respectively)....................................... $652,281,108 $56,299,318 $21,709,669 $730,290,095
Cash................................................. 125,020 427,187 552,207
Interest receivable.................................. 11,532,235 1,094,529 357,748 12,984,512
Receivable for investments sold...................... 21,053,284 21,053,284
Receivable for Fund and Series shares sold,
respectively........................................ 85,665 69,820 13,283 168,768
Due from broker - variation margin................... 50,000 50,000
Deferred expenses and other assets................... 30,179 2,056 15,732 47,967
------------ ----------- ----------- ----------- ------------
Total assets..................................... 685,157,491 57,465,723 22,523,619 -- 765,146,833
------------ ----------- ----------- ----------- ------------
LIABILITIES
Bank overdraft....................................... 13,298 13,298
Payable for investments purchased.................... 1,634,527 1,634,527
Payable for Fund and Series shares reacquired,
respectively........................................ 1,343,834 297,119 1,640,953
Accrued expenses and other liabilities............... 41,470 40,732 82,202
Dividends payable.................................... 674,725 39,073 13,621 727,419
Management fee payable............................... 244,773 22,996 7,696 275,465
Distribution fee payable............................. 124,113 14,452 4,354 142,919
------------ ----------- ----------- ----------- ------------
Total liabilities................................ 4,063,442 427,670 25,671 -- 4,516,783
------------ ----------- ----------- ----------- ------------
NET ASSETS........................................... $681,094,049 $57,038,053 $22,497,948 -- $760,630,050
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Net assets were comprised of:
Common stock/shares of beneficial interest at
par............................................... $ 446,924 $ 49,004 $ 19,459 $ (16,292)* $ 499,095
Paid in capital in excess of par................... 671,859,068 53,647,357 21,477,122 16,292* 746,999,839
------------ ----------- ----------- ----------- ------------
672,305,992 53,696,361 21,496,581 -- 747,498,934
Accumulated net realized gain (loss) on investment... (16,254,380) 77,548 (498,441) (16,675,273)
Net unrealized appreciation of investments........... 25,042,437 3,264,144 1,499,808 29,806,389
------------ ----------- ----------- ----------- ------------
Net assets, June 30, 1995............................ $681,094,049 $57,038,053 $22,497,948 -- $760,630,050
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
Class A:
Net asset value and redemption price per share..... $ 15.23 $ 11.63 $ 11.56 $ 15.23
Maximum sales charge (3.00% of offering price)..... 0.47 0.36 0.36 0.47
------------ ----------- ----------- ------------
Maximum offering price............................. $ 15.70 $ 11.99 $ 11.92 $ 15.70
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Class B:
Net asset value, offering price and redemption
price per share................................... $ 15.26 $ 11.63 $ 11.56 $ 15.26
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Class C:
Net asset value, offering price and redemption
price per share................................... $ 15.26 $ 11.63 $ 11.56 $ 15.26
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
------------------------------
* Adjustment to reflect the exchange of shares of beneficial interest of
Prudential Municipal Series Fund: Arizona Series and Minnesota Series for
common stock of Prudential National Municipals Fund, Inc.
</TABLE>
16
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL MUNICIPAL SERIES FUND
NATIONAL -------------------------------------
MUNICIPALS ARIZONA MINNESOTA PRO FORMA PRO FORMA
FUND, INC. SERIES SERIES ADJUSTMENTS COMBINED
----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest.............................. $44,341,072 $3,732,964 $1,524,851 $ $49,598,887
----------- ---------- ---------- ------------- -----------
Expenses
Distribution Fee -- Class A........... 201,886 15,630 4,699 222,215
Distribution Fee -- Class B........... 2,538,258 211,051 95,804 2,845,113
Distribution Fee -- Class C........... 1,022 62 2 1,086
Management fee........................ 3,209,138 274,980 113,618 (40,863)(a) 3,556,873
Transfer agent's fees & expenses...... 614,000 29,000 30,000 673,000
Reports to shareholders............... 210,000 44,000 33,700 (61,700)(b) 226,000
Custodian's fees & expenses........... 133,000 73,000 71,100 (86,100)(b) 191,000
Taxes................................. 222,000 222,000
Registration fees..................... 82,000 38,000 36,300 (44,300)(b) 112,000
Directors'/Trustees' fees............. 37,700 2,879 3,375 (6,254)(b) 37,700
Legal fees............................ 63,000 14,000 13,500 (18,500)(b) 72,000
Audit fee............................. 50,500 12,400 9,700 (17,600)(b) 55,000
Miscellaneous......................... 25,117 8,240 2,464 (6,936)(b) 28,885
----------- ---------- ---------- ------------- -----------
Total Expenses...................... 7,387,621 723,241 414,262 (282,253) 8,242,871
----------- ---------- ---------- ------------- -----------
Net investment income................... 36,953,451 3,009,723 1,110,589 282,253 41,356,016
----------- ---------- ---------- ------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investment transactions............... (4,181,264) 521,583 (397,994) (4,057,675)
Financial futures contracts........... (2,455,311) (125,854) (81,008) (2,662,173)
----------- ---------- ---------- -----------
(6,636,575) 395,729 (479,002) (6,719,848)
----------- ---------- ---------- -----------
Net change in unrealized
appreciation/depreciation of:
Investment transactions............... 20,377,852 734,474 1,678,132 22,790,458
Financial futures contracts........... (955,375) (32,188) (17,500) (1,005,063)
----------- ---------- ---------- -----------
19,422,477 702,286 1,660,632 21,785,395
----------- ---------- ---------- -----------
Net gain (loss) on investments.......... 12,785,902 1,098,015 1,181,630 15,065,547
----------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.............. $49,739,353 $4,107,738 $2,292,219 $282,253 $56,421,563
----------- ---------- ---------- ------------- -----------
----------- ---------- ---------- ------------- -----------
<FN>
------------------------
(a) Adjustment to reflect reduction in management fee rate of Prudential
National Municipals Fund, Inc.
(b) Adjustment to reflect reduction of duplicative expenses.
</TABLE>
17
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
Prudential National Municipals Fund, Inc. (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.
The preceding are pro forma financial statements which give effect to the
following proposed alternative transactions whereby: (i) all of the assets of
the Arizona Series, Georgia Series and Minnesota Series of Prudential Municipal
Series Fund (the "Series Fund") will be exchanged for shares of the Fund and the
Fund will assume the liabilities of each such series, or (ii) all of the assets
of the Arizona Series and Minnesota Series of the Series Fund will be exchanged
for shares of the Fund and the Fund will assume the liabilities of each such
series. Immediately after the exchange, in the case of (i) above, shares of the
Fund will be distributed to shareholders of the Arizona Series, Georgia Series
and Minnesota Series of the Series Fund and each such series will be terminated,
and, in the case of (ii) above, shares of the Fund will be distributed to
shareholders of the Arizona Series and the Minnesota Series of the Series Fund
and each such series will be terminated. Pro forma financial statements are
presented for only those combinations of series whose combined net assets exceed
ten percent of the net assets of the Fund as of July 31, 1995. The preceding pro
forma financial statements include a pro forma Statement of Assets and
Liabilities at June 30, 1995 and a pro forma Statement of Operations for the
year ended June 30, 1995 for each of (i) and (ii) above and a pro forma
Portfolio of Investments at June 30, 1995 for (i) above.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITIES VALUATIONS: 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 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. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain(loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Fund intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates 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.
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.
18
<PAGE>
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.
REORGANIZATION AND SOLICITATION EXPENSES: Expenses of reorganization and
solicitation will be borne by the Fund and Arizona Series, Georgia Series and
Minnesota Series of the Prudential Municipal Series Fund in proportion to their
respective assets and will include reimbursement of brokerage firms and others
for expenses in forwarding proxy solicitation material to shareholders.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with 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. Effective January 1,
1995, PMF has agreed to waive a portion (.05 of 1% of the Fund's average daily
net assets) of its management fee. The Fund is not required to reimburse PMF for
such waiver.
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 and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class
A and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, .50 of 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1%
and .75 of 1% (annualized) of the average daily net assets of the Class A, B and
C shares, respectively, for the year ended June 30, 1995.
PMFD has advised the Fund that it has received approximately $33,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended June 30, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended June 30, 1995, it received
approximately $544,500 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
19
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Additional Information
February 28, 1995
Prudential National Municipals Fund, Inc. (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. There can be no assurance that the Fund's investment objective will
be achieved. 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, 1995, a copy
of which may be obtained from the Fund upon request at the address or telephone
noted above.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
General Information. . . . . . . . . . . . . . . . . . . B-2 22
Investment Objective and Policies. . . . . . . . . . . . B-2 8
Investment Restrictions. . . . . . . . . . . . . . . . . B-6 15
Directors and Officers . . . . . . . . . . . . . . . . . B-7 15
Manager. . . . . . . . . . . . . . . . . . . . . . . . . B-9 15
Distributor. . . . . . . . . . . . . . . . . . . . . . . B-11 16
Portfolio Transactions and Brokerage . . . . . . . . . . B-13 19
Purchase and Redemption of Fund Shares . . . . . . . . . B-14 23
Shareholder Investment Account . . . . . . . . . . . . . B-17 31
Net Asset Value. . . . . . . . . . . . . . . . . . . . . B-20 19
Taxes, Dividends and Distributions . . . . . . . . . . . B-20 20
Performance Information. . . . . . . . . . . . . . . . . B-22 20
Custodian and Transfer and Dividend Disbursing
Agent and Independent Accountants. . . . . . . . . . . B-24 19
Financial Statements . . . . . . . . . . . . . . . . . . B-25 -
Report of Independent Accountants. . . . . . . . . . . . B-37 -
Appendix A-Description of Tax-Exempt Security Ratings. . A-1 -
<PAGE>
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache National Municipals Fund, Inc. to Prudential National
Municipals Fund, Inc.
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. There can be no assurance that the Fund's investment objective will
be achieved. 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, 1993
and 1994 the Fund's portfolio turnover rates were 82% and 120%, 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
Fund will only engage in futures transactions for bona fide hedging purposes in
accordance with the rules of the Commodity Futures Trading Commission and not
for speculation. 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
The 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 following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
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 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.
(14) Invest more than 25% of the value of its total assets in securities
whose issuers are located in any one state.
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.
3. Purchase the securities of any one issuer if, to the knowledge of the
Fund, any officer or director of the Fund or the Manager or Subadviser owns more
than 1/2 of 1% of the outstanding securities of such issuer, and such officers
and directors who own more than 1/2 of 1% own in the aggregate more than 5% of
the outstanding securities of such issuer.
4. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position With Fund During Past 5 Years
--------------------------------- ---------------------------- -------------------------------------------------------------------
<S> <C> <C>
Delayne Dedrick Gold (56) Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, New York
Arthur Hauspurg (69) Director Trustee and former President, Chief Executive Officer and Chairman
c/o Prudential Mutual Fund of the Board of Consolidated Edison Company of New York, Inc.;
Management, Inc. Director of COMSAT Corp.
One Seaport Plaza
New York, New York
* Harry A. Jacobs, Jr. (73) Director Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim Chairman
New York, New York and Chief Executive Officer of Prudential Mutual Fund Management,
Inc. (PMF) (June-September 1993); Chairman of the Board of
Prudential Securities (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
Total Return Fund, Inc.
B-7
<PAGE>
<CAPTION>
Principal Occupations
Name, Address and Age Position With Fund During Past 5 Years
--------------------------------- ---------------------------- -----------------------------------------------------------------
<S> <C> <C>
* Lawrence C. McQuade (67) President and Vice Chairman of PMF (since 1988); Managing Director, Investment
One Seaport Plaza Director Banking, Prudential Securities (1988-1991); Director of Quixote
New York, New York Corporation (since February 1992) and BUNZL, PLC (since June 1991);
formerly, Director of Crazy Eddie Inc. (1987-1990) and 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 Total Return Fund, Inc., and The High Yield
Income Fund, Inc.
Stephen P. Munn (52) Director Chairman (since January 1994), Director and President (since 1988)
101 So. Salina St. and Chief Executive Officer (1988-December 1993) of Carlisle
Syracuse, New York Companies Incorporated.
* Richard A. Redeker (51) Director President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), Prudential Mutual Fund Management, Inc. (PMF); Executive
New York, New York Vice President, Director and Member of the Operating Committee
(since October 1993), Prudential Securities; Director (since
October 1993) of Prudential Securities Group, Inc.; Executive Vice
President, The Prudential Investment Corporation (since July 1994);
Director (since January 1994) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund Services, Inc.
(PMFS); formerly Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-September 1993);
Director of The Global Government Plus Fund, Inc., The Global Total
Return Fund, Inc. and The High Yield Income Fund, Inc.
Louis A. Weil, III (53) Director Publisher and Chief Executive Officer, Phoenix Newspapers, Inc.
120 E. Van Buren (since August 1991); Director of Central Newspapers, Inc.
Phoenix, Arizona (since September 1991); prior thereto, Publisher of Time Magazine
(May 1989-March 1991); formerly President, Publisher and Chief
Executive Officer of The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The Global Government Plus Fund, Inc.
David W. Drasnin (58) Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square
Suite 500
Wilkes-Barre, Pennsylvania
Robert F. Gunia (48) Vice President Chief Administrative Officer (since July 1990), Director (since
One Seaport Plaza January 1989),Executive Vice President, Treasurer and Chief
New York, New York Financial Officer (since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities; Executive Vice
President, Treasurer and Comptroller (since March 1991) of PMFD and
Director (since June 1987) of PMFS; Vice President and Director of
The Asia Pacific Fund, Inc. (since May 1989).
Grace Torres (35) Treasurer and First Vice President (since March 1994) of PMF; First Vice
One Seaport Plaza Principal Financial and President (since March 1994) of PSI. Prior thereto, Vice President,
New York, New York Accounting Officer Bankers Trust Company.
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior Counsel (since
One Seaport Plaza June 1987) and First Vice President (June 1987-December 1990)
New York, New York 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 (36) Assistant First Vice President (since January 1994) and Associate General
One Seaport Plaza Secretary Counsel (since January 1992) of PMF; Vice President and Associate
New York, New York General Counsel of Prudential Securities (since January 1992);
formerly, Assistant General Counsel (August 1988-December 1991),
Associate Vice President (January 1989-December 1990) and Vice
President (January 1991-December 1993) of PMF.
<FN>
---------------
* "Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
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 Incorporated 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 which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at
the beginning of each calendar quarter or, pursuant to an exemptive order of the
Securities and Exchange Commission (SEC), at the daily rate of return of the
Fund (the Fund rate). Payment of the interest so accrued is also deferred and
accruals become payable at the option of the Director. The Fund's obligation to
make payments of deferred Directors' fees, together with interest thereon, is a
general obligation of the Fund.
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.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1994 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed by
Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1994.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement Estimated From Fund
Aggregate Benefits Accrued Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
------------------------------- ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Delayne Dedrick Gold - Director $7,700 None N/A $185,000(24)*
Arthur Hauspurg - Director $7,500 None N/A $37,500(5)*
Stephen P. Munn - Director $7,500 None N/A $40,000(6)*
Louis A. Weil, III - Director $7,500 None N/A $97,500(12)*
<FN>
---------------
* Indicated number of funds in Fund Complex (including the Fund) to which
aggregate compensation relates.
</TABLE>
As of February 3, 1995, 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 3, 1995, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest were:
Glenn A. Capalbo & Paula J. Evans & Susan M. Capalbo, 7A Eagle Run, East
Greenwich, RI, who held 2,725 Class C shares (27%), Temple Street Associates 2,
555 Long Wharf Drive, New Haven, CT, who held 4,716 Class C shares (48%),
Stephen W. Mullins & Deborah L. Mullins, 1132 Mulberry Circle, Charleston, WV,
who held 539 Class C shares (5%) and Ray Behrman & Carol Behrman, 8361 W.
Clubhouse Ln, Boise, ID, who held 1,609 (16%) Class C shares.
As of February 3, 1995, Prudential Securities was the record holder for
other beneficial owners of 10,851,364 Class A shares (or 33% of the outstanding
Class A shares) and 5,227,921 Class B shares (or 37% of the outstanding Class B
shares) and 7,448 Class C shares (or 75% of the outstanding Class C 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, 1995, PMF managed and/or administered open-end
and closed-end management investment companies with assets of approximately $45
billion. According to the Investment Company Institute, as of April 30, 1994,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and 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
B-9
<PAGE>
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) 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. No such reductions were required during the fiscal year ended
December 31, 1994. Currently, the Fund believes that the most restrictive
expense limitation of state securities commissions is 21/2% 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 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 May 2, 1994 and by
shareholders of the Fund on April 28, 1988.
For the fiscal years ended December 31, 1994, 1993 and 1992, the Fund paid
PMF management fees of $3,633,518, $4,087,672 and $3,946,039, respectively.
B-10
<PAGE>
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 will 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 2, 1994, 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 PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of Prudential which, as of
December 31, 1993, was one of the largest financial institutions in the world
and the largest insurance company in North America. Prudential has been engaged
in the insurance business since 1875. In July 1994, Institutional Investor
ranked Prudential the second largest institutional money manager of the 300
largest money management organizations in the United States as of December 31,
1993.
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, One Seaport Plaza, New York, New York 10292
(Prudential Securities or PSI), acts as the distributor of the Class B and
Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C 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, Class B and Class C 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
then 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 so 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 so 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. On May 3,
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, adopted a plan of
distribution for the Class C shares of the Fund and approved further amendments
to the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. The Plans were
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 2, 1994. The Class A Plan, as amended, was approved by the
Class A and Class B shareholders and the Class B Plan, as amended, was approved
by Class B shareholders on July 19, 1994. The Class C Plan was approved by the
sole shareholder of Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended December 31, 1994, PMFD received
payments of approximately $14,116 under the Class A Plan. This amount was
primarily expended on commission credits to Prudential Securities and Prusec for
payment of account
B-11
<PAGE>
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended December 31, 1994,PMFD also received approximately
$92,500 in initial sales charges.
Class B Plan. For the fiscal year ended December 31, 1994, Prudential
Securities received $3,758,114 from the Fund under the Plan. It is estimated
that the Distributor spent approximately $2,592,900 in distributing the Fund's
Class B shares, on behalf of the Fund during the year ended December 31, 1994.
It is estimated that of this amount approximately $3,400 (0.1%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$930,300 (35.9%) on compensation to Prusec, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of Fund shares; $422,200 (16.3%) on interest and/or carrying
costs; and $1,237,000 (47.7%) on the aggregate of (i) payments of commissions to
financial advisers ($923,900 or 35.6%) and (ii) an allocation on account of
overhead and other branch office distribution-related expenses ($313,100 or
12.1%). 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) 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.
Prudential Securities 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 " 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, 1994,
Prudential Securities received approximately $976,100 in contingent deferred
sales charges.
Class C Plan. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges" in the Prospectus. For the period August 1, 1994 (inception of Class C
shares) through December 31, 1994, Prudential Securities did not receive any
contingent deferred sales charges.
The Class A, Class B and Class C 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 Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors 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
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), 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 any 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
each class of shares of the Fund by the Distributor. 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 the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
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 2, 1994.
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. 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
shares of the Fund may not exceed .75 of 1% per class. 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 any class, all sales
charges on shares of that class would be suspended.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of
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<PAGE>
securities) from January 1, 1980 through December 31, 1990, in violation of
securities laws to persons for whom such securities were not suitable in light
of the individuals' financial condition or investment objectives. It was also
alleged that the safety, potential returns and liquidity of the investments had
been misrepresented. The limited partnerships principally involved real estate,
oil and gas producing properties and aircraft leasing ventures. The SEC Order
(i) included findings that PSI's conduct violated the federal securities laws
and that an order issued by the SEC in 1986 requiring PSI to adopt, implement
and maintain certain supervisory procedures had not been complied with; (ii)
directed PSI to cease and desist from violating the federal securities laws and
imposed a $10 million civil penalty; and (iii) required PSI to adopt certain
remedial measures including the establishment of a Compliance Committee of its
Board of Directors. Pursuant to the terms of the SEC settlement, PSI established
a settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has agreed
to provide additional funds, if necessary, for that purpose. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action. In settling the above referenced
matters, PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
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
B-13
<PAGE>
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.
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. Portfolio securities may
not be purchased from any underwriting or selling syndicate of which Prudential
Securities (or any affiliate), during the existence of the syndicate, is a
principal underwriter (as defined in the Investment Company Act), except in
accordance with rules of the SEC. This limitation, in the opinion of the Fund,
will not significantly affect the Fund's ability to pursue its present
investment 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 objectives but not subject to such limitations.
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 (or any affiliate) 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 (or any affiliate) 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 (or any affiliate) 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 noninterested Directors has adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage
transactions with Prudential Securities (or any affiliate) are also subject to
such fiduciary standards as may be imposed upon Prudential Securities (or such
affiliate) by applicable law.
The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1992, 1993 and 1994.
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 (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder Guide" in
the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account-Exchange Privilege."
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<PAGE>
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 3%
and Class B* and Class C* shares of the Fund are sold at net asset value.* Using
the Fund's net asset value at December 31, 1994, the maximum offering price of
the Fund's shares is as follows:
Class A
Net asset value and redemption price per Class A share................... $14.42
------
Maximum sales charge (3% of offering price).............................. .45
------
Offering price to public................................................. $14.87
======
Class B
Net asset value, offering price and redemption price per Class B share*.. $14.45
======
Class C
Net asset value, offering price and redemption price per Class C share*.. $14.44
======
-------
*Class B and Class C shares are subject to a contingent deferred sales charge on
certain redemptions. See "Shareholder Guide-How to Sell Your Shares-Contingent
Deferred Sales Charges" in the Prospectus.
Reduction and Waiver of Initial Sales Charges-Class A Shares
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 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-Alternative Purchase Plan" 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 and spouse'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 any
retirement or 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
(excluding money market funds other than those acquired pursuant to the exchange
privilege) 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
B-15
<PAGE>
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 any retirement or
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 shares of
the Fund and shares of other Prudential Mutual Funds. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) 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 any
retirement or group plans.
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. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
Waiver of the Contingent Deferred Sales Charge-Class B Shares
The Contingent Deferred Sales Charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide-How to Sell Your
Shares-Waiver of Contingent Deferred Sales Charges-Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
Category of Waiver Required Documentation
-------------------------------------- ----------------------------------------
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a letter
unable to engage in any substantial from a physician on the physician's
gainful activity by reason of any letterhead stating that the shareholder
medically determinable physical or (or, in the case of a trust, the
mental impairment which can be grantor) is permanently disabled. The
expected to result in death or to letter must also indicate the date of
be of long-continued and indefinite disability.
duration.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
Quantity Discount-Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 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 exceeded $500,000. For example, if you purchased $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 was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000.
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<PAGE>
The quantity discount will be imposed at the following rates depending on
whether the aggregate value exceeded $500,000 or $1 million:
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Process
---------------------------------------
Year since Purchase
Payment Made $500,001 to $1 million Over $1 million
---------------------------------- ---------------------- ---------------
First. . . . . . . . . . . . . . . 3.0% 2.0%
Second . . . . . . . . . . . . . . 2.0% 1.0%
Third. . . . . . . . . . . . . . . 1.0% 0%
Fourth and thereafter. . . . . . . 0% 0%
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 CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, 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. 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 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 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.
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-17
<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 and Class C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, 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 CDSC will be payable upon such
exchange of Class B and Class C shares, but a CDSC 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 and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the time
of exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares may be subject to the CDSC 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 CDSC, 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. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market account will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege the shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund without subjecting such shares to any CDSC. Shares of any
fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
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.
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,
B-18
<PAGE>
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)
Period of Monthly Investments: $100,000 $150,000 $200,000 $250,000
------------------------------ -------- -------- -------- --------
25 Years...................... $110 $165 $220 $275
20 Years...................... 176 264 352 440
15 Years...................... 296 444 592 740
10 Years...................... 555 833 1,110 1,388
5 Years...................... 1,371 2,057 2,742 3,428
See "Automatic 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 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 to shareholders having shares of
the Fund held through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges" 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 and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the systematic withdrawal plan.
B-19
<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. Net asset value is calculated separately for each class. 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. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time.
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. For federal income tax purposes,
the Fund had a capital loss carryforward as of December 31, 1994 of
approximately $19,372,500 which expires in 2002. Accordingly, no capital gains
distribution is expected to be paid until net gains have been realized in excess
of such amount. The Fund will elect to treat net capital losses of approximately
$3,999,200 incurred in the two month period ended December 31, 1994 as having
been incurred in the following fiscal year.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher
distribution-related fee to which Class B and Class C shares are subject. The
per share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C 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.
B-20
<PAGE>
The Fund generally will be subject to a nondeductible excise tax of 4% to
the extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.
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,
B-21
<PAGE>
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.
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. Yield is determined separately for Class A, Class B and
Class C 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. During this period, no Class C shares were
outstanding.
Yield is calculated according to the following formula:
YIELD = 2 [ ( a - b +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, 1994 for the Fund's
Class A, Class B and Class C shares was 5.69%, 5.47% and 5.23%, 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. Yield for the Fund will vary based on a number of factors
including change in net asset value, market conditions, the level of interest
rates and the level of Fund income and 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, Class B and Class C 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, 1994 for
the Fund's Class A, Class B and Class C shares was 9.42%, 9.06% and 8.66,
respectively.
B-22
<PAGE>
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, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.
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, 1994 was -8.86% and
6.25%, 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,
1994 was -11.39%, 6.13% and 8.41%, respectively. The average annual total return
for Class C shares for the since inception period ended December 31, 1994 was
-3.63%.
Aggregate Total Return. The Fund may from time to time advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B and Class C 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 periods ended December 31, 1994 was -6.04% and 39.04%,
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, 1994 was
-6.39%, 35.65% and 124.24%, respectively. See "How the Fund Calculates
Performance" in the Prospectus. The aggregate total return for Class C shares
for the since inception period ended December 31, 1994 was -2.63%.
B-23
<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
[CHART]
1Source: 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, 1994, the Fund incurred fees of $457,600 for the
services of PMFS.
Price Waterhouse LLP, 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-24
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. Portfolio of Investments
December 31, 1994
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
LONG-TERM INVESTMENTS--88.6%
Alabama--0.9%
Courtland Ind. Dev. Brd.
Rev.,
Champion Int'l. Corp.,
Baa1 $ 6,000 7.20%, 12/1/13, Ser.
A..................... $ 5,890,260
------------
Alaska--0.8%
North Slope Boro.,
Capital Appre., Ser. B,
C.G.I.C.,
Aaa 11,000 Zero Coupon, 6/30/05.... 5,646,190
------------
Arizona--1.8%
Mesa Ind. Dev. Auth.,
Hlth. Care Facs. Rev.,
Aaa 3,540 7.50%, 1/1/04, B.I.G.... 3,782,242
Pima Cnty. Unified Sch.
Dist.,
No. 1, Tucson, F.G.I.C.,
Aaa 3,000 7.50%, 7/1/10........... 3,321,360
Salt River Proj., Elec.
Sys.
Rev., Agricultural
Imp. & Pwr. Dist.,
Aa 6,000 5.25%, 1/1/11, Ser. B... 5,169,720
------------
12,273,322
------------
California--5.5%
California St. Pub. Wks.
Brd.
Lease Rev., Dept. of
Corrections,
A.M.B.A.C.,
Aaa 6,500 5.25%, 12/1/13.......... 5,472,545
Culver City Redev. Fin.
Auth.
Tax Alloc. Rev.,
A.M.B.A.C.,
Aaa 9,225 5.50%, 11/1/14.......... 7,928,334
Riverside Elec. Rev.,
Aa 3,000 6.00%, 10/1/15.......... 2,728,590
San Jose Redev. Proj.,
Tax Alloc., M.B.I.A.,
Aaa $ 5,000 6.00%, 8/1/11........... $ 4,767,600
Santa Margarita/Dana
Point Auth. Rev.,
M.B.I.A.,
Aaa 2,000 7.25%, 8/1/09........... 2,167,380
Aaa 2,450 7.25%, 8/1/10........... 2,653,252
Aaa 1,750 7.25%, 8/1/11........... 1,893,027
Aaa 2,000 7.25%, 8/1/14........... 2,169,320
South Orange Cnty. Pub.
Fin. Auth.,
Foothill Area Proj.,
F.G.I.C.,
Aaa 2,000 6.50%, 8/15/10.......... 1,961,400
Special Tax Rev.,
F.G.I.C.,
Aaa 3,650 8.00%, 8/15/09.......... 4,080,335
West Contra Costa School
Dist., Cert. of Part.,
Ba 1,600 7.125%, 1/1/24.......... 1,478,288
------------
37,300,071
------------
Colorado--1.6%
Colorado Springs Arpt.
Rev.,
BBB* 3,700 6.90%, 1/1/12, Ser. A... 3,498,757
BBB* 7,960 7.00%, 1/1/22, Ser. A... 7,372,552
------------
10,871,309
------------
Connecticut--0.3%
Connecticut St. Spec.
Tax
Oblig. Rev.,
Trans. Infrastructure,
A1 2,000 7.125%, 6/1/10, Ser.
A..................... 2,130,540
------------
Florida--2.4%
Broward Cnty. Res. Rec.
Rev., Broward Waste
Energy, L.P. South,
A 13,645 7.95%, 12/1/08.......... 14,709,856
Florida St. Brd. Ed.
Cap. Outlay,
Aaa 195 9.125%, 6/1/14,
E.T.M................. 245,429
Aa 1,260 9.125%, 6/1/14.......... 1,605,366
------------
16,560,651
------------
B-25 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
Georgia--3.6%
Atlanta Urban Res. Fin.
Auth., Clark Atlanta
Univ. Dorm. Proj.,
NR $ 4,755D 9.25%, 6/1/10........... $ 5,568,628
Atlanta Wtr. & Swr.
Rev.,
Aa 4,410 6.00%, 1/1/11........... 4,230,689
Georgia St. Gen. Oblig.,
Aaa 8,000 6.50%, 12/1/09, Ser.
F..................... 8,278,160
Georgia St. Res. Fin.
Auth.,
Sngl. Fam. Insured
Mtge., Ser. C-C1,
Aa 6,550 8.00%, 12/1/16.......... 6,809,184
------------
24,886,661
------------
Illinois--0.7%
Illinois Dev. Fin.
Auth., Poll.
Ctrl. Rev.,
Commonwealth Edison
Co. Proj., Ser. D,
Aaa 5,000 6.75%, 3/1/15,
A.M.B.A.C............. 4,977,500
------------
Kentucky--3.1%
Kentucky St. Prpty. &
Bldgs. Comm. Rev.,
Aaa 19,100 6.25%, 9/1/07,
M.B.I.A............... 19,197,219
Perry Cnty., Solid Waste
Disp. Res.,
T.J. Int'l. Proj.,
NR 2,250 7.00%, 6/1/24........... 2,025,540
------------
21,222,759
------------
Louisiana--4.9%
Louisiana St. Offshore
Term. Auth.,
Deepwater Port Rev.,
A3 3,000 7.45%, 9/1/04, Ser. E... 3,202,590
New Orleans, Cap. Appr.,
A.M.B.A.C.,
Aaa 13,500 Zero Coupon, 9/1/09..... 5,208,570
Orleans Parish, Sch.
Brd.,
Aaa 5,780 8.90%, 2/1/07, M.B.I.A.,
E.T.M................. 7,065,125
Regl. Louisiana Trans.
Auth. Rev.,
Aaa 3,700 8.00%, 12/1/08,
F.G.I.C............... 4,003,844
St. Charles Parish,
Poll. Ctrl. Rev.,
Louisiana Pwr. & Lt.
Co.,
NR $ 4,000 8.25%, 6/1/14........... $ 4,222,080
Baa3 5,000 8.00%, 12/1/14, Ser.
1989.................. 5,225,250
West Feliciana Parish
Poll.
Ctrl. Rev.,Gulf States
Util.,
Baa3 5,000@ 7.00%, 11/1/15.......... 4,801,200
------------
33,728,659
------------
Maryland--1.1%
Maryland St. Hlth. &
Higher
Ed. Facs., Auth. Rev.,
Doctor's Comm. Hosp.,
Baa 4,000 5.50%, 7/1/24........... 2,961,920
Northeast Waste Disp.
Auth.,
Baltimore City Sludge
Proj.,
NR 4,591 7.25%, 7/1/07........... 4,453,775
------------
7,415,695
------------
Michigan--1.7%
Holland Sch. Dist.,
A.M.B.A.C.,
Aaa 4,000 Zero Coupon, 5/1/12..... 1,286,360
Michigan St. Hsg. Dev.
Auth.
Rev., Rental Hsg.,
A+* 1,000 7.55%, 4/1/23, Ser. B... 1,026,000
Sngl. Fam. Mtge.,
AA+* 5,185 7.50%, 6/1/15, Ser. A... 5,378,090
AA+* 3,130 7.75%, 12/1/19, Ser.
D..................... 3,262,837
Okemos Pub. Sch. Dist.,
Cnty. of Ingham,
M.B.I.A.,
Aaa 1,100 Zero Coupon, 5/1/12..... 353,749
Aaa 1,700 Zero Coupon, 5/1/13..... 506,039
------------
11,813,075
------------
Minnesota--0.5%
Southern Minnesota Mun.
Pwr. Agcy. Pwr. Supply
Sys. Rev.,
A 3,880 5.00%, 1/1/12, Ser. A... 3,199,448
------------
Mississippi--0.7%
Mississippi St., Highway
Bd.,
Aaa 5,000 6.20%, 2/1/08, E.T.M.... 4,964,250
------------
B-26 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
New Jersey--9.3%
Bergen Cnty. Util.
Auth.,
Wtr. Poll. Ctrl. Rev.,
Ser. B, F.G.I.C.,
Aaa $ 7,640 Zero Coupon, 12/15/07... $ 3,442,049
Aaa 4,695 Zero Coupon, 12/15/09... 1,848,656
Camden Cnty. Poll. Ctrl.
Fin.
Auth., Solid Waste
Res. Rec. Rev.,
Baa1 1,180 7.125%, 12/1/01, Ser.
C..................... 1,156,329
Baa1 5,100 7.50%, 12/1/09, Ser.
B..................... 4,983,414
Hudson Cnty. Impvt.
Auth.,
Solid Waste Sys.,
BBB-* 12,000 7.10%, 1/1/20........... 11,396,760
New Jersey Econ. Dist.
Heating & Cool.,
Trigen Trenton Proj.,
BBB-* 1,400 6.20%, 12/1/10.......... 1,292,144
Mkt. Transition Fac.
Rev.,
Sr. Lien, M.B.I.A.,
Aaa 3,875 5.80%, 7/1/09........... 3,671,408
New Jersey Hlth. Care
Facs.
Fin. Auth. Rev.,
A.M.B.A.C.,
Jersey Shore Med.
Ctr.,
Aaa 2,585 6.10%, 7/1/10........... 2,482,505
Aaa 2,775 6.125%, 7/1/11.......... 2,670,604
Aaa 1,435 6.125%, 7/1/12.......... 1,367,713
Aaa 2,000 6.25%, 7/1/16........... 1,902,600
New Jersey Sports &
Exposition Auth.,
Convention Ctr. Luxury
Tax Rev.,
Aaa 5,500 6.00%, 7/1/13,
M.B.I.A............... 5,251,950
New Jersey St. Hsg. &
Mtge. Fin. Agcy.,
Aaa 3,435 7.70%, 10/1/29,
M.B.I.A............... 3,524,963
New Jersey St. Tpke.
Auth. Rev.,
A 3,000 6.75%, 1/1/08, Ser. A... 3,074,310
A 8,000 6.50%, 1/1/16, Ser. C... 7,887,440
New Jersey Waste
Wtr.Treat.,
Trust Loan Rev.,
Aa 2,000 6.875%, 6/15/09......... 2,064,880
Union Cnty. Utils.
Auth.,
Solid Waste Rev.,
A-* 5,500 7.10%, 6/15/06, Ser.
A..................... 5,499,670
------------
63,517,395
------------
New York--13.4%
New York City, Gen.
Oblig.,
Baa1 $ 5,000 8.25%, 11/15/02, Ser.
F..................... $ 5,467,500
Baa1 3,500 8.00%, 8/1/03, Ser. D... 3,794,070
Baa1 1,500 8.00%, 8/1/04, Ser. D... 1,602,000
Baa1 2,000 7.75%, 8/15/04, Ser.
A..................... 2,110,220
Baa1 1,500 8.25%, 6/1/06, Ser. B... 1,664,325
Baa1 5,000 7.65%, 2/1/07, Ser. D... 5,266,750
New York City, Mun. Wtr.
Fin. Auth.,
Wtr. & Swr. Sys. Rev.,
Aaa 21,250 6.75%, 6/15/16,
F.G.I.C............... 21,397,263
New York St. Dorm. Auth.
Rev., Court Facs.,
Baa1 6,070 5.20%, 5/15/05, Ser.
A..................... 5,338,565
Baa1 5,000 5.625%, 5/15/13, Ser.
A..................... 4,258,100
New York St.
Environmental
Facs. Corp., Poll.
Ctrl. Rev.,
Aa 5,000 5.75%, 6/15/12.......... 4,534,300
New York St. Med. Care
Facs. Fin. Auth. Rev.,
Mental Hlth. Svcs.,
Ser. F, F.S.A.,
Aaa 5,000 5.25%, 8/15/08.......... 4,419,650
Aaa 13,350 5.25%, 2/15/19.......... 11,048,861
New York Hosp., Ser. A,
Aaa 4,000# 6.50%, 8/15/29,
A.M.B.A.C............. 3,840,520
New York St. Urban Dev.
Corp. Rev. Corr.
Facs., F.S.A.,
Aaa 2,955 5.45%, 1/1/07........... 2,710,710
Aaa 3,000 6.50%, 1/1/09........... 3,044,100
Aaa 3,000 5.50%, 1/1/14........... 2,616,300
Triborough Bridge &
Tunl. Auth.,
Aa 8,500 6.625%, 1/1/12, Ser.
X..................... 8,608,290
------------
91,721,524
------------
Ohio--1.2%
Cleveland Pub. Pwr.
Sys.,
Rev. First Mgte., Ser.
A,
M.B.I.A.,
Aaa 2,685 Zero Coupon, 11/15/10... 957,417
Columbus Wtr. Sys. Rev.,
Ctrl. Rev. Detroit
Ed.,
A1 2,000 6.375%, 11/1/10......... 1,985,020
B-27 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
Ohio (cont'd.)
Ohio St. Pub. Facs.,
Comm. of Higher Ed.,
A1 $ 5,000 7.25%, 5/1/04........... $ 5,425,900
------------
8,368,337
------------
Oklahoma--2.6%
Tulsa Mun. Arpt. Trust
Rev.,
American Airlines, Inc.,
Baa2 19,000 7.375%, 12/1/20......... 17,708,000
------------
Pennsylvania--2.7%
Allegheny Cnty. Arpt.
Rev.,
Greater Pittsburgh
Int'l. Arpt.,
M.B.I.A.,
Aaa 8,535 8.25%, 1/1/16, Ser. C... 9,171,284
Pennsylvania St Univ., Gen. Oblig.,
A1 6,000 5.50%, 8/15/16.......... 5,189,400
Philadelphia Wtr. &
Waste
Auth. Rev., C.G.I.C.,
Aaa 4,500 5.50%, 6/15/15.......... 3,845,295
------------
18,205,979
------------
Puerto Rico--9.3%
Puerto Rico Comnwlth.,
Aaa 6,000 7.50%, 7/1/04,
M.B.I.A............... 6,741,660
Aaa 5,000 5.50%, 7/1/13,
M.B.I.A............... 4,481,150
Aaa 5,000 5.25%, 7/1/18,
M.B.I.A............... 4,204,850
Puerto Rico Elec. Pwr.
Auth., Pwr. Rev.,
Baa1 2,500 7.00%, 7/1/07, Ser. S... 2,605,825
Baa1 2,550 6.125%, 7/1/08, Ser.
S..................... 2,475,999
Puerto Rico Hwy. & Trans. Auth. Rev.,
Baa1 8,405 6.375%, 7/1/08, Ser.
V..................... 8,326,245
Baa1 4,000 6.625%, 7/1/12, Ser.
V..................... 3,961,200
Baa1 4,460 6.625%, 7/1/12, Ser.
T..................... 4,394,260
Baa1 4,000 5.25%, 7/1/21, Ser. X... 3,212,160
Puerto Rico Public Bldgs. Auth. Rev.,
Baa1 5,000 5.60%, 7/1/08........... 4,470,450
Aaa 5,065 5.75%, 7/1/10, F.S.A.... 4,767,988
Puerto Rico Tel. Auth.
Rev.,
Ser. I, M.B.I.A.,
Aaa 8,200 5.25%, 1/25/07.......... 7,531,946
Aaa 7,600 5.449%, 1/16/15......... 6,651,444
------------
63,825,177
------------
South Carolina--1.4%
Charleston Waterworks &
Swr. Rev.,
Aaa $ 7,415 10.375%, 1/1/10,
E.T.M................. $ 9,520,786
------------
Tennessee--1.0%
Metropolitan Gov't.
Nashville & Davidson
Cnty., Wtr. & Swr.
Rev.,
A1 6,575 7.30%, 1/1/08........... 6,839,907
------------
Texas--9.5%
Alliance Arpt. Auth.
Inc.,
Spec. Facs. Rev.,
American Airlines
Proj.,
Baa2 4,500 7.50%, 12/1/29.......... 4,246,425
Austin Combined Util.
Sys.
Rev., Ser. B88,
A 5,400 7.75%, 11/15/08......... 5,759,208
Dallas Ft. Worth, Regl.
Arpt.
Rev., Ser. A, F.G.I.C.,
Aaa 3,500 7.375%, 11/1/08......... 3,778,950
Aaa 3,500 7.375%, 11/1/09......... 3,762,815
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............... 4,328,862
Harris Cnty., Toll Rd.,
Aaa 3,000 5.00%, 8/15/16,
F.G.I.C............... 2,407,020
Keller Cnty. Indep. Sch.
Dist.,
Aaa 7,000 5.50%, 8/15/13.......... 6,215,090
Northwest Indpt. Sch.
Dist.,
Cap. Apprec.,
A.M.B.A.C.,
Aaa 4,890 Zero Coupon, 8/15/12.... 1,530,863
San. Antonio Texas Elec.
& Gas Rev., Ser. A,
Aa1 4,055 5.00%, 2/1/16........... 3,247,325
Texas Mun. Pwr. Agcy.
Rev.,
Aaa 9,980 Zero Coupon, 9/1/14,
M.B.I.A............... 2,709,770
Texas Pub. Fin. Auth.,
Aa 10,000 5.50%, 10/1/13, Ser.
A..................... 8,776,700
Texas Wtr. Res. Fin.
Auth. Rev.,
A 11,970@ 7.625%, 8/15/08......... 12,586,335
B-28 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
Texas (cont'd.)
Univ. Texas Univ. Rev.,
Fin. Sys.,
Aa1 $ 2,500 7.00%, 8/15/07, Ser.
A..................... $ 2,624,950
Aa1 3,000 6.75%, 8/15/13, Ser.
B..................... 3,021,090
------------
64,995,403
------------
U. S. Virgin Islands--0.6%
Virgin Islands Pub. Fin.
Auth. Rev.,
Matching Fund Loan
Notes,
NR 3,900 7.25%, 10/1/18, Ser.
A..................... 3,800,355
------------
Virginia--4.9%
Henrico Cnty. Ind. Dev.
Auth. Rev., Secours
Hlth. Sys., St. Mary's
Proj.,
A1 10,100 7.50%, 9/1/07, Ser. B... 10,688,426
Prince William County
Va. Park Auth. Rev.,
A 4,570 7.50%, 7/15/20.......... 4,715,280
Roanoke Cnty., Gen.
Oblig.,
Aa 3,000 5.50%, 6/1/13........... 2,607,810
Virginia St. Pub. Sch.
Auth.,
Aa 5,640 6.125%, 8/1/11, Ser.
A..................... 5,410,283
Aa 5,635 6.125%, 8/1/12, Ser.
A..................... 5,369,704
West Point Ind. Dev.,
Chesapeake Corp.,
Baa3 5,750 6.25%, 3/1/19........... 4,986,918
------------
33,778,421
------------
Washington--3.1%
Tacoma Dept. Pub. Util.
&
Lt. Div., Lt. & Pwr.
Rev.,
A 4,450 9.375%, 1/1/15.......... 4,715,576
Washington St. Pub. Pwr.
Supply Sys. Rev.,
Nuclear Proj. No. 1,
Aa 4,000 7.00%, 7/1/08, Ser. A... 4,105,520
Aa 5,000 7.25%, 7/1/09, Ser. B... 5,181,950
Nuclear Proj. No. 2,
Aa 2,000 7.25%, 7/1/06, Ser. A... 2,120,180
Aaa 6,000 Zero Coupon, 7/1/06,
M.B.I.A., Ser. A...... 2,880,120
Washington St. Pub. Pwr.
Supply Sys. Rev.,
Nuclear Proj. No. 3,
Zero Coupon, 7/1/06,
Aaa $ 5,000 F.G.I.C., Ser. B...... $ 2,400,100
------------
21,403,446
------------
Total long-term
investments
(cost $611,914,906)..... 606,565,120
------------
SHORT-TERM INVESTMENTS--10.2%
California--5.7%
State of California,
R.A.W.,
F.R.W.D.S.,
5.73%, 1/5/95, Ser.
SP-1* 10,157 94C-10................ 10,157,426
Los Angeles Int'l.
Arpt.,
LAX Two Proj., F.R.D.D.,
VMIG-2 28,900 6.00%, 1/3/95........... 28,900,000
------------
39,057,426
------------
Florida--0.6%
Manatee Cnty. Hsg. Fin.
Auth.,
Sngl. Fam. Mtge. Rev.,
A.M.T.,
VMIG1 4,100 4.11%, 1/16/95,
F.R.M.D., Ser. 94..... 4,100,000
------------
Georgia--0.7%
Burke Cnty. Dev. Auth.,
Poll.
Adj. Ctrl. Rev., Pwr.
Co. Vogtle, Ser. 94A,
VMIG1 5,100 6.25%, 1/3/95,
F.R.D.D............... 5,100,000
------------
Illinois--0.1%
Chicago O'Hare Int'l.
Arpt.,
American Airlines Inc.,
F.R.D.D.,
P-2 700 6.00%, 1/3/95, Ser.
83B................... 700,000
------------
Louisiana--0.7%
Louisiana St, Gen.
Oblig.,
J.P.M. Putters, Ser. 29,
F.R.W.D.S.,
VMIG1 5,000 5.75%, 1/5/95........... 5,000,000
------------
North Carolina--0.7%
North Carolina Eastern
Mun. Pwr. Agcy.,
NR 5,000 3.85%, 1/30/95,
T.E.C.P............... 5,000,000
------------
B-29 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
Tennessee--0.5%
Shelby Cnty. Hlth. Ed. &
Hsg. Fac., Brd. Hosp.
Rev.,
Meth. Hlth., F.R.S.D.,
VMIG1 $ 3,240 4.20%, 8/1/95, Ser.
85C................... $ 3,240,000
------------
Texas--0.5%
Brazos River Harbor
Nav. Dist., Dow
Chemical
Co. Proj., T.E.C.P.,
P-1 3,400 4.95%, 3/15/95, Ser.
91.................... 3,400,000
------------
Virginia--0.7%
York Cnty. Ind. Dev.
Auth.,
Mun. Elec. & Pwr. Co.,
VMIG1 4,500 5.15%, 1/5/95,
T.E.C.P............... 4,500,000
------------
Total short-term
investments
(cost $70,097,426)...... 70,097,426
------------
Total Investments--98.8%
(cost $682,012,332; Note
4).................... 676,662,546
Other assets in excess
of
liabilities--1.2%..... 8,471,349
------------
Net Assets--100%........ $685,133,895
------------
------------
(a) The following abbreviations are used in portfolio
descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
B.I.G.--Bond Investors Guaranty Insurance Company
C.G.I.C.--Capital Guaranty Insurance Corporation
E.T.M.--Escrowed to Maturity
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate Daily Demand Note
F.R.M.D.--Floating Rate Monthly Demand Note
F.R.S.D.--Floating Rate Semi-Annual Demand Note
F.R.W.D.--Floating Rate Weekly Demand Note
F.R.W.D.S.--Floating Rate Weekly Demand Note Synthetic
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
R.A.W.--Revenue Anticipation Warrants
T.E.C.P.--Tax Exempt Commercial Paper
# Represents when-issued security.
D Prerefunded issues are secured by escrowed cash
and
direct U.S. guaranteed obligations.
* Standard and Poor's Rating.
@ Pledged as initial margin on financial futures
contract.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information
contains a description of Moody's and Standard &
Poor's ratings.
B-30 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets December 31, 1994
-----------------
<S> <C>
Investments, at value (cost $682,012,332)......................... $ 676,662,546
Cash.............................................................. 3,342
Interest receivable............................................... 12,558,652
Receivable for Fund shares sold................................... 2,378,893
Receivable for investments sold................................... 363,069
Due from broker - variation margin................................ 24,374
Other assets...................................................... 19,910
-------------
Total assets.................................................. 692,010,786
-------------
Liabilities
Payable for investments purchased................................. 3,789,611
Payable for Fund shares reacquired................................ 1,995,201
Dividends payable................................................. 419,733
Management fee payable............................................ 243,777
Distribution fee payable.......................................... 286,275
Accrued expenses.................................................. 142,294
-------------
Total liabilities............................................. 6,876,891
-------------
Net Assets........................................................ $ 685,133,895
-------------
-------------
Net assets were comprised of:
Common stock, at par............................................ $ 474,315
Paid-in capital in excess of par................................ 713,644,111
-------------
714,118,426
Accumulated net realized loss on investments.................... (23,680,276)
Net unrealized depreciation on investments...................... (5,304,255)
-------------
Net assets, December 31, 1994................................... $ 685,133,895
=============
Class A:
Net asset value and redemption price per share ($12,720,790 /
881,875 shares of common stock issued and outstanding)......... $14.42
Maximum sales charge (3.0% of offering price).................... .45
-------------
Maximum offering price to public................................. $14.87
=============
Class B:
Net asset value, offering price and redemption price per share
($672,271,575 / 46,539,855 shares of common stock issued and
outstanding)................................................... $14.45
=============
Class C:
Net asset value, offer price and redemption price per share
($141,530 / 9,798 shares of common stock issued and outstanding) $14.44
=============
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations
Year Ended
December 31,
Net Investment Income 1994
------------
Income
Interest.............................. $ 47,004,859
------------
Expenses
Distribution fee--Class A............. 14,116
Distribution fee--Class B............. 3,758,114
Distribution fee--Class C............. 321
Management fee........................ 3,633,518
Transfer agent's fees and expenses.... 649,000
Tax expense........................... 251,000
Reports to shareholders............... 237,000
Custodian's fees and expenses......... 127,000
Registration fees..................... 93,500
Legal fees............................ 61,000
Audit fee............................. 51,000
Trustees' fees........................ 37,700
Insurance expense..................... 19,200
Miscellaneous......................... 618
------------
Total expenses...................... 8,933,087
------------
Net investment income................... 38,071,772
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... (27,537,466)
Financial futures contracts........... 3,847,102
------------
(23,690,364)
------------
Net change in unrealized appreciation
/depreciation of:
Investments........................... (68,112,297)
Financial futures contracts........... 45,531
------------
(68,066,766)
------------
Net loss on investments................. (91,757,130)
------------
Net Decrease in Net Assets
Resulting from Operations............... $(53,685,358)
------------
------------
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets
Year Ended December 31,
Increase (Decrease) ------------------------------
in Net Assets 1994 1993
------------- -------------
Operations
Net investment income.... $ 38,071,772 $ 44,152,405
Net realized gain (loss)
on investment
transactions........... (23,690,364) 38,512,754
Net change in unrealized
appreciation
(depreciation) of
investments............ (68,066,766) 16,778,159
------------- -------------
Net increase (decrease)
in net assets resulting
from operations........ (53,685,358) 99,443,318
------------- -------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................ (758,853) (645,048)
Class B................ (37,310,847) (43,507,357)
Class C................ (2,072) --
------------- -------------
(38,071,772) (44,152,405)
------------- -------------
Distributions from net
realized gains
Class A................ (95,056) (563,957)
Class B................ (5,131,497) (34,572,412)
------------- -------------
(5,226,553) (35,136,369)
------------- -------------
Fund share transactions
(Note 5)
Net proceeds from shares
issued................. 86,309,362 201,764,486
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 27,093,049 50,661,082
Cost of shares
reacquired............. (193,751,516) (246,514,570)
------------- -------------
Increase (decrease) in
net assets from Fund
share transactions..... (80,349,105) 5,910,998
------------- -------------
Total increase
(decrease)............... (177,332,788) 26,065,542
------------- -------------
Net Assets
Beginning of year.......... 862,466,683 836,401,141
------------- -------------
End of year................ $ 685,133,895 $ 862,466,683
------------- -------------
------------- -------------
See Notes to Financial Statements. See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Notes to Financial Statements
Prudential National Municipals Fund, Inc. (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 Policies
The following is a summary 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 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. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain(loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Fund intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates 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.
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.
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with 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
B-33
<PAGE>
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. Effective January 1, 1995, PMF has agreed to waive a
portion (.05 of 1% of the Fund's average daily net assets) of its management
fee. The Fund is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the
Class A and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, .50 of 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the fiscal year ended December 31, 1994.
PMFD has advised the Fund that it has received approximately $92,500 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended December 31, 1994. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended December 31, 1994,
it received approximately $976,100 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary
of PMF, serves as the Fund's transfer agent and during the fiscal year ended
December 31, 1994, the Fund incurred fees of approximately $457,600 for the
services of PMFS. As of December 31, 1994, $36,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the fiscal year ended December 31, 1994, were $852,772,280 and
$995,815,438, respectively.
At December 31, 1994, the Fund sold 78 financial futures contracts on the
Municipal Bond Index which expire in March 1995. The value at disposition of
such contracts is $7,779,719. The value of such contracts on December 31, 1994
was $7,734,188, thereby resulting in an unrealized gain of $45,531. The Fund has
pledged $11,970,000 principal amount of Texas Wtr. Res. Fin. Auth. Rev. Bonds
and $5,000,000 principal amount of West Feliciana Parish Poll. Ctrl. Rev. Bonds
as initial margin on such contracts.
The federal income tax basis of the Portfolio's investments at December 31,
1994 was $682,417,893 and, accordingly, net unrealized depreciation for federal
income tax purposes was $5,755,347 (gross unrealized appreciation--$11,820,207
gross unrealized depreciation--$17,575,554).
For federal income tax purposes, the Fund has a capital loss carryforward
as of December 31, 1994 of approximately $19,372,500 which expires in 2002.
Accordingly, no capital gains distribution is expected to be paid until net
gains have been realized in excess of such amount.
The Fund will elect to treat net capital losses of approximately $3,999,200
incurred in the two month period ended December 31, 1994 as having been incurred
in the following fiscal year.
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to
B-34
<PAGE>
3.0%. 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.
Class C shares are sold with a contingent deferred sales charge of 1% during the
first year. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase commencing in or about
February 1995.
There are 750 million shares of common stock, $.01 par value, per share,
divided into three classes, designated Class A, Class B and Class C common
stock, each of which consists of 250 million authorized shares.
Transactions in shares of common stock were as follows:
Class A Shares Amount
---------------------------- ----------- -------------
Year ended December 31,
1994:
Shares sold................. 2,875,693 $ 42,583,262
Shares issued in
reinvestment of dividends
and distributions......... 37,934 573,468
Shares reacquired........... (2,900,866) (42,851,546)
----------- -------------
Net increase in shares
outstanding............... 12,761 $ 305,184
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
Class B Shares Amount
---------------------------- ----------- -------------
Year ended December 31,
1994:
Shares sold................. 2,885,324 $ 43,581,881
Shares issued in
reinvestment of dividends
and distributions......... 1,749,682 26,518,677
Shares reacquired........... (10,042,966) (150,899,970)
----------- -------------
Net decrease in shares
outstanding............... (5,407,960) $ (80,799,412)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
Class C
----------------------------
August 1, 1994* through
December 31, 1994:
Shares sold................. 9,735 $ 144,219
Shares issued in
reinvestment of
dividends................. 63 904
----------- -------------
Net increase in shares
outstanding............... 9,798 $ 145,123
----------- -------------
----------- -------------
---------------
* Commencement of offering of Class C shares.
B-35
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
PER -------------------------------------------------- ---------------------------------------------------- ------------
SHARE January 22, August 1,
OPERATING 1990D 1994DD
PERFOR- Year Ended December 31, through Year Ended December 31, through
MANCE: ----------------------------------- December 31, ---------------------------------------------------- December 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
------- ------- ------ ------ ------------ -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
asset
value,
beginning
of
period $ 16.30 $ 15.94 $16.00 $15.09 $14.98 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $15.13
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
Income
from
investment
operations
Net
investment
income... .81 .90 .94 .97 .90 .75 .84 .88 .91 .90 .29
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions..(1.78) 1.05 .43 .91 .11 (1.78) 1.05 .44 .91 (.04) (.69)
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
Total
from
investment
opera-
tions.. (.97) 1.95 1.37 1.88 1.01 (1.03) 1.89 1.32 1.82 .86 (.40)
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
Less
distributions
Dividends
from
net
investment
income... (.81) (.90) (.94) (.97) (.90) (.75) (.84) (.88) (.91) (.90) (.29)
Distributions
from net
realized
gains.. (.10) (.69) (.49) -- -- (.10) (.69) (.49) -- -- --
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
Total
distri-
butions. (.91) (1.59) (1.43) (.97) (.90) (.85) (1.53) (1.37) (.91) (.90) (.29)
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
Net
asset
value,
end
of
period $ 14.42 $ 16.30 $15.94 $16.00 $15.09 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $14.44
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ------
TOTAL
RETURN#:...(6.04)% 12.60% 8.88% 12.94% 6.88% (6.39)% 12.15% 8.50% 12.42% 5.96% (2.63)%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000)...$12,721 $14,167 $7,700 $3,819 $1,846 $672,272 $848,299 $828,702 $874,338 $882,212 $ 141
Average
net
assets
(000).. $14,116 $11,786 $5,401 $2,697 $1,161 $751,623 $854,919 $829,830 $862,249 $940,215 $ 103
Ratios
to
average
net
assets:##
Expenses,
including
distribution
fees... .77% .69% .72% .75% .75%* 1.17% 1.09% 1.12% 1.15% 1.13% 1.51%*
Expenses,
excluding
distribution
fees... .67% .59% .62% .65% .65%* .67% .59% .62% .65% .64% .76%*
Net
investment
income.. 5.38% 5.49% 5.79% 6.27% 6.43%* 4.96% 5.09% 5.39% 5.87% 6.03% 4.84%*
Portfolio
turnover
rate... 120% 82% 114% 59% 110% 120% 82% 114% 59% 110% 120%
---------------
* Annualized.
D Commencement of offering of Class A shares.
DD Commencement of offering of Class C 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.
## Because of the event referred to in DD and the timing of such, the ratios for the Class C shares are not necessarily
comparable to that of Class A or B shares and are not necessarily indicative of future ratios.
See Notes to Financial Statements.
</TABLE>
B-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudential National Municipals Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential National Municipals
Fund, Inc. (the "Fund") at December 31, 1994, 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, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 21, 1995
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 forgoing 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>
(ICON)
Prudential
National
Municipals
Fund, Inc.
SEMI
ANNUAL
REPORT
June 30, 1995
Prudential Mutual Funds
Building Your Future
On Our StrengthSM (LOGO)
<PAGE>
Prudential National Municipals Fund, Inc.
Performance At A Glance.
Municipal bonds turned in a strong performance in the first six months of the
year, more than making up ground lost last year. A slowing economy pushed
interest rates down, lifting bond prices sharply higher in one of the strongest
bond market rallies in years. We're pleased to report that Prudential National
Municipals Fund performed in line with the average municipal bond fund,
according to Lipper Analytical Services.
<TABLE>
Cumulative Total Returns1 As of 6/30/95
<CAPTION>
----------------------------------------------------------------------------
Six One Five Ten Since
Months Year Years Years Inception2
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A 8.5% 7.8% 47.0% N/A 50.9%
----------------------------------------------------------------------------
Class B 8.3 7.4 44.2 117.1 267.8
----------------------------------------------------------------------------
Class C 8.2 N/A N/A N/A 5.3
----------------------------------------------------------------------------
*Lipper Gen. Debt. Avg 9.0 7.6 45.4 129.4 287.5
----------------------------------------------------------------------------
</TABLE>
<TABLE>
Average Annual Total Returns1 As of 6/30/95
<CAPTION>
----------------------------------------------------------------------------
One Five Ten Since
Year Years Years Inception2
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 4.6% 7.4% N/A 7.3%
----------------------------------------------------------------------------
Class B 2.4 7.4 8.1 9.0
----------------------------------------------------------------------------
Class C N/A N/A N/A N/A
----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
30-Day
Dividend SEC-Yield
<S> <C> <C> <C>
Your Class A $0.071 4.88%
Dividend -------------------------------------
As of 6/30/95 Class B $0.066 4.60
-------------------------------------
Class C $0.063 4.32
------------------------------------------------------
</TABLE>
Past performance is not a guarantee of future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
1Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account sales
charges. The Average Annual Total Returns do take into account applicable sales
charges. The Fund charges a maximum front end sales load of 5% for Class A
shares. Class B shares are subject to a declining contingent deferred sales
charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%, for six years. Class C shares have
a 1% CDSC for one year. Class B shares will automatically convert to Class A
shares a quarterly basis, after approximately seven years.
2Inception dates: 1/22/90 Class A; 4/25/80 Class B; 8/1/94 Class C.
*These are the average returns of 230 funds in the general municipal debt fund
category for six months; 201 funds for one year; 95 funds for five years; 153
funds for 10 years; and 31 funds since inception, as determined by Lipper
Analytical Services, Inc.
GRAPH
Source: Lipper Analytical Services, Inc. Financial markets change, so a
mutual fund's past performance should never be used to predict future results.
The risks to each of the investments listed above are different -- we provide
12-month total returns for several Lipper mutual fund categories to show you
that reaching for higher yields means tolerating more risk. The greater the
risk, the larger the potential reward or loss. In addition, we've added
historical 20-year average annual returns to show that 1995's returns (so far)
are higher than normal. These returns assume the reinvestment of dividends.
Stock funds will fluctuate a great deal. Smaller capitalization stocks offer
greater potential for long term growth but may be more volatile than larger
capitalization stocks. Investors receive higher historical total returns from
stocks than from most other investments.
Bond funds provide more income than stock funds, which can help smooth out their
total returns year by year. But their prices still fluctuate (sometimes a good
deal) and their returns are historically lower than those of stock funds.
Sector or specialty stock funds usually entail the greatest risks because they
are not widely diversified. They are designed for sophisticated investors who
can tolerate additional risk in exchange for higher potential rewards or losses.
Money market funds attempt to preserve a constant share value; they don't
fluctuate much in price but their returns are generally among the lowest of
the major investment categories.
<PAGE>
Patricia Dolan, Fund Manager
Portfolio Manager's Report PICTURE
The Prudential National Municipals Fund invests in carefully selected, medium
quality, long-term municipal bonds that offer a high level of current income
exempt from federal income taxes. The Fund invests in bonds that are well-priced
considering their underlying value. These bonds are varied among the states,
sectors and maturities.
1. Strategy Session.
What We See Now.
As interest rates fell, we purchased bonds with longer maturities, locking in
current high yields and increasing the Fund's potential for price increases.
The portfolio's duration, a measure of its potential to increase in price as
interest rates fall, increased to 8.1 years from 7.6 years. Bonds with longer
maturities generally carry higher interest rates.
As interest rates dropped, though, municipal bond funds faced challenges.
While the prices of the bonds we held rose, the yields on those same bonds
declined. Since dividends are paid out of the bonds' income, we needed to
enhance income so we increased our investments in higher yielding BBB and
A-rated industrial development bonds to 23% from 15% of assets. These bonds
were issued by economic development authorities and backed by companies in the
airline and paper industries like American Airlines, Federal Express, United
Airlines, Champion International and Weyerhauser. They should benefit from a
growing economy. We also hold 18% of assets in utility bonds and 10% in
transportation issues.
We are also well-diversified geographically.
We hold 13% of assets in New York, 11% in Texas, 10% in Puerto Rico, and 6% in
California. These bonds are valuable because they offer higher yields or are
in high demand but in low supply.
<PAGE>
2. What Went Well.
Many Of Our Bonds
Couldn't Be Called.
We increased assets invested in non-callable bonds (those that can not be paid
off prematurely by the issuer to save on interest costs) to 30% from 25%. These
bonds not only offer attractive yields but also appreciate well when interest
rates decline. They are valuable because not many municipal bonds offer
protection from call risk -- only about a third of the Lehman Brothers'
Municipal Bond Index is not callable.
It Paid To Buy
Puerto Rico Bonds.
This year, the supply of new municipal bonds in the 50 states has declined
sharply. So, we looked elsewhere. We bought bonds sold by Puerto Rico, because
they are tax-exempt federally and in virtually all states. We think these bonds
are attractively priced, but to make them even more so, we purchased insurance
on them in the secondary market. For example, we bought insurance on some
Puerto Rico Highway Authority bonds, and as a result their market value
appreciated substantially -- by more than the cost of their insurance.
3. And Not So Well.
We Would Have Benefited From
A Longer Duration.
In the first quarter, our duration was shorter than that of some competing
funds, because we overestimated the economy's strength. As the slowdown became
apparent in the second quarter, we extended duration, but should have done so
sooner. Duration generally ranged from 7.6 years to 8.3 years, and was 8.1
years on June 30.
Municipals Suffered From Tax Talk.
Congress is considering various plans to reduce the value of the tax exemption
enjoyed by municipal bonds, perhaps by lowering or eliminating income taxes on
other types of bonds. Clearly, this created uncertainty in the market -- one
reason why municipal bonds did not rise in tandem with taxable bonds in the
second quarter. We believe it is unlikely that a flat tax proposal -- under
which everyone would pay a single-rate income tax -- will pass Congress.
4. Looking Ahead.
Municipal bonds yields are very attractive now. In the second quarter, when
U.S. government and corporate bond yields fell, municipal yields did not
follow to the same extent. The results are some very good buying opportunities
now in the municipal market. Plus, if interest rates continue to fall,
investors in municipal bonds could reasonably expect a bit more price
appreciation in addition to coupon income.
We expect municipal bond prices to be sensitive to any proposal designed to
reduce the federal income tax paid by the nation's wealthier individuals.
Municipal bond investors should be prepared to weather some volatility this
year as a consequence. Overall, we believe municipal bonds still offer good
value, and that volatility can offer some attractive buying opportunities.
1
<PAGE>
President's Letter
(PICTURE)
July 31, 1995
Dear Shareholder:
You've probably noticed your shareholder report looks different this month.
We've designed it to provide clear, concise and forthright information about
your investment, its performance, risks and potential rewards. And, from time
to time, I'll share some thoughts with you about the industry, mutual fund
trends and how we're responding to them at Prudential Mutual Funds.
On The Hill
One recent trend we like is part of the "Contract with America." It's called
the American Dream Savings Account and it was approved by the House of
Representatives earlier in the year. The Senate has now taken up the proposal,
which would improve the traditional Individual Retirement Account program by
allowing higher non-working spouse contributions. The proposed law would also
allow tax-free and penalty-free withdrawals from the account before age 59 1/2,
for certain expenses. Prudential Mutual Funds supports the proposal and we urge
you to share your opinion about it with your Senator. You can reach your
Senator's office by calling 202-224-3121.
In Closing
One final note: if you're a Class B shareholder, you'll begin noticing a
change on your statements once you've held your shares for seven years. At
that time they will automatically begin to convert to Class A shares on a
quarterly basis. Since Class A shares carry lower annual distribution charges
than Class B shares, your total returns will automatically rise after the
conversion. Conversions started earlier this year and will occur each calendar
quarter -- beginning in December, 1995, they'll take place every March, June,
September and December.
I hope you'll find this information useful as you work with your financial
advisor or registered representative to develop your personal investment plan.
Thank you for choosing Prudential Mutual Funds for your mutual fund investment.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--91.0%
------------------------------------------------------------------------------------------------------------------------------
Alabama--1.2%
Courtland Ind. Dev. Brd. Rev., Champion Int'l. Corp.,
Ser. A Baa1 7.20% 12/01/13 $ 6,000 $ 6,414,360
Solid Waste Disp. Rev. Baa1 5.90 2/01/17 2,000 1,892,640
------------
8,307,000
------------------------------------------------------------------------------------------------------------------------------
Arizona--1.7%
Pima Cnty. Unified Sch. Dist., No. 1, Tuscon, F.G.I.C. Aaa 7.50 7/01/10 3,000@ 3,580,230
Tucson, Gen. Oblig.,
Ser. A A1 7.375 7/01/11 1,000 1,161,640
Ser. A A1 7.375 7/01/12 1,100 1,287,033
Ser. A A1 7.375 7/01/13 4,500 5,279,850
------------
11,308,753
------------------------------------------------------------------------------------------------------------------------------
California--5.6%
Foothill/Eastern Trans. Corr. Agcy., Toll Rd. BBB-* Zero 1/01/20 10,000 1,767,200
Glendale Redev. Agcy. Tax Alloc. Rev., Central Glendale Redev.
Proj., A.M.B.A.C. Aaa 5.50 12/01/13 2,400 2,282,568
Los Angeles Metro Trans. Auth., Sales Tax Rev., F.G.I.C., Ser.
A Aaa 5.00 7/01/21 5,000 4,304,650
San Bernardino Cnty., Cert. of Part., Med. Ctr. Fin. Proj.,
Ser. A, M.B.I.A. Aaa 5.50 8/01/22 10,000 9,196,400
San Jose Redev. Proj., Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 5,000 5,124,400
Santa Margarita/Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3-3A-4 + 4A Aaa 7.25 8/01/09 2,000 2,301,520
Impvt. Dists. 3-3A-4 + 4A Aaa 7.25 8/01/10 2,450 2,822,596
Impvt. Dists. 3-3A-4 + 4A Aaa 7.25 8/01/14 2,000 2,306,640
So. Orange Cnty. Pub. Fin. Auth., F.G.I.C.,
Foothill Area Proj. Aaa 8.00 8/15/09 3,650 4,472,746
Foothill Area Proj. Aaa 6.50 8/15/10 2,000 2,158,460
West Contra Costa Sch. Dist., Cert. of Part. Ba 7.125 1/01/24 1,600 1,638,560
------------
38,375,740
------------------------------------------------------------------------------------------------------------------------------
Colorado--3.1%
Colorado Hsg. Fin. Auth.,
Sngl. Fam. Prog. Aa 8.00 6/01/25 5,000 5,681,250
Sngl. Fam. Prog. Aa 7.90 12/01/25 3,000 3,382,890
Colorado Springs Arpt. Rev., A.M.T.,
Ser. A BBB* 6.90 1/01/12 3,700 3,803,674
Ser. A BBB* 7.00 1/01/22 7,960 8,182,004
------------
21,049,818
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 3 -----
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Connecticut--0.3%
Connecticut St. Spec. Tax Oblig. Rev., Trans. Infrastructure,
Ser. A. A1 7.125% 6/01/10 $ 2,000 $ 2,283,680
------------------------------------------------------------------------------------------------------------------------------
Florida--3.4%
Broward Cnty. Res. Rec. Rev., Broward Waste Energy, L.P.
South. A 7.95 12/01/08 13,645 14,967,883
Florida St. Brd. Ed.,
Cap. Outlay Aa 9.125 6/01/14 1,260 1,719,371
Cap. Outlay, E.T.M. Aa 9.125 6/01/14 195 271,693
Hillsborough Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev, Tampa
Elec. Proj. Aa2 8.00 5/01/22 5,000 5,892,500
------------
22,851,447
------------------------------------------------------------------------------------------------------------------------------
Georgia--3.4%
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm. Proj. NR 9.25 6/01/10 4,655D 5,620,214
Atlanta Wtr. & Swr. Rev. Aa 6.00 1/01/11 4,410 4,494,805
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Corp., 1st Mtg.,
M.B.I.A. Aaa 8.00 1/01/22 5,000 5,918,000
Georgia St. Res. Fin. Auth., Sngl. Fam. Insured Mtge., Ser.
C-C1 Aa 8.00 12/01/16 6,550 7,073,738
------------
23,106,757
------------------------------------------------------------------------------------------------------------------------------
Illinois--0.2%
Kane & De Kalb Cntys. Illinois Cmnty. Unit Sch., A.M.B.A.C.,
Dist. No. 301 Aaa Zero 12/01/10 3,055 1,182,713
Dist. No. 301 Aaa Zero 12/01/14 1,600 473,440
------------
1,656,153
------------------------------------------------------------------------------------------------------------------------------
Indiana--2.0%
Indianapolis Int'l. Arpt. Auth. Rev., A.M.T.,
Federal Express Corp. Proj. Baa2 7.10 1/15/17 9,000 9,319,860
United Air Lines Proj., Ser. A Baa2 6.50 11/15/31 4,250 4,037,500
------------
13,357,360
------------------------------------------------------------------------------------------------------------------------------
Kentucky--1.8%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan Bloedel
Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,222,060
Jefferson Cnty. Poll. Ctrl. Rev., Louisville Gas & Elec., Ser.
A, 1st Mtg., A.M.T. Aa2 7.75 2/01/19 5,700 6,194,247
------------
12,416,307
------------------------------------------------------------------------------------------------------------------------------
Louisiana--4.2%
New Orleans, Louisiana Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 13,500 5,777,730
Orleans Parish, Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90 2/01/07 5,780 7,575,673
</TABLE>
--------------------------------------------------------------------------------
----- 4 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Louisiana (cont'd.)
St. Charles Parish, Louisiana Pwr. & Lt. Co., 1st Mtg., A.M.T. Baa2 6.875% 7/01/24 $ 5,000 $ 5,114,150
St. Charles Parish, Poll. Ctrl. Rev.,
Louisiana Pwr. & Lt. Co. NR 8.25 6/01/14 4,000 4,412,680
Louisiana Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 5,000 5,502,600
------------
28,382,833
------------------------------------------------------------------------------------------------------------------------------
Maryland--2.3%
Maryland St. Hlth. & Higher Ed. Facs., Auth. Rev.,
Doctor's Comm. Hosp. Baa 5.50 7/01/24 4,000 3,180,880
Univ. of Maryland Med. Ctr., F.G.I.C. Aaa 5.00 7/01/20 4,400 3,778,060
Francis Scott Key Med. Ctr., F.G.I.C. Aaa 5.00 7/01/18 5,000 4,341,200
Northeast Waste Disp. Auth., Baltimore City Sludge Compositing
Fac. NR 7.25 7/01/07 4,096 4,181,483
------------
15,481,623
------------------------------------------------------------------------------------------------------------------------------
Michigan--2.3%
Dickinson Cnty. Economic Dev. Auth., Poll. Ctrl. Rev.,
Champion Int'l. Corp. Proj. Baa1 5.85 10/01/18 4,000 3,726,040
Holland Sch. Dist., A.M.B.A.C. Aaa Zero 5/01/12 4,000 1,419,240
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg., Ser. B A* 7.55 4/01/23 1,000 1,067,400
Sngl. Fam. Mtge., Ser. A AA* 7.50 6/01/15 5,185 5,527,625
Sngl. Fam. Mtge., Ser. D, A.M.T. AA* 7.75 12/01/19 3,130 3,331,165
Okemos Pub. Sch. Dist., M.B.I.A.,
Cnty. of Ingham Aaa Zero 5/01/12 1,100 390,291
Cnty. of Ingham Aaa Zero 5/01/13 1,700 564,247
------------
16,026,008
------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.6%
Southern Mun. Pwr. Agcy., Pwr. Supply Sys. Rev., M.B.I.A. Aaa Zero 1/01/21 9,950 2,122,833
St. Louis Park Hlth. Care Facs. Rev., Hlth. Sys. Oblig. Group,
Ser. A, A.M.B.A.C. Aaa 5.20 7/01/23 2,045 1,816,798
------------
3,939,631
------------------------------------------------------------------------------------------------------------------------------
Nevada--0.7%
Clark Cnty. Southwest Gas Corp., Ser. A, A.M.T. Baa3 6.50 12/01/33 5,000 4,769,850
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 5 -----
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.4%
Bergen Cnty. Util. Auth., Wtr. Poll. Ctrl. Rev., F.G.I.C.,
Ser. B Aaa Zero 12/15/07 $7,640 $3,886,162
Ser. B Aaa Zero 12/15/09 4,695 2,071,481
Camden Cnty. Poll. Ctrl. Fin. Auth., Solid Waste Res. Rec.
Rev., Ser. B, A.M.T. Ba 7.50% 12/01/09 2,600 2,636,946
Hudson Cnty. Impvt. Auth., Solid Waste Sys. BBB-* 7.10 1/01/20 7,000 6,896,120
New Jersey St. Hsg. & Mtge. Fin. Agcy., A.M.T., M.B.I.A. Aaa 7.70 10/01/29 3,420 3,627,218
New Jersey St. Tpke. Auth. Rev.,
Ser. A A 6.75 1/01/08 3,000 3,230,910
Ser. C, M.B.I.A. Aaa 6.50 1/01/16 10,000 10,820,500
Ser. C, F.S.A. Aaa 6.50 1/01/16 2,500 2,705,125
New Jersey Waste Wtr.Treat., Trust Loan Rev. Aa 6.875 6/15/09 2,000 2,186,820
Union Cnty. Utils. Auth., Solid Waste Rev., Ser. A, A.M.T. A-* 7.10 6/15/06 5,500 5,668,575
------------
43,729,857
------------------------------------------------------------------------------------------------------------------------------
New York--12.6%
New York City, Gen. Oblig.,
Ser. F Baa1 8.25 11/15/02 5,000 5,688,200
Ser. D Baa1 8.00 8/01/03 3,500 3,921,190
Ser. D Baa1 8.00 8/01/04 1,500 1,687,080
Ser. A Baa1 7.75 8/15/04 2,000 2,225,060
Ser. B Baa1 8.25 6/01/06 1,500 1,751,025
Ser. D Baa1 7.65 2/01/07 5,000 5,437,000
New York City, Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys. Rev.,
F.G.I.C. Aaa 6.75 6/15/16 21,250 22,838,437
New York St. Dorm. Auth. Rev., St. Univ. Edl. Facs., Ser. A Baa1 5.50 5/15/13 5,725 5,243,070
New York St. Environmental Facs. Corp., Poll. Ctrl. Rev. Aa 5.75 6/15/12 5,000 4,883,500
New York St. Local Gov't. Assist. Corp.,
Ser. C A Zero 4/01/13 6,750 2,251,935
Ser. O A 6.00 4/01/14 5,500 5,733,200
New York St. Urban Dev. Corp. Rev., F.S.A.,
Corr. Facs. Aaa 6.50 1/01/09 3,000 3,256,380
Corr. Facs. Aaa 5.50 1/01/14 3,000 2,827,260
Port Auth. of New York & New Jersey, Ser. 91 A1 5.20 11/15/16 5,000 4,488,050
Triborough Bridge & Tunl. Auth., M.B.I.A.,
Ser. X Aaa 6.625 1/01/12 8,500 9,266,870
Ser. A Aaa 5.00 1/01/15 5,000 4,471,900
------------
85,970,157
------------------------------------------------------------------------------------------------------------------------------
North Carolina--1.0%
Charlotte, Cert. of Part., Ref. Conv. Fac. Proj., Ser. C.,
A.M.B.A.C. Aaa 5.00 12/01/21 8,000 6,936,400
</TABLE>
--------------------------------------------------------------------------------
----- 6 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
North Dakota--0.8%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C. Aaa 7.20% 6/30/13 $5,000 $5,745,200
------------------------------------------------------------------------------------------------------------------------------
Ohio--3.3%
Cleveland Pub. Pwr. Sys. Rev., First Mgte., Ser. A, M.B.I.A. Aaa Zero 11/15/10 2,685 1,080,310
Ohio Mun. Elec. Generation Agcy., A.M.B.A.C. Aaa 5.375 2/15/24 5,230 4,765,105
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Fac. Rev., Buckeye Pwr.
Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 13,500 16,507,395
------------
22,352,810
------------------------------------------------------------------------------------------------------------------------------
Oklahoma--2.9%
Tulsa Mun. Arpt. Trust Rev., American Airlines, Inc., A.M.T. Baa2 7.375 12/01/20 19,000 19,649,230
------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.9%
Allegheny Cnty. Arpt. Rev., Greater Pittsburgh Int'l. Arpt.,
Ser. C, M.B.I.A., A.M.T. Aaa 8.25 1/01/16 8,535 9,397,376
Pennsylvania St. Univ., Gen. Oblig. A1 5.50 8/15/16 6,000 5,615,580
Philadelphia Wtr. & Waste Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/07 4,840 5,192,546
M.B.I.A. Aaa 6.25 8/01/09 3,400 3,599,512
M.B.I.A. Aaa 6.25 8/01/11 2,500 2,627,175
------------
26,432,189
------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--9.9%
Puerto Rico Comnwlth., M.B.I.A. Aaa 5.25 7/01/18 5,000 4,605,400
Puerto Rico Elec. Pwr. Auth.,
Pwr. Rev., Ser. S Baa1 7.00 7/01/07 2,500 2,745,475
Pwr. Rev., C.G.I.C. Aaa 6.125 7/01/08 1,500 1,591,995
Pwr. Rev., Ser. S Baa1 6.125 7/01/08 1,050 1,065,508
Puerto Rico Hwy. & Trans. Auth. Rev.,
Ser. T Baa1 6.625 7/01/12 4,460 4,639,114
Ser. V Baa1 6.625 7/01/12 4,000 4,160,640
Ser. W, F.S.A. Aaa 5.25 7/01/20 2,900 2,634,012
Ser.W Baa1 5.25 7/01/20 4,000 3,534,000
Ser. X, F.S.A. Aaa 5.25 7/01/21 4,000 3,646,560
Ser. X, F.S.A. Aaa 5.00 7/01/22 1,400 1,227,422
Puerto Rico Public Bldgs. Auth. Rev. Baa1 5.60 7/01/08 5,000 4,909,550
Puerto Rico Public Bldgs. Auth. Rev.,
F.S.A. Aaa 5.75 7/01/10 5,065 5,125,932
A.M.B.A.C. Aaa 5.75 7/01/15 9,200 9,060,252
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 7 -----
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Puerto Rico (cont'd.)
Puerto Rico Tel. Auth. Rev., M.B.I.A.,
Ser. I Aaa 5.25% 1/25/07 $8,200 $8,108,898
Ser. I Aaa 5.45 1/16/15 7,600 7,352,848
Univ. of Puerto Rico Sys. Rev., Cap. Apprec., Ser. N, M.B.I.A. Aaa Zero 6/01/11 6,865 2,784,238
------------
67,191,844
------------------------------------------------------------------------------------------------------------------------------
South Carolina--2.1%
Charleston Waterworks & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 9,901,769
Piedmont Mun. Pwr. Agcy., Elec. Rev., F.G.I.C. Aaa 6.75 1/01/19 4,300 4,697,793
------------
14,599,562
------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.6%
Bristol Tenn. Hlth. & Ed. Fac. Brd. Rev., Bristol Memorial
Hosp., F.G.I.C. Aaa 6.75 9/01/10 5,000 5,538,600
Mcminn Cnty. Ind. Dev. Rev., Bowater Inc., A.M.T. Baa1 7.40 12/01/22 5,000 5,298,500
------------
10,837,100
------------------------------------------------------------------------------------------------------------------------------
Texas--7.5%
Alliance Arpt. Auth. Inc., Spec. Facs Rev., American Airlines
Proj., A.M.T. Baa2 7.50 12/01/29 1,500 1,561,170
Austin Combined Util. Sys. Rev., Ser. B88 A 7.75 11/15/08 5,400 5,927,688
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 4,002,775
Ser. A Aaa 7.375 11/01/09 3,500 3,989,510
Harris Cnty. Hlth. Facs. Dev. Corp., Spec. Facs. Rev., Texas
Med. Ctr. Hosp., M.B.I.A. Aaa 7.25 5/15/07 4,100 4,535,543
Harris Cnty., Toll Rd., F.G.I.C. Aaa 5.00 8/15/16 3,000 2,636,640
New Braunfels Indpt. Sch. Dist., Gen. Oblig.,
Cap. Appre. Aaa Zero 2/01/10 2,335 959,638
Cap. Appre. Aaa Zero 2/01/11 2,365 910,360
Northwest Indpt. Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 8/15/12 4,890 1,704,458
San Antonio Texas Elec. & Gas Rev.,
Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 2,216,000
Ser. A Aa 5.00 2/01/16 4,055 3,561,588
Texas Mun. Pwr. Agcy. Rev., M.B.I.A Aaa Zero 9/01/14 9,980 3,033,321
Texas Wtr. Res. Fin. Auth. Rev. A 7.625 8/15/08 11,970 12,648,220
Univ. Texas Univ. Rev., Fin. Sys., Ser. B Aa 6.75 8/15/13 3,000 3,238,860
------------
50,925,771
</TABLE>
--------------------------------------------------------------------------------
----- 8 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Virginia--3.0%
Henrico Cnty. Ind. Dev. Auth. Rev., Secours Hlth. Sys., St.
Mary's Proj.,
Ser. B A1 7.50% 9/01/07 $10,100 $11,202,314
Prince William Cnty. Va. Park Auth. Rev. A 7.50 7/15/20 4,570 5,037,191
West Point Ind. Dev., Chesapeake Corp. Baa3 6.25 3/01/19 4,000 3,874,840
------------
20,114,345
------------------------------------------------------------------------------------------------------------------------------
Washington--3.2%
Washington St., Gen. Oblig. Aa 5.50 5/01/18 2,705 2,547,353
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/06 6,000 3,174,600
Nuclear Proj. No. 2, Ser. A, F.S.A. Aaa 7.25 7/01/06 2,000 2,271,900
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 5,000 2,645,500
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00 7/01/08 4,000 4,461,240
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 5,709,400
Nuclear Proj. No. 3 Aa Zero 7/01/17 5,500 1,273,690
------------
22,083,683
------------
Total Long-Term Investments (cost $594,680,171) 619,881,108
------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.8%
District Of Columbia--0.3%
Dist. of Columbia Rev., Gen. Oblig., Ser. 92A-4, F.R.D.D. VMIG1 4.40 7/03/95 2,000 2,000,000
------------------------------------------------------------------------------------------------------------------------------
Florida--0.3%
Manatee Cnty. Hsg. Fin. Auth., Sngl. Fam. Mtge. Rev., Ser. 94 MIG1 3.87 7/17/95 2,200 2,200,000
------------------------------------------------------------------------------------------------------------------------------
Iowa--0.9%
Iowa Fin. Auth. Solid Waste Disp. Rev. Cedar River Paper Co.
Proj.,
Ser. 93A, F.R.D.D. A1+* 4.45 7/03/95 6,000 6,000,000
------------------------------------------------------------------------------------------------------------------------------
Texas--3.2%
Brazos River Auth., Poll. Ctrl. Rev., Elec. Co., Ser. 95C,
F.R.D.D. VMIG1 4.35 7/03/95 5,800 5,800,000
Gulf Coast Ind. Dev. Auth., Citgo Petroleum, Ser. 95, F.R.D.D. VMIG1 4.40 7/03/95 15,900 15,900,000
------------
21,700,000
------------------------------------------------------------------------------------------------------------------------------
Wyoming--0.1%
Lincoln Cnty. Poll. Ctrl. Rev., Exxon Corp. Project, Ser. 87B,
F.R.D.D. P-1 4.35 7/03/95 500 500,000
------------
Total Short-Term Investments (cost $32,400,000) 32,400,000
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 9 -----
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
(Note 1)
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Total Investments--95.8% (cost $627,080,171; Note 4) $652,281,108
Other assets in excess of liabilities--4.2% 28,812,941
------------
Net Assets--100% $681,094,049
------------
------------
</TABLE>
---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
C.G.I.C.--Capital Guaranty Insurance Corporation
E.T.M.--Escrowed to Maturity
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate Daily Demand Note**
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
D Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
* Standard and Poor's Rating.
** For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
@ Pledged as initial margin on financial futures contract.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
--------------------------------------------------------------------------------
----- 10 See Notes to Financial Statements.
<PAGE>
Statement of Assets and
Liabilities (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets June 30, 1995
-------------
Investments, at value (cost $627,080,171)................................................................... $652,281,108
Cash........................................................................................................ 125,020
Receivable for investments sold............................................................................. 21,053,284
Interest receivable......................................................................................... 11,532,235
Receivable for Fund shares sold............................................................................. 85,665
Due from Broker-variation margin............................................................................ 50,000
Deferred expenses and other assets.......................................................................... 30,179
-------------
Total assets............................................................................................. 685,157,491
-------------
Liabilities
Payable for investments purchased........................................................................... 1,634,527
Payable for Fund shares reacquired.......................................................................... 1,343,834
Dividends payable........................................................................................... 674,725
Management fee payable...................................................................................... 244,773
Distribution fee payable.................................................................................... 124,113
Accrued expenses............................................................................................ 41,470
-------------
Total liabilities........................................................................................ 4,063,442
-------------
Net Assets.................................................................................................. $681,094,049
-------------
-------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 446,924
Paid-in capital in excess of par......................................................................... 671,859,070
-------------
672,305,994
Accumulated net realized loss on investments............................................................. (16,254,382 )
Net unrealized appreciation on investments............................................................... 25,042,437
-------------
Net assets, June 30, 1995................................................................................ $681,094,049
-------------
-------------
Class A:
Net asset value and redemption price per share
($482,613,726 / 31,690,006 shares of common stock issued and outstanding)............................. $15.23
Maximum sales charge (3.0% of offering price)............................................................ .47
-------------
Maximum offering price to public......................................................................... $15.70
Class B:
Net asset value, offering price and redemption price per share
($198,229,654 / 12,985,987 shares of common stock issued and outstanding)............................. $15.26
Class C:
Net asset value, offering price and redemption price per share
($250,669 / 16,421 shares of common stock issued and outstanding)..................................... $15.26
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 11 -----
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations (Unaudited)
------------------------------------------------------------
------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
Net Investment Income 1995
-----------
<S> <C>
Income
Interest.................................... $21,595,153
-----------
Expenses
Management fee, net of waiver of $171,894... 1,468,135
Distribution fee--Class A................... 195,010
Distribution fee--Class B................... 743,429
Distribution fee--Class C................... 701
Transfer agent's fees and expenses.......... 310,000
Custodian's fees and expenses............... 96,000
Reports to shareholders..................... 35,000
Registration fees........................... 32,000
Audit fee................................... 26,000
Directors' fees............................. 19,000
Legal fees.................................. 11,000
Insurance expense........................... 9,000
Miscellaneous............................... 5,422
-----------
Total expenses........................... 2,950,697
-----------
Net investment income.......................... 18,644,456
-----------
Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions..................... 10,414,894
Financial futures contracts................. (2,989,000)
-----------
7,425,894
-----------
Net change in unrealized
appreciation/depreciation of:
Investments................................. 30,550,723
Financial futures contracts................. (204,031)
-----------
30,346,692
-----------
Net gain on investment transactions............ 37,772,586
-----------
Net Increase in Net Assets
Resulting from Operations...................... $56,417,042
-----------
-----------
</TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months Year Ended
Increase (Decrease) Ended December 31,
in Net Assets June 30, 1995 1994
------------- -------------
<S> <C> <C>
Operations
Net investment income........ $ 18,644,456 $ 38,071,772
Net realized gain (loss) on
investment transactions... 7,425,894 (23,690,364)
Net change in unrealized
appreciation
(depreciation) of
investments............... 30,346,692 (68,066,766)
------------- -------------
Net increase (decrease) in
net assets resulting from
operations................ 56,417,042 (53,685,358)
------------- -------------
Dividends and distributions
(Note 1)
Dividends from net investment
income
Class A................... (10,991,883) (758,853)
Class B................... (7,647,900) (37,310,847)
Class C................... (4,673) (2,072)
------------- -------------
(18,644,456) (38,071,772)
------------- -------------
Distributions from net
realized gains
Class A................... -- (95,056)
Class B................... -- (5,131,497)
------------- -------------
-- (5,226,553)
------------- -------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold...................... 61,261,875 86,309,362
Net asset value of shares
issued
in reinvestment of
dividends
and distributions......... 10,946,409 27,093,049
Cost of shares reacquired.... (114,020,716) (193,751,516)
------------- -------------
Decrease in net assets from
Fund share transactions... (41,812,432) (80,349,105)
------------- -------------
Total decrease.................. (4,039,846) (177,332,788)
Net Assets
Beginning of period............. 685,133,895 862,466,683
------------- -------------
End of period................... $ 681,094,049 $ 685,133,895
------------- -------------
------------- -------------
</TABLE>
--------------------------------------------------------------------------------
----- 12 See Notes to Financial Statements.
<PAGE>
Notes to Financial
Statements (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. (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 Policies
The following is a summary 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 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. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain(loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates 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.
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.
------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
("PMF"). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with 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.
--------------------------------------------------------------------------------
13 -----
<PAGE>
Notes to Financial
Statements (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
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. Effective January 1, 1995,
PMF has agreed to waive a portion (.05 of 1% of the Fund's average daily net
assets) of its management fee which amounted to $171,894 ($0.004 per share for
Class A, B and C shares; .05% of averge net assets). The Fund is not required to
reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the six months ended June 30, 1995.
PMFD has advised the Fund that it has received approximately $13,300 in
front-end sales charges resulting from sales of Class A shares during the six
months ended June 30, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended June 30, 1995, it
received approximately $226,100 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the six months ended June
30, 1995, the Fund incurred fees of approximately $224,100 for the services of
PMFS. As of June 30, 1995, $37,300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 1995, were $347,299,886 and $375,277,244,
respectively.
At June 30, 1995, the Fund sold 150 financial futures contracts on the Municipal
Bond Index which expire in September, 1995. The value at disposition of such
contracts is $17,188,188. The value of such contracts on June 30, 1995 was
$17,029,688, thereby resulting in an unrealized loss of $158,500. The Fund has
pledged $3,000,000 principal amount of Pima County Unified School District Bonds
as initial margin on such contracts.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of June 30,
1995, net unrealized appreciation for federal income tax purposes was
$25,200,937 (gross unrealized appreciation--$28,074,406 gross unrealized
depreciation--$2,873,469).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1994 of approximately $19,372,500 which expires in 2002.
Accordingly, no capital gains distribution is expected to be paid until net
gains have been realized in excess of such amount.
The Fund will elect to treat net capital losses of approximately $3,999,200
incurred in the two month period ended December 31, 1994 as having been incurred
in the following fiscal year.
------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. 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. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
--------------------------------------------------------------------------------
----- 14
<PAGE>
Notes to Financial
Statements (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
There are 750 million shares of common stock, $.01 par value, per share, divided
into three classes, designated Class A, Class B and Class C 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>
Six months ended June 30, 1995:
Shares sold...................... 3,445,052 $ 51,685,578
Shares issued in reinvestment of
dividends...................... 424,805 6,488,026
Shares reacquired................ (5,372,877) (81,131,086)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,503,020) (22,957,482)
Shares issued upon conversion
from Class B................... 32,311,151 480,932,260
----------- -------------
Net increase in shares
outstanding.................... 30,808,131 $ 457,974,778
----------- -------------
----------- -------------
Year ended December 31, 1994:
Shares sold...................... 2,875,693 $ 42,583,262
Shares issued in reinvestment of
dividends and distributions.... 37,934 573,468
Shares reacquired................ (2,900,866) (42,851,546)
----------- -------------
Net increase in shares
outstanding.................... 12,761 $ 305,184
----------- -------------
----------- -------------
<CAPTION>
Class B
---------------------------------
<S> <C> <C>
Six months ended June 30, 1995:
Shares sold...................... 627,104 $ 9,478,179
Shares issued in reinvestment of
dividends...................... 296,797 4,455,705
Shares reacquired................ (2,209,349) (32,889,630)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,285,448) (18,955,746)
Shares reacquired upon conversion
into Class A................... (32,268,420) (480,932,260)
----------- -------------
Net decrease in shares
outstanding.................... (33,553,868) $(499,888,006)
----------- -------------
----------- -------------
Year ended December 31, 1994:
Shares sold...................... 2,885,324 $ 43,581,881
Shares issued in reinvestment of
dividends and distributions.... 1,749,682 26,518,677
Shares reacquired................ (10,042,966) (150,899,970)
----------- -------------
Net decrease in shares
outstanding.................... (5,407,960) $ (80,799,412)
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
--------------------------------- ----------- -------------
<S> <C> <C>
Six months ended June 30, 1995:
Shares sold...................... 6,448 $ 98,118
Shares issued in reinvestment of
dividends...................... 175 2,678
----------- -------------
Increase in shares outstanding... 6,623 $ 100,796
----------- -------------
----------- -------------
August 1, 1994* through
December 31, 1994:
Shares sold...................... 9,735 $ 144,219
Shares issued in reinvestment of
dividends...................... 63 904
----------- -------------
Increase in shares outstanding... 9,798 $ 145,123
----------- -------------
----------- -------------
</TABLE>
---------------
* Commencement of offering of Class C shares.
------------------------------------------------------------
Note 6. Proposed Reorganization
On July 25, 1995, the Directors of the Fund approved an Agreement and Plan of
Reorganization (the "Plan") which provides for the transfer of substantially
all of the assets and liabilities of the Prudential Municipal Series Fund;
Arizona Series, Georgia Series and Minnesota Series ("The Series") to the
Fund. Class A, Class B shares and Class C shares of The Series would be
exchanged at net asset value for Class A, Class B and Class C shares,
respectively, of equivalent value of the Fund.
It is expected that the reorganization will take place in late October 1995. The
Fund and The Series will each bear their pro-rata share of the costs of the
reorganization, including costs of proxy solicitation.
--------------------------------------------------------------------------------
15 -----
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------
January 22,
Six Months 1990(b)
Ended Year Ended December 31, through
June 30, ----------------------------------------- December 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
---------- ------- ------- ------ ------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 14.42 $ 16.30 $ 15.94 $16.00 $15.09 $14.98
---------- ------- ------- ------ ------ ------
Income from investment operations
Net investment income......................... .42 .81 .90 .94 .97 .90
Net realized and unrealized gain (loss) on
investment transactions..................... .81 (1.78) 1.05 .43 .91 .11
---------- ------- ------- ------ ------ ------
Total from investment operations............ 1.23 (.97) 1.95 1.37 1.88 1.01
---------- ------- ------- ------ ------ ------
Less distributions
Dividends from net investment income.......... (.42) (.81) (.90) (.94) (.97) (.90)
Distributions from net realized gains......... -- (.10) (.69) (.49) -- --
---------- ------- ------- ------ ------ ------
Total distributions......................... (.42) (.91) (1.59) (1.43) (.97) (.90)
---------- ------- ------- ------ ------ ------
Net asset value, end of period................ $ 15.23 $ 14.42 $ 16.30 $15.94 $16.00 $15.09
---------- ------- ------- ------ ------ ------
---------- ------- ------- ------ ------ ------
TOTAL RETURN(c):.............................. 8.53% (6.04)% 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $482,614 $12,721 $14,167 $7,700 $3,819 $1,846
Average net assets (000)...................... $393,252 $14,116 $11,786 $5,401 $2,697 $1,161
Ratios to average net assets:
Expenses, including distribution fees....... .69%(a) .77% .69% .72% .75% .75%(a)
Expenses, excluding distribution fees....... .59%(a) .67% .59% .62% .65% .65%(a)
Net investment income....................... 5.64%(a) 5.38% 5.49% 5.79% 6.27% 6.43%(a)
Portfolio turnover rate....................... 54% 120% 82% 114% 59% 110%
</TABLE>
---------------
(a) Annualized.
(b) Commencement of offering of Class A shares.
(c) 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.
--------------------------------------------------------------------------------
----- 16 See Notes to Financial Statements.
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, ------------------------------------------------------------
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
---------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15
---------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .39 .75 .84 .88 .91 .90
Net realized and unrealized gain (loss) on
investment transactions..................... .81 (1.78) 1.05 .44 .91 (.04)
---------- -------- -------- -------- -------- --------
Total from investment operations............ 1.20 (1.03) 1.89 1.32 1.82 .86
---------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.39) (.75) (.84) (.88) (.91) (.90)
Distributions from net realized gains......... -- (.10) (.69) (.49) -- --
---------- -------- -------- -------- -------- --------
Total distributions......................... (.39) (.85) (1.53) (1.37) (.91) (.90)
---------- -------- -------- -------- -------- --------
Net asset value, end of period................ $ 15.26 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
TOTAL RETURN(c):.............................. 8.30% (6.39)% 12.15% 8.50% 12.42% 5.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $198,230 $672,272 $848,299 $828,702 $874,338 $882,212
Average net assets (000)...................... $299,836 $751,623 $854,919 $829,830 $862,249 $940,215
Ratios to average net assets:
Expenses, including distribution fees....... 1.08%(a) 1.17% 1.09% 1.12% 1.15% 1.13%
Expenses, excluding distribution fees....... .58%(a) .67% .59% .62% .65% .64%
Net investment income....................... 5.14%(a) 4.96% 5.09% 5.39% 5.87% 6.03%
Portfolio turnover rate....................... 54% 120% 82% 114% 59% 110%
<CAPTION>
Class C
August 1,
Six Months 1994(b)
Ended through
June 30, December 31,
1995 1994
<S> <C> <C>
---------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $14.44 $15.13
----- -----
Income from investment operations
Net investment income......................... .37 .29
Net realized and unrealized gain (loss) on
investment transactions..................... .82 (.69)
----- -----
Total from investment operations............ 1.19 (.40)
----- -----
Less distributions
Dividends from net investment income.......... (.37) (.29)
Distributions from net realized gains......... -- --
----- -----
Total distributions......................... (.37) (.29)
----- -----
Net asset value, end of period................ $15.26 $14.44
----- -----
----- -----
TOTAL RETURN(c):.............................. 8.17% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $251 $141
Average net assets (000)...................... $188 $103
Ratios to average net assets:
Expenses, including distribution fees....... 1.34%(a) 1.51%(a)
Expenses, excluding distribution fees....... .59%(a) .76%(a)
Net investment income....................... 5.00%(a) 4.84%(a)
Portfolio turnover rate....................... 54% 120%
</TABLE>
---------------
(a) Annualized.
(b) Commencement of offering of Class C shares.
(c) 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.
--------------------------------------------------------------------------------
See Notes to Financial Statements. 17 -----
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
Directors
Delayne Dedrick Gold
Arthur Hauspurg
Harry A. Jacobs, Jr.
Steven P. Munn
Richard A. Redeker
Louis A. Weil, III
Officers
Richard A. Redeker, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Grace Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
The accompanying financial statements as of June 30, 1995 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
The Prudential National Municipals Fund and the Lehman Bros. Index:
Comparing a $10,000 Investment.
Class A
Chart
Class B
Chart
Class C
Chart
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will
be worth more or less than their original cost. The charts on the right are
designed to give you an idea how much the Fund's returns can fluctuate from
year to year by measuring the best and worst years in terms of total annual
return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential National Municipals Fund (Class
A, Class B and Class C) with a similar investment in the Lehman Brothers
Municipal Bond Index by portraying the initial account values at the
commencement of operations of each class, and subsequent account values at the
end of this reporting period (June 30), as measured on a quarterly basis,
beginning in 1990 for Class A shares, in 1985 for Class B shares and in 1994
for Class C shares. For purposes of the graphs, and unless otherwise indicated,
in the accompanying tables it has been assumed (a) that the maximum applicable
front-end sales charge was deducted from the initial $10,000 investment in
Class A shares; (b) the maximum applicable contingent deferred sales charge was
deducted from the value of the investment in Class B and Class C shares,
assuming full redemption on June 30, 1995; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to Class A shares, on a
quarterly basis, beginning approximately seven years after purchase. This
conversion feature is not reflected in the graph.
The Index is a weighted index of 21,000 municipal bonds (general obligation
bonds, revenue bonds, insured bonds and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term investment grade municipal bond
market. The index is unmanaged and includes the reinvestment of all dividends,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The securities in the Index may
differ substantially from the securities in the Fund. The Index is not the only
one that may be used to characterize performance of municipal bond funds and
other indexes may portray different comparative performance.
<PAGE>
Prudential Mutual Funds
Building Your Future
On Our StrengthSM (LOGO)
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
743918203
743918104 MF104E2
743918302 Cat# 4303167
<PAGE>
LETTER TO
SHAREHOLDERS
-------------------------------------------------
October 18, 1994
Dear Shareholder:
It has been a most difficult year in the U.S. financial markets. When we
last wrote in February interest rates were starting to rise, ending a three-year
long bull market in bonds. What started as a trickle has become a torrent.
Interest rates have continued to increase this year, sending bond prices down
sharply. Of course, as interest rates rise, bond prices decline. In this
environment of falling prices and unusual volatility, your Prudential Municipal
Series Fund -- Arizona Series sought to minimize risk while maximizing your
tax-free income.
The Series seeks maximum income exempt from Arizona and federal income
taxes* consistent with preservation of capital. The Series is comprised of
investment grade municipal obligations with an average credit quality of Aa/AA,
as determined by Moody's Investors Service or Standard & Poor's Rating Group.
The Series performed in line with the Lipper Arizona Municipal Debt Average over
the last year, but because long-term interest rates rose, total returns were
disappointing. As a result, the Series has become more cautious and shortened
its average maturity.
<TABLE>
<CAPTION>
SERIES PERFORMANCE
As of August 31, 1994
30-day Taxable Equivalent Yields
NAV SEC Yield @28% @31% @39.6%
<S> <C> <C> <C> <C> <C>
Class A $11.59 4.5% 6.7% 7.0% 8.0%
Class B $11.58 4.3% 6.4% 6.6% 7.6%
Class C $11.58 N/A N/A N/A N/A
</TABLE>
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future results.
*Interest on municipal obligations may be subject to the federal
alternative minimum tax. See your Series' prospectus for more details.
N/A - Yield information with respect to Class C is not available as
operations commenced in August 1994.
-1-
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURNS
HISTORICAL (AS OF 8/31/94)(1) AVERAGE ANNUAL (AS OF 9/30/94)(2)
1-Yr. 5-Yr. Since Incep.** 1-Yr. 5-Yr. Since Incep.**
<S> <C> <C> <C> <C> <C> <C>
Class A -0.6% N/A +40.5% -5.8% N/A +6.6%
Class B -1.1% +41.5% +126.1% -8.2% +7.0% +8.4%
Class C N/A N/A +0.1% N/A N/A -1.9%
Lipper AZ
Muni Debt Avg.*** -1.2% +44.9% +122.8% N/A N/A N/A
</TABLE>
(1) Source: Lipper Analytical Services, Inc. These figures do not take into
account sales charges.
(2) Source: Prudential Mutual Fund Management, Inc. These averages take
into account applicable sales charges. The Series charges a maximum initial
sales charge of 3% for Class A shares. Class B shares are subject to a declining
contingent deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1%, respectively, for
the first six years. Class B shares will automatically convert to Class A shares
approximately seven years after purchase. This conversion feature is expected to
be implemented in February 1995. Class C shares are subject to a contingent
deferred sales charge of 1% during the first year.
**Inception on January 22, 1990 for Class A, September 22, 1984 for Class B
and August 1, 1994 for Class C.
***These are the average returns of 27 Arizona municipal debt funds for
one-year, five-year, and since inception of Class B shares, as determined by
Lipper Analytical Services, Inc.
Note: Without expense subsidies and management fee waivers, the Series'
historical and average annual total returns would have been lower. The Series'
Class B average annual total return since inception would have been 8.3%.
ONCE WAS NOT ENOUGH
In February, the Federal Reserve raised short-term interest rates for the
first time in years, hoping to control inflation. Since then, the Fed has moved
four more times, until the federal funds rate (the overnight interbank lending
rate) now stands at 4.75%, up from 3% at the start of the year. The Fed also
increased the discount rate (the bank lending rate) to 4% from 3% over the same
period.
Interest rates rise when the financial markets fear inflation, the bond
holder's enemy. Inflation is feared because it robs purchasing power from a
bond's fixed-interest rate.
Municipal bond interest rates increased by more than a percentage point, to
6.46% on August 25 from 5.52% on December 29, 1993, as measured by the Bond
Buyer's Revenue Bond Index, a widely used yardstick of interest rates in the
tax-free market.
ARIZONA: ECONOMY GROWING RAPIDLY
The Arizona economy is among the fastest growing in the nation. In Phoenix,
population and employment increases have reached levels not seen since the boom
times of the mid-1980s. From 1983 to 1993, the state's population has grown by
nearly 33%. Arizona's population is the third fastest growing
-2-
<PAGE>
in the nation after Nevada and Colorado, and in employment, the state is second
only to Georgia in growth.
Not surprisingly, state finances are in excellent condition. Fiscal 1994
revenues came in $179 million ahead of already upwardly revised estimates, so
the legislature voted to cut income taxes by $100 million in its 1995 budget.
The only question mark on the horizon is political. Running for reelection
in November, Governor Symington has pledged to phase out the state's income tax
over a four-year period should he be reelected. This would reduce revenues by
$1.5 billion. The governor argues that the growing economy, and particularly the
stimulus of the tax cut, would make up for the shortfall, a position subject to
some debate.
With new issues down 54% to date this year in Arizona, bonds have been
scarce. We have remained fully invested, anticipating this drought will continue
through the year.
A TAX REMINDER
As a result of the federal Revenue Reconciliation Act of 1993, which
affects bonds purchased after April 30, 1993, it is possible that this year you
may have some taxable income from your tax-free municipal bond fund. The law
stipulates that the portion of any gain realized on the sale or retirement of a
tax-free bond purchased at a market discount to its face value must be taxed as
ordinary income.
Following this change in federal tax law, some discount bonds have been
selling at levels so cheap they will produce a higher after-tax return than
other bonds not subject to the provisions of the new law. We have occasionally
taken advantage of this market imbalance because we have determined that at very
low prices these bonds can still provide you with a higher after-tax return on
your investment.
THE OUTLOOK
We expect continued volatility in the municipal bond market until the
economy reaches a level of growth that is sustainable without causing inflation.
If the economy continues to surge, the ever vigilant Fed will move again,
lifting short-term rates. If the economy slows substantially, long term rates
should stabilize. Although rates may keep rising, we believe that most of the
increase is now behind us.
In the months ahead, we expect supply -- or the lack of it -- to become
more important in the tax-free municipal bond market. Through the first eight
months of the year, new issue volume is off 42%, according to Securities Data
Co., which tracks this statistic. The pace is accelerating. In August, new issue
volume fell 56%.
-3-
<PAGE>
As always, it is a pleasure to have you as a shareholder in the Prudential
Municipal Series Fund -- Arizona Series, and to take this opportunity to report
our activities to you.
Sincerely,
/s/Lawrence C. McQuade
Lawrence C. McQuade
President
/s/Christian Smith
Christian Smith
Portfolio Manager
-4-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
ARIZONA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.6%
Arizona St. Edl. Loan
Mkt. Corp.,
A $ 1,375 7.00%, 3/1/05, Ser.
B.................... $ 1,453,334
Arizona St. Hsg. Fin.
Review Brd.,
Sngl. Fam. Mtge. Rev.,
A-* 10 10.625%, 12/1/02, Ser.
82................... 10,310
Arizona St. Mun. Fin.
Proj.,
Cert. of Part.,
8.75%, 8/1/06, Ser. 15,
Aaa 700 B.I.G.................. 749,014
7.875%, 8/1/14, Ser.
25,
Aaa 2,250 A.M.B.A.C.............. 2,724,412
Arizona St. Trans. Brd.
Hwy. Rev.,
Aaa 2,000(D)@ 7.00%, 7/1/09.......... 2,216,100
Aa 1,500(D) 6.00%, 7/1/10.......... 1,587,765
Arizona St. Univ. Sys.
Rev.,
Aaa 1,000(D) 7.00%, 7/1/10, Ser.
A.................... 1,121,880
Central Arizona Wtr.
Consv. Dist.,
Contract Rev.,
A1 1,500(D) 7.50%, 11/1/05......... 1,716,285
Chandler, Cap. Apprec.
Ref.,
Aaa 2,000 Zero Coupon, 7/1/02,
F.G.I.C.............. 1,318,500
Gen. Oblig.,
Aaa 500 4.375%, 7/1/13,
F.G.I.C.............. 399,390
La Paz Cnty., Unified
Sch. Dist.,
No. 27, Parker Impvt.
Proj.,
Baa 450 9.40%, 7/1/96.......... 483,728
Maricopa Cnty. Hosp.
Dist. No. 1, Facs.
Rev.,
East Valley
Behavioral
Hlth. Fac. Proj.,
Aaa 725(D) 7.80%, 6/1/13,
F.G.I.C.............. 796,804
Maricopa Cnty. Ind.
Dev. Auth.
Hosp. Fac. Rev.,
John C. Lincoln
Hosp.,
Aaa 2,000 7.00%, 12/1/00,
F.S.A................ 2,188,640
Maricopa Cnty. Ind.
Dev. Auth. Hosp. Fac.
Rev.,
Mercy Hlth.,
9.00%, 7/1/99, Ser. D,
Aaa $ 1,000 M.B.I.A.,.............. $ 1,058,760
A1 525(D) 9.25%, 7/1/11, Ser.
D.................... 556,616
A1 475 9.25%, 7/1/11, Ser.
D.................... 500,132
Samaritan Hlth. Svcs.,
Aaa 290(D) 12.00%, 1/1/08......... 341,527
Maricopa Cnty. Sch.
Dist.,
No. 41 Gilbert Proj.,
6.50%, 7/1/08, Ser. E,
Aaa 2,000(D)@ F.G.I.C................ 2,170,720
No. 40 Glendale Elem.
Sch.,
Zero Coupon, 7/1/04,
Aaa 2,810 A.M.B.A.C.............. 1,621,510
No. 11 Peoria Unified
Sch. Dist.,
Zero Coupon, 7/1/04,
Aaa 1,500 M.B.I.A................ 865,575
Zero Coupon, 7/1/04,
Aaa 1,140 F.G.I.C................ 657,837
No. 3 Tempe Elem. Sch.,
Zero Coupon, 7/1/09,
Aaa 1,500 A.M.B.A.C.............. 595,155
Zero Coupon, 7/1/14,
Aaa 1,500 A.M.B.A.C.............. 425,055
Maricopa Cnty. Unified
Sch. Dist.,
No. 80 Chandler,
F.G.I.C.
Aaa 1,330 Zero Coupon, 7/1/09.... 527,704
Aaa 1,000 6.25%, 7/1/11.......... 1,029,360
Navajo Cnty. Unified
Sch. Dist.,
No. 006 Herber
Overgaard,
Aaa 250 7.25%, 7/1/00,
A.M.B.A.C............ 276,285
Aaa 300 7.35%, 7/1/03,
A.M.B.A.C............ 332,679
Nogales Mun. Dev. Auth.
Rev.,
Aaa 500(D)@ 8.00%, 6/1/08,
M.B.I.A.............. 558,990
Peoria Bell Road Impvt.
Dist.,
BBB* 465 7.20%, 1/1/11.......... 486,525
Phoenix Arpt. Rev.,
6.40%, 7/1/12, Ser. D,
Aaa 810 M.B.I.A................ 817,930
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
Phoenix Ind. Dev. Auth.
Hosp.,
John C. Lincoln Hosp.,
BBB* $ 500 6.00%, 12/1/10......... $ 467,470
BBB* 500 6.00%, 12/1/14......... 453,245
Phoenix St. & Hwy.
Rev.,
A1 1,480 6.25%, 7/1/06, Ser.
92................... 1,546,126
Zero Coupon, 7/1/12,
Aaa 3,000 F.G.I.C................ 975,420
Pima Cnty. Ind. Dev.
Auth. Hlth. Care,
Carondelet
St. Josephs & Marys
Hosp.,
Aaa 1,000 7.90%, 7/1/05,
B.I.G................ 1,115,350
Aaa 1,000(D) 8.00%, 7/1/13,
B.I.G................ 1,119,170
Pima Cnty. Ind. Dev.
Auth. Rev.,
Tucson Elec. Pwr.
Co.,
Aaa 2,700 7.25%, 7/15/10,
F.S.A................ 2,887,110
Pima Cnty., Unified
Sch. Dist.
No. 16, Catalina
Foothills,
Zero Coupon, 7/1/08,
Aaa 3,000 F.G.I.C................ 1,290,810
Zero Coupon, 7/1/09,
Aaa 3,455 F.G.I.C................ 1,370,840
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 835 7.50%, 4/1/22.......... 869,110
Puerto Rico Comnwlth.
Hwy.
Auth. Rev.,
AAA* 490(D) 7.70%, 7/1/03, Ser.
Q.................... 566,763
Puerto Rico, Comnwlth.,
Gen. Oblig.,
8.41%, 7/1/08, Ser. A,
Aaa 1,000(D)(D) M.B.I.A................ 1,012,500
Salt River Proj. Agric.
Impvt. & Pwr. Dist.,
Elec. Sys. Rev.,
Aa 1,500 4.75%, 1/1/17, Ser.
C.................... 1,218,540
Aa 500 5.75%, 1/1/20, Ser.
C.................... 468,960
Santa Cruz Cnty.
Unified Sch. Dist.
No. 1
Nogales, Cruz Cnty.,
Zero Coupon, 1/1/06,
Aaa 770 A.M.B.A.C.............. 397,051
Santa Cruz Cnty.,
Unified Sch. Dist.
No. 1
Nogales, Cruz Cnty.,
Zero Coupon, 7/1/06,
Aaa $ 700 A.M.B.A.C.............. $ 350,560
Scottsdale Ind. Dev.
Auth. Rev., Mem.
Hosp.,
8.50%, 9/1/07, Ser. A,
Aaa 2,100 A.M.B.A.C.............. 2,352,378
Scottsdale, Gen.
Oblig.,
Aa1 500 5.50%, 7/1/09.......... 479,885
Aa1 1,000(D) 6.00%, 7/1/10.......... 1,066,020
Aa1 1,000 4.00%, 7/1/13, Ser.
D.................... 737,640
Tempe Impvt. Dist. Auth. Rev.,
Papago Park Ctr.,
Dist. No. 166,
A1 500 7.10%, 1/1/06.......... 522,910
Tempe, Gen. Oblig.,
Aa 500 5.25%, 7/1/13.......... 451,190
Tolleson Mun. Fin. Corp. Rev.,
Citizen Util. Co.,
AAA* 400 9.20%, 9/1/05.......... 426,812
Tucson Wtr. Rev.,
Aaa 1,000 8.60%, 7/1/00,
E.T.M................ 1,179,540
A1 1,000 5.50%, 7/1/09.......... 947,480
7.00%, 7/1/10, Ser. C,
Aaa 500 M.B.I.A................ 534,925
Univ. Arizona Revs.
Sys.,
A1 1,750 6.25%, 6/1/11, Ser.
B.................... 1,771,438
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund,
NR 600 7.25%, 10/1/18, Ser.
A.................... 618,972
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Prog.,
NR 460 7.75%, 10/1/06, Ser.
91................... 502,978
Virgin Islands Wtr. &
Pwr. Auth., Elec.
Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser.
A.................... 522,300
Wtr. Sys. Rev.,
NR 500 8.50%, 1/1/10, Ser.
A.................... 549,280
------------
Total long-term
investments
(cost $55,132,298)..... 58,361,295
------------
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--1.4%
Goodyear, Gen. Oblig.,
Baa1 $ 100 10.00%, 7/1/95......... $ 104,311
Pinal Cnty. Ind. Dev.
Auth. Hlth. Care,
Ctrl. Rev., F.R.D.D.,
P1 700 3.35%, 9/1/94.......... 700,000
------------
Total short-term
investments
(cost $799,625)........ 804,311
------------
Total Investments--99.0%
(cost $55,931,923; Note
4)................... 59,165,606
Other assets in excess
of
liabilities--1.0%.... 613,223
------------
Net Assets--100%....... $ 59,778,829
------------
------------
</TABLE>
------------------
(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.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's rating.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D)Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
@ Pledged as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $55,931,923)................................................. $59,165,606
Cash..................................................................................... 83,991
Interest receivable...................................................................... 737,249
Receivable for Fund shares sold.......................................................... 21,467
Other assets............................................................................. 1,869
---------------
Total assets........................................................................... 60,010,182
---------------
Liabilities
Accrued expenses......................................................................... 66,324
Payable for Fund shares reacquired....................................................... 57,677
Dividends payable........................................................................ 49,717
Management fee payable................................................................... 25,227
Distribution fee payable................................................................. 22,648
Due to broker-variation margin payable................................................... 8,750
Deferred trustee fees.................................................................... 1,010
---------------
Total liabilities...................................................................... 231,353
---------------
Net Assets............................................................................... $59,778,829
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 51,601
Paid-in capital in excess of par....................................................... 56,542,821
---------------
56,594,422
Distributions in excess of net realized gains.......................................... (25,526)
Net unrealized appreciation of investments............................................. 3,209,933
---------------
Net assets, August 31, 1994............................................................ $59,778,829
---------------
---------------
Class A:
Net asset value and redemption price per share ($7,674,526 / 662,409 shares of
beneficial interest issued and outstanding).......................................... $11.59
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $11.95
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share ($52,104,103 / 4,497,713
shares of beneficial interest issued and outstanding)................................ $11.58
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share ($199.97 / 17.262 shares
of beneficial interest issued and outstanding)....................................... $11.58
---------------
---------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1994
---------------
<S> <C>
Income
Interest............................ $ 3,939,686
---------------
Expenses
Management fee...................... 313,334
Distribution fee--Class A........... 7,141
Distribution fee--Class B........... 277,628
Custodian's fees and expenses....... 52,000
Reports to shareholders............. 37,500
Transfer agent's fees and
expenses............................ 33,000
Registration fees................... 20,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Trustees' fees...................... 3,375
Miscellaneous....................... 7,770
---------------
Total expenses.................... 777,248
---------------
Net investment income................. 3,162,438
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 790,344
Financial futures contract
transactions........................ (32,841)
---------------
757,503
---------------
Net change in unrealized
appreciation/depreciation of:
Investments......................... (4,562,693)
Financial futures contracts......... (22,813)
---------------
(4,585,506)
---------------
Net loss on investments............... (3,828,003)
---------------
Net Decrease in Net Assets
Resulting from Operations............. $ (665,565)
---------------
---------------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income... $ 3,162,438 $ 2,979,801
Net realized gain on
investment
transactions.......... 757,503 175,821
Net change in unrealized
appreciation of
investments........... (4,585,506) 3,112,559
------------ -----------
Net increase (decrease)
in net assets
resulting from
operations............ (665,565) 6,268,181
------------ -----------
Dividends and
distributions (Note 1):
Dividends from net
investment income
Class A............... (386,495) (201,649)
Class B............... (2,775,943) (2,778,152)
------------ -----------
(3,162,438) (2,979,801)
------------ -----------
Distributions from net
realized gains
Class A............... (74,328) (21,305)
Class B............... (618,468) (500,545)
------------ -----------
(692,796) (521,850)
------------ -----------
Series share transactions
(Note 5)
Net proceeds from shares
sold.................. 10,037,346 12,302,375
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 2,064,510 1,717,602
Cost of shares
reacquired.............. (11,709,424) (6,722,273)
------------ -----------
Net increase in net
assets from Series
share transactions.... 392,432 7,297,704
------------ -----------
Total increase
(decrease).............. (4,128,367) 10,064,234
Net Assets
Beginning of year......... 63,907,196 53,842,962
------------ -----------
End of year............... $ 59,778,829 $63,907,196
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
NOTES TO FINANCIAL STATEMENTS
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Arizona Series (the "Series") commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in "investment grade" tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund, and the Series, 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 Trustees.
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.
All securities are valued as of 4:15 P.M., New York time.
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 Series 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 Series 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 Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series 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.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of 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: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series 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
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
-10-
<PAGE>
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
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 1% of the average daily net assets of the Series.
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 and Class C shares of the Fund (collectively
the "Distributors"). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the "Class A, B and C Plans"), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class
A and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, .50 of 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the fiscal year ended August 31, 1994.
PMFD has advised the Series that it has received approximately $63,200 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1994,
it received approximately $76,800 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary
of PMF, serves as the Fund's transfer agent. During the year ended August 31,
1994, the Series incurred fees of approximately $23,600 for the services of
PMFS. As of August 31, 1994, approximately $1,900 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding
short-term investments, for the year ended August 31, 1994 were $20,412,123 and
$21,899,033, respectively.
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of August 31, 1994, net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes is $3,233,683 (gross
unrealized appreciation--$4,247,842 gross unrealized depreciation--$1,014,159).
At August 31, 1994, the Series sold 35 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts is $3,606,406. The value of such contracts on August 31, 1994 was
$3,630,156, thereby resulting in an unrealized loss of $23,750.
NOTE 5. CAPITAL
The Series currently offers Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 3.0%. 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. Class C
-11-
<PAGE>
shares are sold with a contingent deferred sales charge of 1% during the first
year. Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase commencing in or about February
1995.
The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share. Transactions in shares of
beneficial interest for the fiscal years ended August 31, 1993 and 1994 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
-------------------------------- -------- ------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold..................... 156,225 $ 1,879,629
Shares issued in reinvestment of
dividends and distributions... 29,257 350,410
Shares reacquired............... (55,416) (665,858)
-------- ------------
Net increase in shares
outstanding................... 130,066 $ 1,564,181
-------- ------------
-------- ------------
Year ended August 31, 1993:
Shares sold..................... 379,867 $ 4,588,716
Shares issued in reinvestment of
dividends and distributions... 10,501 127,266
Shares reacquired............... (38,736) (459,132)
-------- ------------
Net increase in shares
outstanding................... 351,632 $ 4,256,850
-------- ------------
-------- ------------
<CAPTION>
Class B Shares Amount
-------------------------------- -------- ------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold..................... 679,458 $ 8,157,517
Shares issued in reinvestment of
dividends and distributions... 142,601 1,714,100
Shares reacquired............... (930,146) (11,043,566)
-------- ------------
Net decrease in shares
outstanding................... (108,087) $ (1,171,949)
-------- ------------
-------- ------------
Year ended August 31, 1993:
Shares sold..................... 639,982 $ 7,713,659
Shares issued in reinvestment of
dividends and distributions... 132,586 1,590,336
Shares reacquired............... (520,539) (6,263,141)
-------- ------------
Net increase in shares
outstanding................... 252,029 $ 3,040,854
-------- ------------
-------- ------------
<CAPTION>
Class C
--------------------------------
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold..................... 17 $ 200
-------- ------------
Net increase in shares
outstanding................... 17 $ 200
-------- ------------
-------- ------------
</TABLE>
---------------
* Commencement of offering of Class C shares.
-12-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
----------------------------------------------------- ------------------------------------------------ -----------
January 22, August 1,
1990(D) 1994(D)(D)
Year Ended August 31, through Year Ended August 31, through
--------------------------------------- August 31, ------------------------------------------------ August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
<CAPTION>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning
of period... $12.44 $11.88 $11.32 $10.80 $ 10.99@ $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $ 11.60
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Income from
investment
operations
Net
investment
income... .65 .67 .68 .69 .42 .60 .62 .63 .64 .65 .04
Net realized
and unrealized
gain (loss)
on investment
transactions.. (.72) .68 .56 .52 (.19)@ (.73) .69 .55 .52 (.17) (.02)
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Total
from
investment
operations... (.07) 1.35 1.24 1.21 .23@ (.13) 1.31 1.18 1.16 .48 .02
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Less distributions
Dividends
from
net
investment
income... (.65) (.67) (.68) (.69) (.42) (.60) (.62) (.63) (.64) (.65) (.04)
Distributions
from net
realized
gains... (.13) (.12) -- -- -- (.13) (.12) -- -- -- --
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Total
distributions.(.78) (.79) (.68) (.69) (.42) (.73) (.74) (.63) (.64) (.65) (.04)
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Net asset
value,
end of
period... $11.59 $12.44 $11.88 $11.32 $ 10.80 $ 11.58 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 11.58
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
TOTAL
RETURN#:... (.59)% 11.79% 11.23% 11.45% 2.01%@ (1.08)% 11.42% 10.68% 11.02% 4.49% 0.10%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)... $7,675 $6,622 $2,146 $1,508 $ 436 $52,104 $57,286 $51,697 $57,209 $59,216 $ 200@@
Average
net
assets
(000)... $7,141 $3,613 $1,758 $ 937 $ 260 $55,526 $53,656 $53,477 $58,973 $60,359 $ 199@@
Ratios to
average net
assets:##
Expenses,
including
distribution
fees... .89% .92% 1.02% 1.02% .96%* 1.29% 1.32% 1.42% 1.41% 1.30% 1.90%*
Expenses,
excluding
distribution
fees... .79% .82% .92% .92% .86%* .79 % .82% .92% .91% .82% 1.14%*
Net
investment
income... 5.40% 5.58% 5.81% 6.13% 6.36%* 5.40 % 5.18% 5.42% 5.77% 5.99% 6.34%*
Portfolio
turnover... 33% 14% 42% 25% 49% 33 % 14% 42% 25% 49% 33%
<FN>
---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C 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.
## Because of the event referred to in (D)(D) and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that of
Class A or B shares and are not necessarily indicative of future ratios.
@ Restated.
@@ Figures are actual and not rounded to the nearest thousand.
</TABLE>
See Notes to Financial Statements.
-13-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Arizona Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Arizona Series, including the portfolio of
investments, as of August 31, 1994, the related statements of operations for the
year then ended and of changes in 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. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Arizona Series, as of August 31, 1994, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
October 17, 1994
FEDERAL INCOME TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of
the Series' fiscal year end (August 31, 1994) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 1994, dividends paid from
net investment income of $.64 per Class A share, $.58 per Class B share, and
$.04 per Class C share were all federally tax-exempt interest dividends. In
addition, the Series paid to both Class A and B shares a long-term capital gain
distribution of $.115 per share which is taxable as such and a short-term
capital gain distribution of $.018 per share which is taxable as ordinary
income.
In January 1995, you will be advised on IRS Form 1099 DIV or substitute 1099
DIV as to the federal tax status of the distributions received by you in
calendar year 1994.
-14-
<PAGE>
[Graph]
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential Municipal Series Fund: Arizona Series
(Class A, Class B, and Class C) with a similar investment in the Lehman Brothers
Municipal Bond Index (the Index) by portraying the initial account values at the
commencement of operations of each class and subsequent account values at the
end of each fiscal year (August 31) beginning in 1990 for Class A, in 1984 for
Class B shares and 1994 for Class C shares. For purposes of the graphs and,
unless otherwise indicated, the accompanying tables, it has been assumed that
(a) the maximum sales charge was deducted from the initial $10,000 investment in
Class A shares; (b) the maximum applicable contingent deferred sales charge was
deducted from the value of the investment in Class B shares and Class C shares,
assuming full redemption on August 31, 1994; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. This conversion
feature is expected to be implemented on or about February 1995 and is not
reflected in the graph. The graph and accompanying tables reflect the past
subsidy and/or waiver of expenses and/or management fees. Without fee waivers
and expense subsidies, the value of a $10,000 investment in the Series and the
Series' average annual total return, as shown above, would have been lower.
The Index is a weighted index comprised of 21,000 municipal bonds (general
obligation bonds, revenue bonds, insured bonds and prerefunded bonds) selected
by Lehman Brothers as representative of the long-term investment grade municipal
bond market. The Index is an unmanaged index and includes the reinvestment of
all income, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Series. The securities which comprise
the Index may differ substantially from the securities in the Series' portfolio
because the Index, among other things, is not state specific. The Lehman
Brothers Municipal Bond Index is not the only index which may be used to
characterize performance of long-term, investment-grade tax-exempt bond funds
and other indexes may portray different comparative performance.
<PAGE>
TRUSTEES
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
OFFICERS
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Deborah A. Docs, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
1633 Broadway
New York, NY 10019
LEGAL COUNSEL
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
PRUDENTIAL MUTUAL FUNDS
One Seaport Plaza
New York, NY 10292
Toll free (800) 225-1852, Collect (908) 417-7555
This report is not authorized for distribution to prospective
investors unlessp receded or accompanied by a current prospectus.
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Prudential Mutual Funds Building Your Future On Our Strength
<PAGE>
LETTER TO
SHAREHOLDERS
--------------------------------------------
October 18, 1994
Dear Shareholder:
It has been a most difficult year in the U.S. financial markets. When we
last wrote in February interest rates were starting to rise, ending a three-year
long bull market in bonds. What started as a trickle has become a torrent.
Interest rates have continued to increase this year, sending bond prices down
sharply. Of course, as interest rates rise, bond prices decline. In this
environment of falling prices and unusual volatility, your Prudential Municipal
Series Fund -- Georgia Series sought to minimize risk while maximizing your
tax-free income.
The Series seeks maximum income exempt from Georgia state and federal
income taxes* consistent with preservation of capital. The Series is comprised
of investment grade municipal obligations with an average credit quality of
Aa/AA, as determined by Moody's Investors Service or Standard & Poor's Ratings
Group. The Series performed in line with the Lipper Georgia Municipal Debt
Average over the last year, but because long-term interest rates rose, total
returns were disappointing. As a result, the Series has become more cautious and
shortened its average maturity.
<TABLE>
<CAPTION>
SERIES PERFORMANCE
As of August 31, 1994
30-day Taxable Equivalent Yields
NAV SEC Yield @28% @31% @39.6%
<S> <C> <C> <C> <C> <C>
Class A $11.19 4.0% 6.0% 6.2% 7.1%
Class B $11.19 3.8% 5.7% 5.8% 6.6%
Class C $11.19 N/A N/A N/A N/A
</TABLE>
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future results.
*Interest on municipal obligations may be subject to the federal
alternative minimum tax. See your Series' prospectus for more details.
N/A = Yield information with respect to Class C is not available as
operations commenced in August 1994.
-1-
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURNS
HISTORICAL (AS OF 8/31/94)(1) AVERAGE ANNUAL (AS OF 9/30/94)(2)
1-Yr. 5-Yr. Since Incep.** 1-Yr. 5-Yr. Since Incep.**
<S> <C> <C> <C> <C> <C> <C>
Class A -1.6% N/A +38.3% -7.7% N/A +6.0%
Class B -2.0% +39.4% +127.0% -10.2% +6.4% +8.3%
Class C N/A N/A -0.1% N/A N/A -3.1%
Lipper GA
Muni Debt Avg.*** +1.6% +43.1% +143.6% N/A N/A N/A
</TABLE>
(1) Source: Lipper Analytical Services, Inc. These figures do not take into
account sales charges.
(2) Source: Prudential Mutual Fund Management, Inc. These averages take
into account applicable sales charges. The Series charges a maximum initial
sales charge of 3% for Class A shares. Class B shares are subject to a declining
contingent deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1%, respectively, for
the first six years. Class B shares will automatically convert to Class A shares
approximately seven years after purchase. This conversion feature is expected to
be implemented in February 1995. Class C shares are sold subject to a contingent
deferred sales charge of 1% during the first year.
**Inception on January 22, 1990 for Class A, September 25, 1984 for Class B
and August 1, 1994 for Class C.
***These are the average returns of 20 Georgia municipal debt funds for
one-year, five-year, and since inception of Class B shares, as determined by
Lipper Analytical Services, Inc.
Note: Without expense subsidies and management fee waivers, the Series'
historical and average annual total returns would have been lower. The Series'
Class B average annual total return since inception would have been 8.1%
ONCE WAS NOT ENOUGH
When we wrote to you in February, the Federal Reserve raised short-term
interest rates for the first time in years, hoping to control inflation. Since
then, the Fed has moved four more times, until the federal funds rate (the
overnight interbank lending rate) now stands at 4.75%, up from 3% at the start
of the year. The Fed also increased the discount rate (at which it lends banks
money) to 4% from 3% over the same period.
Interest rates rise when the financial markets fear inflation, the bond
holder's enemy. Inflation is feared because it robs purchasing power from a
bond's fixed-interest rate.
Municipal bond interest rates increased by nearly a percentage point, to
6.46% on August 25 from 5.52% on December 29, 1993, as measured by the Bond
Buyer's Revenue Bond Index, a widely used yardstick of interest rates in the
tax-free market.
GEORGIA: STRONG FINANCIAL POSITION
As a state government, Georgia has one of the strongest financial positions
in the country. Because of its solid economic growth, the state cut both taxes
and spending, and is still expected to end the fiscal year with a surplus. In
addition, the state has a reserve of $220 million and growing, should it face
any unforeseen financial difficulty. Georgia's latest budget includes welfare
reform with a work requirement, business and low-income tax cuts, an increase in
-2-
<PAGE>
personal income tax exemptions and sales tax exemptions. If revenues continue to
come in ahead of budget, other tax cuts may be considered.
Georgia's debt position is excellent. Virtually all debt is either general
obligation or state-guaranteed. It is among the states with the highest credit
ratings.
Because of the state's fiscal strength, the Series has concentrated its
investments in local and school district bonds.
A TAX REMINDER
As a result of the federal Revenue Reconciliation Act of 1993, which
affects bonds purchased after April 30, 1993, it is possible that this year you
may have some taxable income from your tax-free municipal bond fund. The law
stipulates that the portion of any gain realized on the sale or retirement of a
tax-free bond purchased at a market discount to its face value must be taxed as
ordinary income.
As a result of this change in federal tax law, some discount bonds have
been selling at levels so cheap they will produce a higher after-tax return than
other bonds not subject to the provisions of the new law. We have occasionally
taken advantage of this market imbalance because we have determined that at very
low prices these bonds can still provide you with a higher after-tax return on
your investment.
THE OUTLOOK
We expect volatility in the municipal bond market until the economy reaches
a level of growth that is sustainable without causing inflation. If the economy
continues to surge, the ever vigilant Fed will move again, boosting short-term
rates. If the economy slows substantially, long-term rates should stabilize.
Although rates may keep rising, we believe that most of the increase is now
behind us.
In the months ahead, we expect supply -- or the lack of it -- to become
more important in the tax-free municipal bond market. Through the first eight
months of the year, new issue volume is off 42%, according to Securities Data
Co., which tracks this statistic. The pace is accelerating. In August, new issue
volume fell 56%.
-3-
<PAGE>
As always, it is a pleasure to have you as a shareholder in the Prudential
Municipal Series Fund -- Georgia Series, and to take this opportunity to report
our activities to you.
Sincerely,
/s/Lawrence C. McQuade
Lawrence C. McQuade
President
/s/Marie Conti
Marie Conti
Portfolio Manager
-4-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
GEORGIA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.2%
Atlanta Urban Res. Fin.
Auth.,
Dorm. Fac. Rev.,
Atlanta Gen. Oblig.,
Aa $ 585(D) 7.10%, 12/1/10.......... $ 653,240
Clark Atlanta Univ.
Proj.,
NR 935(D) 9.25%, 6/1/10........... 1,142,926
Atlanta Wtr. & Swr.
Rev.,
Aa 500 4.75%, 1/1/23........... 398,710
Bartow Cnty. Sch. Dist.,
Gen. Oblig.,
Aaa 500 5.70%, 5/1/14,
M.B.I.A............... 478,870
Clarke Cnty. Sch. Dist.,
Aaa 425 5.50%, 7/1/08,
F.G.I.C............... 415,310
Clayton Cnty. Solid
Waste Mgmt. Auth.
Rev.,
Aa 500 6.50%, 2/1/12, Ser. A... 512,685
Clayton Cnty. Wtr.
Auth.,
Wtr. & Sewage Rev.,
Aaa 500(D) 6.65%, 5/1/12........... 552,730
Cobb Cnty. Kennestone
Hosp.,
Auth. Rev.,
5.00%, 4/1/24, Ser. A,
Aaa 750 M.B.I.A................. 618,173
Columbus Hosp. Auth.
Rev.,
Antic. Cert., St.
Francis Hosp.,
Aaa 500 8.25%, 1/1/07, B.I.G.... 548,650
DeKalb Cnty. Wtr. & Swr.
Rev.,
Aa 750 5.25%, 10/1/23.......... 649,995
DeKalb Private Hosp.
Auth. Rev.,
Wesley Svcs. Inc.
Proj.,
Aa3 500 8.25%, 9/1/15........... 526,385
Douglasville-Douglas
Cnty.,
Wtr. & Swr. Auth.
Rev.,
Aaa 750 5.625%, 6/1/15,
A.M.B.A.C............. 709,980
Downtown Savannah Auth.
Rev., Chatham Co.
Proj.,
Aa 250 5.00%, 1/1/11........... 221,790
Floyd Cnty. Wtr. & Swr.
Rev.,
Aaa 250 5.10%, 11/1/13,
F.G.I.C............... 220,148
Forsyth Cnty. Sch. Dist.
Dev. Rev.,
A1 $ 500 6.75%, 7/1/16, Ser. A... $ 542,050
Fulco Hosp. Auth. Rev.,
Antic. Cert., Baptist
Hlth.,
A 750 6.375%, 9/1/22, Ser.
B..................... 690,203
Shepherd Spinal Ctr.
Proj.,
Aa3 750 7.75%, 10/1/08, Ser.
A..................... 801,487
Fulton Cnty. Bldg. Auth.
Rev.,
Human Res. & Gov't.
Facs. Proj.,
Aa 250 7.00%, 1/1/10........... 268,887
Judicial Ctr. Proj.,
Aa 1,325 Zero Coupon, 1/1/11..... 486,434
Fulton Cnty. Sch. Dist.
Rev.,
Lindbrook Square
Fndtn.,
Aa 750@ 6.375%, 5/1/17.......... 793,162
Georgia Mun. Elec. Auth.
Pwr.
Rev. Ref.,
A1 250 5.30%, 1/1/07, Ser. Z... 240,563
A1 250 6.00%, 1/1/14, Ser. A... 243,562
A1 475 6.25%, 1/1/17, Ser. B... 477,223
Georgia Mun. Gas Auth.
Rev.,
Southern Storage Gas
Proj.,
A-* 600 6.40%, 7/1/14........... 601,164
Green Cnty. Dev. Auth.,
Ind. Park Rev.,
NR 680 6.875%, 2/1/04.......... 746,905
Henry Cnty. Sch. Dist.
Dev. Rev.,
A 750 6.45%, 8/1/11, Ser. A... 779,827
Houston Cnty. Georgia
Sch. Dist.,
Intergovernmental
Contract Trust,
Aaa 250 6.00%, 3/1/14,
M.B.I.A............... 248,860
Marietta Dev. Auth.
Rev.,
Life Coll. Inc. Proj.,
Aaa 500 7.20%, 12/1/09,
C.G.I.C............... 543,375
Monroe Cnty. Dev. Auth.,
Poll. Ctrl. Rev., Gulf
Pwr. Co. Proj.,
A2 500 10.50%, 12/1/14......... 518,600
Peach Cnty. Sch. Dist.,
Aaa 500 6.40%, 2/1/19,
M.B.I.A............... 513,330
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa $ 750 5.40%, 7/1/07,
M.B.I.A............... $ 746,497
Aaa 750 5.50%, 7/1/13,
M.B.I.A............... 714,458
Aaa 450(D)(D) 8.393%, 7/1/20,
F.S.A................. 421,875
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
7.65%, 10/15/22, Ser.
1-B,
Aaa 555 G.N.M.A................. 574,836
Savannah Hosp. Auth.
Rev.,
Candler Hosp.,
Baa 500 7.00%, 1/1/23........... 489,680
Toombs Cnty. Hosp.,
Dr. John Meadows Mem.
Hosp.,
BBB* 500 7.00%, 12/1/17.......... 492,870
Virgin Islands Pub. Fin.
Auth. Rev., Hwy.
Trans. Trust Fund,
NR 200 7.25%, 10/1/18, Ser.
A..................... 206,324
Virgin Islands Wtr. &
Pwr. Auth., Wtr. Sys.
Rev.,
NR 300 8.50%, 1/1/10, Ser. A... 329,568
-----------
Total long-term
investments
(cost $19,490,632).... 20,121,332
-----------
SHORT-TERM INVESTMENT--1.4%
Georgia Hosp. Equip.
Fin. Auth., Pooled
Hosp. Loan, Ser. 85,
3.25%, 9/1/94, F.R.D.D.
Aaa 300 (cost $300,000)....... 300,000
-----------
Total Investments--98.6%
(cost $19,790,632; Note
4).................... 20,421,332
Other assets in excess
of
liabilities--1.4%..... 282,079
-----------
Net Assets--100%........ $20,703,411
-----------
-----------
<FN>
(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.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of these securities is considered
to be the later of the next date on which the
security can be redeemed at par or the next
date on which the rate of interest is adjusted.
* Standard & Poor's rating.
@ Pledged as initial margin on futures contracts.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $19,790,632)................................................... $20,421,332
Cash....................................................................................... 44,045
Interest receivable........................................................................ 336,478
Receivable for Series shares sold.......................................................... 23,025
Other assets............................................................................... 780
---------------
Total assets........................................................................... 20,825,660
---------------
Liabilities
Accrued expenses........................................................................... 55,610
Payable for Series shares reacquired....................................................... 29,965
Dividends payable.......................................................................... 14,171
Management fee payable..................................................................... 8,830
Distribution fee payable................................................................... 8,444
Due to broker-variation margin............................................................. 4,219
Deferred trustees' fees.................................................................... 1,010
---------------
Total liabilities...................................................................... 122,249
---------------
Net Assets................................................................................. $20,703,411
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 18,498
Paid-in capital in excess of par......................................................... 20,109,747
---------------
20,128,245
Accumulated net realized loss on investments............................................. (72,690)
Net unrealized appreciation on investments............................................... 647,856
---------------
Net assets, August 31, 1994.............................................................. $20,703,411
---------------
---------------
Class A:
Net asset value and redemption price per share
($1,181,577 / 105,555 shares of beneficial interest issued and outstanding)............ $11.19
Maximum sales charge (3.0% of offering price)............................................ .35
---------------
Maximum offering price to public......................................................... $11.54
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($19,521,634 / 1,744,219 shares of beneficial interest issued and outstanding)......... $11.19
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($199.58 / 17.83 shares of beneficial interest issued and outstanding)................. $11.19
---------------
---------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest........................... $ 1,345,847
------------
Expenses
Management fee..................... 108,130
Distribution fee--Class A.......... 1,134
Distribution fee--Class B.......... 102,458
Custodian's fees and expenses...... 58,000
Registration fees.................. 28,000
Reports to shareholders............ 19,500
Transfer agent's fees and
expenses........................... 16,000
Legal fees......................... 15,000
Audit fee.......................... 10,500
Trustees' fees..................... 3,375
Miscellaneous...................... 1,048
------------
Total expenses................... 363,145
------------
Net investment income................ 982,702
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ (98,821)
Financial futures transactions..... 95,281
------------
(3,540)
------------
Net change in unrealized
appreciation/
depreciation on:
Investments........................ (1,436,560)
Financial futures contracts........ 28,718
------------
(1,407,842)
------------
Net loss on investments.............. (1,411,382)
------------
Net Decrease in Net Assets
Resulting from Operations............ $ (428,680)
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income... $ 982,702 $ 926,363
Net realized gain (loss)
on investment
transactions.......... (3,540) 312,202
Net change in unrealized
appreciation/depreciation
of investments........ (1,407,842) 1,071,362
------------ -----------
Net increase (decrease)
in net assets
resulting from
operations............ (428,680) 2,309,927
------------ -----------
Dividends and
distributions (Note 1)
Dividends from net
investment income
Class A............... (55,820) (24,841)
Class B............... (926,882) (901,522)
------------ -----------
(982,702) (926,363)
------------ -----------
Distributions from net
realized gains
Class A............... (15,680) (8,466)
Class B............... (302,050) (631,421)
------------ -----------
(317,730) (639,887)
------------ -----------
Series share transactions
(Note 6)
Net proceeds from shares
sold.................. 3,261,528 4,700,499
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 863,092 1,006,072
Cost of shares
reacquired............ (3,609,847) (2,411,522)
------------ -----------
Net increase in net
assets from Series
share transactions.... 514,773 3,295,049
------------ -----------
Total increase
(decrease).............. (1,214,339) 4,038,726
Net Assets
Beginning of year......... 21,917,750 17,879,024
------------ -----------
End of year............... $ 20,703,411 $21,917,750
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
NOTES TO FINANCIAL STATEMENTS
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Georgia Series (the "Series") commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in "investment grade" tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series 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 Trustees.
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.
All securities are valued as of 4:15 P.M., New York time.
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 Series 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 Series 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 Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series 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.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of 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: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series 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
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
-9-
<PAGE>
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with 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 1% of the average daily net assets of the Series.
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 and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class
A and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, .50 of 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the fiscal year ended August 31, 1994.
PMFD has advised the Series that it has received approximately $13,200 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1994,
it received approximately $29,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary
of PMF, serves as the Fund's transfer agent. During the year ended August 31,
1994, the Series incurred fees of approximately $14,000 for the services of
PMFS. As of August 31, 1994, approximately $1,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding
short-term investments, for the year ended August 31, 1994 were $5,648,000 and
$5,611,424, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1994 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes is $630,700 (gross unrealized appreciation--$978,710, gross
unrealized depreciation--$348,010).
At August 31, 1994, the Series sold 15 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts was $1,389,656. The value of such contracts on August 31, 1994
was $1,372,500, thereby resulting in an unrealized gain of $17,156.
The Fund will elect to treat net capital losses of approximately $45,000
incurred in the ten month period ended August 31, 1994 as having been incurred
in the following fiscal year.
-10-
<PAGE>
NOTE 5. EXPENSE SUBSIDY
PMF has agreed to subsidize expenses so that total Series operating
expenses do not exceed 1.40%, 1.80% and 2.05% of the average net assets of the
Class A shares, Class B shares and Class C shares, respectively. No subsidy was
required for the year ended August 31, 1994.
NOTE 6. CAPITAL
The Series currently offers Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 3.0%. 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. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing in or about February, 1995.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
--------------------------------- -------- -----------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold...................... 40,971 $ 479,185
Shares issued in reinvestment of
dividends and distributions.... 3,476 40,440
Shares reacquired................ (30,202) (352,696)
-------- -----------
Net increase in shares
outstanding.................... 14,245 $ 166,929
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 76,007 $ 894,503
Shares issued in reinvestment of
dividends and distributions.... 1,747 20,330
Shares reacquired................ (1,557) (18,441)
-------- -----------
Net increase in shares
outstanding.................... 76,197 $ 896,392
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B
---------------------------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold...................... 237,894 $ 2,782,143
Shares issued in reinvestment of
dividends and distributions.... 70,614 822,652
Shares reacquired................ (281,823) (3,257,151)
-------- -----------
Net increase in shares
outstanding.................... 26,685 $ 347,644
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 323,985 $ 3,805,996
Shares issued in reinvestment of
dividends and distributions.... 85,416 985,742
Shares reacquired................ (206,341) (2,393,081)
-------- -----------
Net increase in shares
outstanding.................... 203,060 $ 2,398,657
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class C
---------------------------------
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold...................... 18 $ 200
-------- -----------
-------- -----------
<FN>
---------------
* Commencement of offering of Class C shares.
</TABLE>
-11-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
----------------------------------------------------- Class B
January 22, ------------------------------------------
1990(D)(D)
Year Ended August 31, Through Year Ended August 31,
--------------------------------------- August 31, ------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991
------------ ------ ------ ------ ----------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $12.12 $11.69 $11.39 $11.05 $ 11.26 $ 12.12 $ 11.69 $ 11.39 $ 11.05
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Income from investment
operations
Net investment income........... .57 .62 .65(D) .64 .41 .52 .57 .61(D) .60
Net realized and unrealized gain
(loss) on investment
transactions.................. (.76) .85 .54 .43 (.21) (.76) .85 .54 .43
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Total from investment
operations.................. (.19) 1.47 1.19 1.07 .20 (.24) 1.42 1.15 1.03
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Less distributions
Dividends from net investment
income........................ (.57) (.62) (.65) (.64) (.41) (.52) (.57) (.61) (.60)
Distributions from net realized
gains......................... (.17) (.42) (.24) (.09) -- (.17) (.42) (.24) (.09)
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Total distributions........... (.74) (1.04) (.89) (.73) (.41) (.69) (.99) (.85) (.69)
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Net asset value, end of
period........................ $11.19 $12.12 $11.69 $11.39 $ 11.05 $ 11.19 $ 12.12 $ 11.69 $ 11.39
------ ------ ------ ------ ----------- ------------ ------- ------- -------
------ ------ ------ ------ ----------- ------------ ------- ------- -------
TOTAL RETURN#:.................. (1.58)% 13.28% 10.84% 10.03% 1.71% (1.98)% 12.83% 10.40% 9.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $1,182 $1,107 $ 177 $ 102 $ 83 $ 19,522 $20,811 $17,702 $17,722
Average net assets (000)........ $1,134 $ 475 $ 155 $ 98 $ 21 $ 20,492 $18,437 $17,436 $19,008
Ratios to average net assets:##
Expenses, including
distribution fees........... 1.30% 1.27% 1.24%(D) 1.70% 1.46%* 1.70% 1.67% 1.64%(D) 2.08%
Expenses, excluding
distribution fees........... 1.20% 1.17% 1.14%(D) 1.60% 1.36%* 1.20% 1.17% 1.14%(D) 1.58%
Net investment income......... 4.92% 5.29% 5.68%(D) 5.67% 5.92%* 4.52% 4.89% 5.28%(D) 5.36%
Portfolio turnover.............. 27% 41% 58% 33% 49% 27% 41% 58% 33%
<CAPTION>
Class C
-----------
August 1,
1994(D)(D)(D)
Through
August 31,
1990 1994
------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 11.23 $ 11.23
------- -----------
Income from investment
operations
Net investment income........... .65 .04
Net realized and unrealized gain
(loss) on investment
transactions.................. (.18) (.04)
------- -----------
Total from investment
operations.................. .47 --
------- -----------
Less distributions
Dividends from net investment
income........................ (.65) (.04)
Distributions from net realized
gains......................... -- --
------- -----------
Total distributions........... (.65) (.04)
------- -----------
Net asset value, end of
period........................ $ 11.05 $ 11.19
------- -----------
------- -----------
TOTAL RETURN#:.................. 4.18% (0.06)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $20,310 $ 200@
Average net assets (000)........ $22,614 $ 199@
Ratios to average net assets:##
Expenses, including
distribution fees........... 1.67% 2.05%*
Expenses, excluding
distribution fees........... 1.22% 1.30%*
Net investment income......... 5.85% 4.68%*
Portfolio turnover.............. 49% 27%
<FN>
---------------
* Annualized.
(D) Net of expense subsidy.
(D)(D) Commencement of offering of Class A shares.
(D)(D)(D) Commencement of offering of Class C 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.
## Because of the events referred to in (D)(D)(D) and the timing of such, the ratios for the Class C shares
are not necessarily comparable to that of Class A and B shares and are not necessarily indicative of
future ratios.
@ Figures are actual and are not rounded to the nearest thousand.
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Georgia Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Georgia Series, including the portfolio of
investments, as of August 31, 1994, the related statements of operations for the
year then ended and of changes in 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. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Georgia Series, as of August 31, 1994, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
October 17, 1994
FEDERAL INCOME TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of
the Series' fiscal year end (August 31, 1994) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 1994,
dividends paid from net investment income of $.57 per Class A share, $.52 per
Class B share and $.04 per Class C shares were all federally tax-exempt interest
dividends. In addition, the Series paid to both Class A and B shares a long-term
capital gain distribution of $.091 per share which is taxable as such and a
short-term capital gain distribution of $.083 per share which is taxable as
ordinary income.
In January 1995, you will be advised on IRS Form 1099 DIV or substitute 1099
DIV as to the federal tax status of the distributions received by you in
calendar year 1994.
-13-
<PAGE>
[Graph]
These graphs are furnished to you in accordance with SEC
regulations. They compare a $10,000 investment in Prudential
Municipal Series Fund: Georgia Series (Class A, Class B, and Class C) with a
similar investment in the Lehman Brothers Municipal Bond Index (the
Index) by portraying the initial account values at the commencement
of operations of each class and subsequent account values at the
end of each fiscal year (August 31) beginning in 1990 for Class A,
in 1984 for Class B shares and 1994 for Class C shares. For purposes of
the graphs and, unless otherwise indicated, the accompanying tables, it has
been assumed that (a) the maximum sales charge was deducted from
the initial $10,000 investment in Class A shares; (b) the maximum
applicable contingent deferred sales charge was deducted from the
value of the investment in Class B shares and Class C shares assuming
full redemption on August 31, 1994; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to Class A shares on
a quarterly basis approximately seven years after purchase. The conversion
feature is expected to be implemented on or about February 1995 and is
not reflected in the graph. The graph and accompanying tables reflect the
past subsidy and/or waiver of expenses and/or management fees. Without
fee waivers and expense subsidies, the value of a $10,000 investment in
the Series and the Series' average annual total return, as
shown above, would have been lower.
The Index is a weighted index comprised of 21,000 municipal bonds (general
obligation bonds, revenue bonds, insured bonds and prerefunded bonds) selected
by Lehman Brothers as representative of the long-term investment grade municipal
bond market. The Index is an unmanaged index and includes the reinvestment of
all income, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Series. The securities which comprise
the Index may differ substantially from the securities in the Series' portfolio
because the Index, among other things, is not state specific. The Lehman
Brothers Municipal Bond Index is not the only index which may be used to
characterize performance of long-term, investment-grade tax-exempt bond funds
and other indexes may portray different comparative performance.
-14-
<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, Inc.
Prudential Government Income Fund, Inc.
(formerly known as Prudential
Government Plus Fund)
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
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, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
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, Inc.
Prudential Equity Income Fund
Prudential Allocation Fund
(formerly known as Prudential FlexiFund)
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Strategist Fund, Inc.
(formerly known as Prudential Growth Fund)
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-REGISTERED TRADEMARK- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
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
<PAGE>
TRUSTEES
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
OFFICERS
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Deborah A. Docs, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
1633 Broadway
New York, NY 10019
LEGAL COUNSEL
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
PRUDENTIAL MUTUAL FUNDS
ONE SEAPORT PLAZA
NEW YORK, NY 10292
TOLL FREE (800) 225-1852, COLLECT (908) 417-7555
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Prudential Mutual Funds Building Your Future On Our Strength
<PAGE>
LETTER TO
SHAREHOLDERS
--------------------------------------------
October 18, 1994
Dear Shareholder:
It has been a most difficult year in the U.S. financial markets. When we
last wrote in February interest rates were starting to rise, ending a three-year
long bull market in bonds. What started as a trickle has become a torrent.
Interest rates have continued to increase this year, sending bond prices down
sharply. Of course, as interest rates rise, bond prices decline. In this
environment of falling prices and unusual volatility, your Prudential Municipal
Series Fund -- Minnesota Series sought to minimize risk while maximizing your
tax-free income.
The Series seeks maximum income exempt from Minnesota and federal income
taxes* consistent with preservation of capital. The Series is comprised of
investment grade municipal obligations with an average Aa/AA credit quality as
determined by Moody's Investors Service or Standard & Poor's Ratings Group. The
Series performed roughly in line with the Lipper Minnesota Municipal Debt
Average, but because long-term interest rates rose, total returns were
disappointing. As a result, the Series has become more cautious and shortened
its average maturity.
<TABLE>
<CAPTION>
SERIES PERFORMANCE
As of August 31, 1994
30-day Taxable Equivalent Yields
NAV SEC Yield @28% @31% @39.6%
<S> <C> <C> <C> <C> <C>
Class A $11.56 4.1% 6.2% 6.5% 7.4%
Class B $11.56 3.8% 5.8% 6.1% 6.9%
Class C $11.56 N/A N/A N/A N/A
</TABLE>
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future results.
*Interest on municipal obligations may be subject to the federal
alternative minimum tax. See your Series' prospectus for more details.
N/A = Yield information with respect to Class C is not available as
operations commenced in August 1994.
-1-
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURNS
HISTORICAL (AS OF 8/31/94)(1) AVERAGE ANNUAL (AS OF 9/30/94)(2)
1-Yr. 5-Yr. Since Incep.** 1-Yr. 5-Yr. Since Incep.**
<S> <C> <C> <C> <C> <C> <C>
Class A -0.9% N/A +34.8% -5.8% N/A +5.6%
Class B -1.3% +35.5% +114.7% -8.2% +5.9% +7.8%
Class C N/A N/A -0.4% N/A N/A -2.3%
Lipper MN
Muni Debt Avg.*** -0.4% +42.2% +134.8% N/A N/A N/A
</TABLE>
(1) Source: Lipper Analytical Services, Inc. These figures do not take into
account sales charges.
(2) Source: Prudential Mutual Fund Management, Inc. These averages take
into account applicable sales charges. The Series charges a maximum initial
sales charge of 3% for Class A shares. Class B shares are subject to a declining
contingent deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1%, respectively, for
the first six years. Class B shares will automatically convert to Class A shares
approximately seven years after purchase. This conversion feature is expected to
be implemented in February 1995. Class C shares are subject to a contingent
deferred sales charge of 1% during the first year.
**Inception on January 22, 1990 for Class A, and October 4, 1984 for Class
B and August 1, 1994 for Class C.
***These are the average returns of 29 Minnesota municipal debt funds for
one-year, five-year, and since inception of Class B shares, as determined by
Lipper Analytical Services, Inc.
Note: Without expense subsidies and management fee waivers, the Series'
historical and average annual total returns would have been lower. The Series'
Class B average annual total return since inception would have been 7.6%
ONCE WAS NOT ENOUGH
When we wrote to you in February, the Federal Reserve raised short-term
interest rates for the first time in years, hoping to control inflation. Since
then, the Fed has moved four more times, until the federal funds rate (the
overnight interbank lending rate) now stands at 4.75%, up from 3% at the start
of the year. The Fed also increased the discount rate (at which it lends banks
money) to 4% from 3% over the same period.
Interest rates rise when the financial markets fear inflation, the bond
holder's enemy. Inflation is feared because it robs purchasing power from a
bond's fixed-interest rate.
Municipal bond interest rates increased by nearly a percentage point, to
6.46% on August 25 from 5.52% on December 29, 1993, as measured by the Bond
Buyer's Revenue Bond Index, a widely used yardstick of interest rates in the
tax-free market.
MINNESOTA: EXCELLENT CREDIT
Minnesota is the strongest economic performer in the north-central region
of the country, because of growth in health care, medical technology and
financial services. The state's 3.6% unemployment rate is among the lowest in
the country.
-2-
<PAGE>
The state maintains an excellent credit position that continues to improve
as a result of its favorable economic growth, balanced economy, strengthening
financial position, and consistent application of conservative debt and fiscal
policies.
With a revenue surplus this year and after much debate, state government
adopted a variety of tax cuts and spending increases. Minnesota's governor
vetoed $174 million in further expenses to maintain the traditional $350 million
surplus.
One unresolved issue is how to fund MinnesotaCare, the state's universal
health care plan which is scheduled for implementation in mid-1997. Although
some want to raise revenue with a new top income tax rate, the governor has
threatened to veto this move.
With new issues down 51.7% to date this year in Minnesota, bonds have been
scarce. We have remained fully invested, anticipating this situation will
continue through the year.
A TAX REMINDER
As a result of the Federal Revenue Reconciliation Act of 1993, which
affects bonds purchased after April 30, 1993, it is possible that this year you
may have some taxable income from your tax-free municipal bond fund. The law
stipulates that the portion of any gain realized on the sale or retirement of a
tax-free bond purchased at a market discount to its face value must be taxed as
ordinary income.
Following this change in federal tax law, some discount bonds have been
selling at levels so cheap they will produce a higher after-tax return than
other bonds not subject to the provisions of the new law. We have occasionally
taken advantage of this market imbalance because we have determined that at very
low prices these bonds can still provide you with a higher after-tax return on
your investment.
THE OUTLOOK
We expect volatility in the municipal bond market until the economy reaches
a level of growth that is sustainable without causing inflation. If the economy
continues to surge, the ever vigilant Fed will move again, boosting short-term
rates. If the economy slows substantially, long term rates should stabilize.
Although rates may keep rising, we believe that most of the increase is now
behind us.
In the months ahead, we expect supply -- or the lack of it -- to become
more important in the tax-free municipal bond market. Through the first eight
months of the year, new issue volume is off 42%, according to Securities
-3-
<PAGE>
Data Co., which tracks this statistic. The pace is accelerating. In August, new
issue volume fell 56%.
As always, it is a pleasure to have you as a shareholder in the Prudential
Municipal Series Fund -- Minnesota Series, and to take this opportunity to
report our activities to you.
Sincerely,
/s/Lawrence C. McQuade
Lawrence C. McQuade
President
/s/Christian Smith
Christian Smith
Portfolio Manager
-4-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MINNESOTA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.8%
Braham Indpt. Sch. Dist., No. 314,
AA* $ 425 5.20%, 2/1/13.......... $ 386,066
Breckenridge Hosp. Facs. Rev.,
Franciscan Sisters Healthcare,
NR 800(D) 9.375%, 9/1/17, Ser.
B1................... 918,648
Dakota Cnty. Hsg. & Redev. Auth.,
Burnsville & Inner Grove,
Sngl. Fam. Mtge.,
Aaa 10 9.375%, 5/1/18,
F.G.I.C.............. 10,423
Metropolitan Council of Minneapolis,
Hubert H. Humphrey Metrodome,
A 500 6.00%, 10/1/09......... 505,240
St. Paul Met. Area,
Aaa 750 6.25%, 12/1/06, Ser.
A.................... 784,545
Aaa 500 6.75%, 9/1/10, Ser.
D.................... 527,135
Minneapolis Cmnty. Dev.
Agcy.,
St. Paul Hsg. &
Redev.
Auth. Rev.,
Aa 10 9.875%, 12/1/15........ 10,371
Tax Increment Rev., M.B.I.A.,
Aaa 750 Zero Coupon, 9/1/01.... 527,543
Aaa 1,000 Zero Coupon, 3/1/06.... 534,620
Aaa 1,000 Zero Coupon, 9/1/07.... 487,720
Minneapolis Hosp. Rev.,
Lifespan Inc., Ser.
B,
Aaa 820(D) 8.70%, 12/1/02......... 933,660
A 800 8.125%, 8/1/17......... 877,952
Minneapolis-St. Paul Hsg. & Redev.
Auth., Hlth. Care Sys. Rev.,
4.75%, 11/15/18, Ser. A,
Aaa 1,500 A.M.B.A.C............ 1,201,200
Minneapolis-St. Paul
Hsg. Fin. Brd. Rev.,
Sngl. Fam. Mtge.,
AAA* 1,000 7.30%, 8/1/31,
G.N.M.A.............. 1,045,850
Minneapolis-St. Paul Met. Arpts.,
Aaa 1,000 7.80%, 1/1/14, Ser.
7.................... 1,114,790
Minnesota Pub. Facs.
Auth., Wtr. Poll.
Ctrl. Rev.,
AA+* $ 500 6.90%, 3/1/03, Ser.
A.................... $ 548,245
AA+* 650 7.00%, 3/1/09.......... 695,630
Minnesota St. Higher
Ed. Facs. Auth. Rev.,
Macalester Coll.,
AA-* 500 6.40%, 3/1/22.......... 511,330
St. Marys Coll.,
Baa 625 6.10%, 10/1/16......... 617,487
Univ. of St. Thomas,
A1 300 5.60%, 9/1/14.......... 282,468
Northern Mun. Pwr.
Agcy., Elec. Sys.
Rev.,
A 370 7.25%, 1/1/16, Ser.
A.................... 401,221
5.50%, 1/1/18, Ser. B,
Aaa 750 A.M.B.A.C............ 698,715
Northfield Coll. Fac.
Rev.,
St. Olaf Coll.,
A 370 6.30%, 10/1/12......... 377,999
Ramsey Cnty., Gen.
Oblig.,
Aaa 500 7.25%, 2/1/04.......... 537,825
Red. Wing Indpt. Sch.
Dist.,
No. 256 Sch. Bldg.,
Aa 500 5.60%, 2/1/09.......... 488,385
Robbinsdale Hosp. Rev.,
North Memorial Med.
Ctr.,
Aaa 1,000 5.55%, 5/15/19,
A.M.B.A.C............ 914,720
Rochester Hlth. Care
Facs. Rev., Mayo Med.
Ctr.,
NR 500(D) 8.30%, 11/15/07, Ser.
A.................... 575,985
Science Museum,
St. Paul, Cert. of
Part.,
AAA* 1,280(D) 7.50%, 12/15/01........ 1,369,462
Southern Mun. Pwr.
Agcy., Pwr. Supply
Sys. Rev., Ser. B,
Aaa 500 5.50%, 1/1/15,
A.M.B.A.C............ 468,580
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
St. Louis Park Hosp.
Rev., Methodist
Hosp., Ser. C,
Aaa $ 500 5.20%, 7/1/16,
A.M.B.A.C............ $ 438,945
Aaa 1,400(D)/@ 7.25%, 7/1/18,
A.M.B.A.C............ 1,577,016
St. Paul Hsg. & Redev.
Auth., Ramsey Med.
Ctr. Proj.,
Aaa 500 5.55%, 5/15/23,
A.M.B.A.C............ 451,675
Tax Increment Rev.,
Aaa 1,000 5.25%, 9/1/05,
A.M.B.A.C............ 982,790
St. Paul Port Auth.,
Energy Park Tax
Increment Rev.,
AAA* 855(D) 8.00%, 12/1/07......... 955,745
Univ. of Minnesota
Rev.,
AAA* 150(D) 9.625%, 2/1/05......... 157,168
Aa 1,000 6.00%, 2/1/11, Ser.
A.................... 1,004,080
Verndale Indpt. Sch. Dist.,
No. 818, Sch. Bldg.
AA* 955 4.875%, 2/1/14......... 823,859
Western Mun. Pwr.
Agcy., Supply Rev.,
A1 500 5.50%, 1/1/15, Ser.
A.................... 459,270
-----------
Total Investments--97.8%
(cost $24,115,494; Note
4)................... 25,204,363
Other assets in excess
of liabilities--2.2%.. 571,627
-----------
Net Assets--100%....... $25,775,990
-----------
-----------
<FN>
------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
@ Pledged as initial margin on financial futures
contracts.
* Standard & Poor's rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $24,115,494)................................................. $25,204,363
Receivable for investments sold.......................................................... 516,583
Interest receivable...................................................................... 405,302
Other assets............................................................................. 865
Receivable for Series shares sold........................................................ 450
---------------
Total assets........................................................................... 26,127,563
---------------
Liabilities
Bank overdraft........................................................................... 207,293
Payable for Series shares reacquired..................................................... 60,521
Accrued expenses......................................................................... 38,534
Dividends payable........................................................................ 18,294
Management fee payable................................................................... 11,060
Distribution fee payable................................................................. 10,607
Due to broker-variation margin........................................................... 4,254
Deferred trustees' fees.................................................................. 1,010
---------------
Total liabilities...................................................................... 351,573
---------------
Net Assets............................................................................... $25,775,990
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 22,301
Paid-in capital in excess of par....................................................... 24,629,740
---------------
24,652,041
Accumulated net realized gain on investments........................................... 55,767
Net unrealized appreciation on investments............................................. 1,068,182
---------------
Net assets, August 31, 1994............................................................ $25,775,990
---------------
---------------
Class A:
Net asset value and redemption price per share
($1,286,717 / 111,328 shares of beneficial interest issued and outstanding).......... $11.56
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $11.92
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($24,489,074 / 2,118,742 shares of beneficial interest issued and outstanding)....... $11.56
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($198.92 / 17.21 shares of beneficial interest issued and outstanding)............... $11.56
---------------
---------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................ $ 1,664,193
-----------
Expenses
Management fee...................... 136,463
Distribution fee--Class A........... 1,179
Distribution fee--Class B........... 130,567
Custodian's fees and expenses....... 62,000
Transfer agent's fees and
expenses............................ 34,600
Registration fees................... 27,500
Reports to shareholders............. 26,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Trustees' fees...................... 3,375
Miscellaneous....................... 643
-----------
Total expenses.................... 447,827
-----------
Net investment income................. 1,216,366
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 98,727
Financial futures transactions...... 95,075
-----------
193,802
-----------
Net change in unrealized appreciation/
depreciation on:
Investments......................... (1,783,295)
Financial futures contracts......... (20,250)
-----------
(1,803,545)
-----------
Net gain (loss) on investments........ (1,609,743)
-----------
Net Decrease in Net Assets
Resulting from Operations............. $ (393,377)
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) --------------------------
in Net Assets 1994 1993
----------- -----------
<S> <C> <C>
Operations
Net investment income.... $ 1,216,366 $ 1,238,313
Net realized gain on
investment
transactions........... 193,802 142,719
Net change in unrealized
appreciation on
investments............ (1,803,545) 1,111,143
----------- -----------
Net increase (decrease)
in net
assets resulting from
operations............. (393,377) 2,492,175
----------- -----------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A................ (57,132) (31,491)
Class B................ (1,159,234) (1,206,822)
----------- -----------
(1,216,366) (1,238,313)
----------- -----------
Distributions from net
realized gains
Class A................ (6,669) (992)
Class B................ (189,576) (46,636)
----------- -----------
(196,245) (47,628)
----------- -----------
Series share transactions
(Note 5)
Net proceeds from shares
sold................... 3,930,513 4,761,162
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 949,351 838,823
Cost of shares
reacquired............... (4,757,735) (4,494,663)
----------- -----------
Net increase in net
assets from Series
share transactions..... 122,129 1,105,322
----------- -----------
Total increase
(decrease)............... (1,683,859) 2,311,556
Net Assets
Beginning of year.......... 27,459,849 25,148,293
----------- -----------
End of year................ $25,775,990 $27,459,849
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
NOTES TO FINANCIAL STATEMENTS
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Minnesota Series (the "Series")
commenced investment operations in October, 1984. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in "investment grade" tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund and the Series in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series 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 Trustees.
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.
All securities are valued as of 4:15 P.M., New York time.
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 Series 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 Series 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 Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series 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.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of 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: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series 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
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
-9-
<PAGE>
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with 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 and employees of the Fund,
and 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 1% of the average daily net assets of the Series.
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 and Class C shares of the Fund (collectively
the "Distributors"). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the "Class A, B and C Plans"), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class
A and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the
Distributors for distribution-related activities at an annual rate of up to .30
of 1%, .50 of 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the fiscal year ended August 31, 1994.
PMFD has advised the Series that it has received approximately $20,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1994,
it received approximately $41,900 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary
of PMF, serves as the Fund's transfer agent and during the year ended August 31,
1994, the Series incurred fees of approximately $22,000 for the services of
PMFS. As of August 31, 1994, approximately $2,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of port- folio securities of the Series, excluding
short-term investments, for the year ended August 31, 1994, were $5,579,927 and
$5,492,077, respectively. At August 31, 1994 the Series sold 17 financial
futures contracts on the Municipal Bond Index expiring in September, 1994. The
value at disposition of such contracts was $1,742,531. The value of such
contracts on August 31, 1994 was $1,763,218, thereby resulting in an unrealized
loss of $20,687.
The cost basis of investments for federal income tax purposes at August 31,
1994 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes was $1,088,869 (gross unrealized appreciation--$1,517,166; gross
unrealized depreciation--$428,297).
NOTE 5. CAPITAL
The Series currently offers Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 3.0%. Class B shares are
sold with a contingent
-10-
<PAGE>
deferred sales charge which declines from 5% to zero depending on the period of
time the shares are held. Class C shares are sold with a contingent deferred
sales charge of 1% during the first year. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase commencing in or about February 1995.
The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 1994 and 1993 were as follows:
<TABLE>
<S> <C> <C>
Class A Shares Amount
------------- -----------
Year ended August 31, 1994:
Shares sold...................... 57,307 $ 690,269
Shares issued in reinvestment of
dividends and distributions.... 4,480 53,440
Shares reacquired................ (23,024) (272,744)
------------- -----------
Net increase in shares
outstanding.................... 38,763 $ 470,965
------------- -----------
------------- -----------
Year ended August 31, 1993:
Shares sold...................... 40,044 $ 478,217
Shares issued in reinvestment of
dividends and distributions.... 2,253 26,990
Shares reacquired................ (3,877) (46,769)
------------- -----------
Net increase in shares
outstanding.................... 38,420 $ 458,438
------------- -----------
------------- -----------
<CAPTION>
Class B
<S> <C> <C>
Year ended August 31, 1994:
Shares sold...................... 267,959 $ 3,240,044
Shares issued in reinvestment of
dividends and distributions.... 74,796 895,911
Shares reacquired................ (378,895) (4,484,991)
------------- -----------
Net decrease in shares
outstanding.................... (36,140) $ (349,036)
------------- -----------
------------- -----------
Year ended August 31, 1993:
Shares sold...................... 359,576 $ 4,282,945
Shares issued in reinvestment of
dividends and distributions.... 68,005 811,833
Shares reacquired................ (373,090) (4,447,894)
------------- -----------
Net increase in shares
outstanding.................... 54,491 $ 646,884
------------- -----------
------------- -----------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold...................... 17 $ 200
------------- -----------
------------- -----------
---------------
* Commencement of offering of Class C shares.
</TABLE>
-11-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class C
---------------------------------------------------- Class B ----------
January 22, --------------------------------------------------- August 1,
1990(D) 1994(D)(D)
Year Ended August 31, Through Year Ended August 31, Through
------------------------------------ August 31, --------------------------------------------------- August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $12.33 $11.78 $11.40 $10.98 $ 11.14 $ 12.33 $ 11.78 $ 11.41 $ 10.98 $ 11.14 $11.63
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Income
from
investment
operations:
Net
investment
income... .58 .62 .66 .64 .39 .53 .58 .61 .60 .62 .04
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... (.68) .57 .38 .42 (.16) (.68) .57 .37 .43 (.16) (.07)
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Total
from
investment
opera-
tions... (.10) 1.19 1.04 1.06 .23 (.15) 1.15 .98 1.03 .46 (.03)
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Less
distributions
Dividends
from
net
investment
income... (.58) (.62) (.66) (.64) (.39) (.53) (.58) (.61) (.60) (.62) (.04)
Distributions
from net
realized
gains.. (.09) (.02) -- -- -- (.09) (.02) -- -- -- --
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Total
distri-
butions... (.67) (.64) (.66) (.64) (.39) (.62) (.60) (.61) (.60) (.62) (.04)
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Net
asset
value,
end
of
period.. $11.56 $12.33 $11.78 $11.40 $ 10.98 $11.56 $12.33 $ 11.78 $ 11.41 $ 10.98 $11.56
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
TOTAL
RETURN#:... (0.87)% 10.45% 9.38% 9.93% 2.00% (1.26)% 9.99% 8.83% 9.64% 4.20% (.38)%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000)... $1,287 $894 $402 $229 $130 $24,489 $26,565 $24,746 $23,600 $24,080 $ 199@@
Average
net
assets
(000)... $1,179 $616 $291 $202 $87 $26,113 $25,387 $24,038 $23,997 $23,558 $ 200@@
Ratios
to
average
net
assets:@
Expenses,
including
distribution
fees... 1.25% 1.29% 1.22% 1.41% 1.46%* 1.65% 1.69% 1.62% 1.81% 1.78% 2.15%*
Expenses,
excluding
distribution
fees... 1.15% 1.19% 1.11% 1.31% 1.33%* 1.15% 1.19% 1.12% 1.31% 1.28% 1.40%*
Net
investment
income... 4.84% 5.15% 5.69% 5.73% 5.80%* 4.44% 4.75% 5.29% 5.33% 5.49% 3.86%*
Portfolio
turnover... 21% 27% 32% 56% 30% 21% 27% 32% 56% 30% 21%
<FN>
---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C 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 return for periods of less than one full year are not annualized.
@ Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares are
not necessarily comparable to that of the Class A or B shares and are not necessarily indicative of
future ratios.
@@ Figures are actual and not rounded to nearest thousand.
See Notes to Financial Statements.
</TABLE>
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Minnesota Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Minnesota Series, including the portfolio of
investments, as of August 31, 1994, the related statements of operations for the
year then ended and of changes in 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. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Minnesota Series, as of August 31, 1994, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
October 17, 1994
FEDERAL INCOME TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of
the Series' fiscal year end (August 31, 1994) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 1994,
dividends paid from net investment income of $.58 per Class A share, $.53 per
Class B share and $.04 per Class C shares were all federally tax-exempt interest
dividends. In addition, the Series paid to both Class A and B shares a long-term
capital gain distribution of $.037 per share which is taxable as such and a
short-term capital gain distribution of $.050 which is taxable as ordinary
income.
In January 1995, you will be advised on IRS Form 1099 DIV or substitute 1099
DIV as to the federal tax status of the distributions received by you in
calendar year 1994.
-13-
<PAGE>
[Graph]
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential Municipal Series Fund: Minnesota
Series (Class A, Class B, and Class C) with a similar investment in the Lehman
Brothers Municipal Bond Index (the Index) by portraying the initial account
values at the commencement of operations of each class and subsequent account
values at the end of each fiscal year (August 31) beginning in 1990 for Class A,
in 1984 for Class B shares and 1994 for Class C shares. For purposes of the
graphs and, unless otherwise indicated, the accompanying tables, it has been
assumed that (a) the maximum sales charge was deducted from the initial $10,000
investment in Class A shares; (b) the maximum applicable contingent deferred
sales charge was deducted from the value of the investment in Class B shares and
Class C shares, assuming full redemption on August 31, 1994; (c) all recurring
fees (including management fees) were deducted; and (d) all dividends and
distributions were reinvested. Class B shares will automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase.
This conversion feature is expected to be implemented on or about February 1995
and is not reflected in the graph. The graph and accompanying tables reflect the
past subsidy and/or waiver of expenses and/or management fees. Without fee
waivers and expense subsidies, the value of a $10,000 investment in the Series
and the Series' average annual total return, as shown above, would have been
lower.
The Index is a weighted index comprised of 21,000 municipal bonds (general
obligation bonds, revenue bonds, insured bonds and prerefunded bonds) selected
by Lehman Brothers as representative of the long-term investment grade municipal
bond market. The Index is an unmanaged index and includes the reinvestment of
all income, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Series. The securities which comprise
the Index may differ substantially from the securities in the Series' portfolio
because the Index, among other things, is not state specific. The Lehman
Brothers Municipal Bond Index is not the only index which may be used to
characterize performance of long-term, investment-grade tax-exempt bond funds
and other indexes may portray different comparative performance.
-14-
<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, Inc.
Prudential Government Income Fund, Inc.
(formerly known as Prudential
Government Plus Fund)
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
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, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
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, Inc.
Prudential Equity Income Fund
Prudential Allocation Fund
(formerly known as Prudential FlexiFund)
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Strategist Fund, Inc.
(formerly known as Prudential Growth Fund)
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-REGISTERED TRADEMARK- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- 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
<PAGE>
TRUSTEES
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Nancy H. Teeters
OFFICERS
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Deborah A. Docs, Assistant Secretary
MANAGER
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
INVESTMENT ADVISER
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
DISTRIBUTORS
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
1633 Broadway
New York, NY 10019
LEGAL COUNSEL
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
PRUDENTIAL MUTUAL FUNDS
ONE SEAPORT PLAZA
NEW YORK, NY 10292
TOLL FREE (800) 225-1852
COLLECT (908) 417-7555
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Prudential Mutual Funds Building Your Future On Our Strength
<PAGE>
SEMI ANNUAL REPORT February 28, 1995
Prudential
Municipal
Series Fund
-----------------------
(PICTURE)
Arizona Series
(LOGO)
<PAGE>
Letter to Shareholders
April 3, 1995
Dear Shareholder:
A powerful rally swept through the tax-exempt municipal bond market this
winter, lifting the value of your shares as yields of long-term municipal
bonds fell and newly-issued tax-exempt bonds became scarce. We are pleased
to report that your Prudential Municipal Series Fund -- Arizona Series earned
a positive total return, performing slightly ahead of the average Arizona
municipal bond fund, as measured by Lipper Analytical Services, Inc.
<TABLE>
CUMULATIVE TOTAL RETURNS1
As of February 28, 1995
<CAPTION>
Six Months 1 Year 5 Years 10 Years Since Inception2
<S> <C> <C> <C> <C> <C>
Class A 3.3% 1.6% 44.5% N/A 45.1%
Class B 3.1% 1.1% 41.5% 122.1% 133.0%
Class C 3.0% N/A N/A N/A 3.1%
Lipper AZ
Muni. Avg3 3.0% 1.2% 43.7% 121.8% 150.8%
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS1
As of March 31, 1995
<CAPTION>
1 Year 5 Years 10 Years Since Inception2
<S> <C> <C> <C> <C>
Class A 3.2% 7.1% N/A 6.9%
Class B 0.9% 7.2% 8.3% 8.4%
Class C N/A N/A N/A 2.6%
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
1 Source: Prudential Mutual Fund Management Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account
sales charges. The average annual returns do take into account applicable
sales charges. The Series charges a maximum front-end sales load of 3% for
Class A shares. Class B shares are subject to a contingent deferred sales
charge of 5%, 4%, 3%, 2%, 1% and 1% for six years. Class C shares have a 1%
CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, after approximately seven years.
2Inception dates: 1/22/90 Class A; 9/24/84, Class B; 8/1/94 Class C.
3Lipper average returns are for 30 funds for six months, 25 funds for one
year, 7 funds for five years, 1 fund for 10 years, and 1 fund since
inception of Class B shares on 9/24/84.
Less Means More...
For You!
Prudential mutual fund shareholders will be seeing
total returns increase in the months to come, thanks
to a reduction in Fund management expenses. Prudential
Mutual Funds lowered the rate on January 1, 1995, to
0.45% from 0.50%. It is our way of showing you that we
appreciate your business and that we remain committedto
managing the Fund for your benefit.
-1-
<PAGE>
Our Objective.
The Series seeks maximum income exempt from Arizona state and federal
income taxes consistent with the preservation of capital. Certain
shareholders may be subject to the federal alternative minimum tax,
however. The Series will invest primarily in Arizona state, municipal
and local government obligations and obligations of U.S. territories
(such as Puerto Rico, the U.S. Virgin Islands and Guam), the income
from which is also exempt from federal and Arizona state income taxes.
On the Hill:
In 1995, Congress will most likely consider an
initiative that would restore full income tax
deductibility for individual retirement account (IRA)
contributions for middle-income wage earners. In
addition, Congress may also consider the creation of
a new tax-deferred savings account called the "American
Dream Savings Account." Prudential Mutual Funds supports
both of these proposals, and we urge you to share your
opinion with your Congressional representatives. We will
keep you updated on these initiatives as they make their
way through the legislative process.
New Year Opens With Bond Rally.
What a difference six months can make! When we last reported to you,
the tax-exempt bond market was in turmoil because interest rates were
rising sharply, and prices (which move in the opposite direction of
interest rates) were falling sharply.
Volatility escalated last year when the Federal Reserve started to increase
short-term interest rates in a pre-emptive strike against inflation. By
November, after the Federal Reserve's sixth increase in the federal funds
rate (the interbank overnight lending rate), investors began to believe
that the economy was showing signs of slowing. As a result, long-term
interest rates in the tax-exempt bond market started to fall.
Long-term rates fell dramatically, and have continued to do so even though
the Federal Reserve raised short-term rates again on February 1, 1995. In
fact, on March 2, the Bond Buyer's Revenue Bond Index sank to 6.3% -- its
lowest since last June. That's more than a full percentage point below its
1994 high -- 7.4% recorded on November 17, 1994.
What We Did As Interest Rates Moved.
During this period of fluctuation, the Series sought to stabilize asset
values by maintaining a balance between bonds with higher coupons and
those with lower coupons, sometimes called premium and discount bonds.
The higher yielding premium bonds help cushion the impact of rising interest
rates while the lower coupon or discount bonds offer price appreciation
potential when interest rates decline.
-2-
<PAGE>
Smaller Supply Supports Market, Too.
The tax-exempt municipal bond market has also been helped recently by a
scarcity of new supply. Last year's higher interest rates made
many issuers reluctant to borrow money. In fact, the Revenue Bond Index
rose dramatically to 6.9% from 5.5% -- nearly one and a half percentage
points. As a result, the level of new bonds issued nationwide fell by 44%
and in Arizona by 63%.
A Tax Reminder:
As a result of the Revenue Reconciliation Act of
1993, it is possible that this year you may have
some taxable income from your normally tax-exempt
municipal bond fund. The law stipulates that the
portion of any gain realized on the sale or retirement
of a tax-exempt bond purchased at a market discount to
its face value may be taxed as ordinary income. The
law affects bonds purchased after April 30, 1993.
Arizona Bonds: Healthy Economy, Strong Credit Quality.
Arizona's economy continues to be one of the fastest growing in the nation,
led by growth in construction, manufacturing and services. New jobs grew
by 4.6% last year, twice the national average and the sixth fastest in the
country. Many of these new jobs are in the rapidly expanding metropolitan
Phoenix area. Much of the state's success story can be attributed to its
competitive wage rates and its pro-business regulatory environment.
The strength of the state's economy makes its bonds all the more valuable.
What's more, Arizona issues very few bonds -- only $2.6 billion last year
compared with $7 billion the year before. Thus, Arizona bonds are more
scarce, of a higher quality, and command higher prices than those of other
states.
How We Traded In The Arizona Market.
In the past six months the Series came across an unusually good buying
opportunity. We sold a triple-B rated hospital bond and bought an insured
bond to upgrade quality without lowering Series' yield. We were able to
execute the transaction because of unusual market volatility induced by
fluctuating interest rates.
We have also sought to increase yield by selectively purchasing Puerto
Rican and Guam utility bonds, because competition for Arizona bonds
usually keeps their prices high and yields low. At present, the Series
has 12% of assets in Puerto Rico, Guam and Virgin Island bonds.
The Outlook.
Tax-exempt municipal bonds have rallied substantially this winter. In
fact, the Lehman Brothers Municipal Bond Index has increased 2.8% over
the last six months. That is a substantial relief to investors who
weathered sharply rising interest rates and falling bond prices in 1994.
-3-
<PAGE>
We believe that long-term interest rates will stabilize in the year ahead,
as investors continue to gain confidence that the Federal Reserve is
satisfied that it has inflation under control. In addition, we think
the supply of tax-exempt municipals will continue to contract, which may
provide an additional reward to investors by supporting bond prices.
As always, it is a pleasure to work for you. We thank you for remaining
with the Prudential Municipal Series Fund -- Arizona Series through a most
difficult 1994. We appreciate the confidence you have shown in us.
Sincerely,
Lawrence C. McQuade
President
Christian Smith
Portfolio Manager
-4-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their
investment portfolio. If you are contemplating putting cash into the
bond market -- in taxable or tax-exempt securities -- you might want to
consider some of the following points. We talked with Prudential Mutual
Funds chief fixed income strategist Dennis Bushe about why bonds and bond
mutual funds may make sense in today's investment environment.
Q. Why are bonds an attractive buy right now?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between 2.5%
and 3.0%. Today's investors receive over 4.5% in total inflation-adjusted,
annualized total return. Of course, these numbers are just for illustration,
but they show how much higher interest rates improve bond total returns when
inflation is only 2.7%, as measured by the Consumer Price Index. And beating
inflation is one primary goal of long-term investing.
Q. Why buy a bond fund instead of an individual bond?
A. One of the biggest risks to bond investing is credit quality. Of course
you can avoid virtually all credit risk in a government bond fund, but some
investors need higher income than Uncle Sam provides. Bond funds help manage
both this risk, and that may be especially important in 1995. First of all,
if the U.S. economy is beginning to slow down, as many economists believe,
then credit quality is a concern. A credit team becomes very valuable,
carefully selecting bonds in different sectors and industries for bond
portfolios. In addition, few individual investors have the resources or
clout to continually monitor companies, unearth possible credit problems
before they surface, and negotiate favorable terms with troubled
issuers -- a bond fund does. Finally, the diversification of a bond
fund may help investors avoid wide price swings if one holding does
experience financial difficulties.
-5-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
ARIZONA SERIES February 28, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--98.2%
Arizona St. Edl. Loan
Mkt. Corp.,
A $ 1,375 7.00%, 3/1/05, Ser. B... $ 1,448,906
Arizona St. Hsg. Fin.
Review Brd.,
Sngl. Fam. Mtge. Rev.,
10.625%, 12/1/02, Ser.
A-* 5 82.................... 5,182
Arizona St. Mun. Fin.
Proj.,
Cert. of Part.,
8.75%, 8/1/06,
Aaa 700 Ser. 15, B.I.G........ 740,691
7.875%, 8/1/14,
Aaa 2,250 Ser. 25, A.M.B.A.C.... 2,814,075
Arizona St. Trans. Brd.
Hwy. Rev.,
Aaa 2,000D 7.00%, 7/1/09........... 2,190,820
Aa 1,500D 6.00%, 7/1/10........... 1,578,795
Arizona St. Univ. Sys.
Rev.,
Aaa 1,000D 7.00%, 7/1/10, Ser. A... 1,112,850
Central Arizona Wtr.
Consv. Dist., Contract
Rev.,
A1 1,500D 7.50%, 11/1/05.......... 1,694,655
Chandler, Cap. Apprec.
Ref.,
Zero Coupon,
Aaa 2,000 7/1/02,F.G.I.C........ 1,344,780
4.375%, 7/1/13,
Aaa 500 F.G.I.C............... 413,740
Guam Pwr. Auth. Rev.,
Ser. A,
BBB* 250 6.625%, 10/1/14......... 251,687
BBB* 1,780 6.75%, 10/1/24.......... 1,797,658
La Paz Cnty., Unified
Sch. Dist.
No. 27, Parker Impvt.
Proj.,
Baa 450 9.40%, 7/1/96........... 472,518
Maricopa Cnty. Hosp.
Dist.
No. 1, Facs. Rev.,
East Valley Behavioral
Hlth. Fac. Proj.,
7.80%, 6/1/13,
Aaa 725D F.G.I.C............... 784,617
Maricopa Cnty. Ind. Dev.
Auth. Hosp. Fac. Rev.,
John C. Lincoln Hosp.,
7.00%, 12/1/00,
Aaa 2,000 F.S.A................. 2,166,600
Mercy Hlth.,
A1 525D 9.25%, 7/1/11, Ser. D... 544,115
A1 475 9.25%, 7/1/11, Ser. D... 490,514
Maricopa Cnty. Ind. Dev.
Auth. Hosp. Fac. Rev.,
Samaritan Hlth. Svcs.,
Aaa $ 285D 12.00%, 1/1/08.......... $ 331,170
Maricopa Cnty. Sch.
Dist.,
No. 41 Gilbert Proj.,
F.G.I.C.,
Aaa 1,500 Zero Coupon, 7/1/07..... 739,800
No. 40 Glendale Elem.
Sch.,
Zero Coupon, 7/1/04,
Aaa 2,810 A.M.B.A.C............. 1,680,436
No. 92 Pendergast Elem.
Sch.,
Zero Coupon, 7/1/04,
Aaa 1,140 F.G.I.C............... 681,743
No. 11 Peoria Unified
Sch. Dist.,
Zero Coupon, 7/1/04,
Aaa 1,500 M.B.I.A............... 903,570
No. 3 Tempe Elem. Sch.,
Zero Coupon, 7/1/09,
Aaa 1,500 A.M.B.A.C............. 643,395
Zero Coupon, 7/1/14,
Aaa 1,500 A.M.B.A.C............. 463,935
Maricopa Cnty. Unified
Sch. Dist.,
No. 80 Chandler,
Zero Coupon, 7/1/09,
Aaa 1,330 F.G.I.C............... 570,477
6.25%, 7/1/11,
Aaa 1,000 F.G.I.C............... 1,060,070
Navajo Cnty. Unified
Sch. Dist.,
No. 006 Herber
Overgaard,
7.25%, 7/1/00,
Aaa 250 A.M.B.A.C............. 271,970
7.35%, 7/1/03,
Aaa 300 A.M.B.A.C............. 329,970
Nogales Mun. Dev. Auth.
Rev.,
8.00%, 6/1/08,
Aaa 500D M.B.I.A............... 550,210
Peoria Bell Road Impvt.
Dist.,
BBB* 465 7.20%, 1/1/11........... 484,893
Phoenix Arpt. Rev. Ref.,
6.40%, 7/1/12, Ser. D,
Aaa 810 M.B.I.A............... 840,343
Phoenix St. & Hwy. Rev.,
6.25%, 7/1/06, Ser.
A1 1,480 92.................... 1,554,592
Zero Coupon, 7/1/12,
Aaa 3,000 F.G.I.C............... 1,054,650
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
Pima Cnty. Ind. Dev.
Auth.
Hlth. Care, Carondelet
Hosp.,
Aaa $ 895D 7.90%, 7/1/05........... $ 990,093
Aaa 105 7.90%, 7/1/05........... 113,794
Aaa 890D 8.00%, 7/1/13........... 987,259
Aaa 110 8.00%, 7/1/13........... 118,920
Pima Cnty. Ind. Dev.
Auth. Rev.,
Tucson Elec. Pwr. Co.,
7.25%, 7/15/10,
Aaa 2,700 F.S.A................. 2,944,809
Pima Cnty., Unified Sch.
Dist. No. 16, Catalina
Foothills,
Zero Coupon, 7/1/09,
Aaa 3,455 F.G.I.C............... 1,481,953
Puerto Rico Comnwlth.,
Gen. Oblig.,
5.78%, 7/1/08,
Aaa 2,000 M.B.I.A............... 2,028,860
Hwy. Auth. Rev.,
Baa1 490D 7.70%, 7/1/03, Ser. Q... 558,855
Puerto Rico Tel. Auth.
Rev.,
A 1,000 5.75%, 1/1/08, Ser. L... 988,730
Salt River Proj. Agric.
Impvt. & Pwr. Dist.,
Elec. Sys. Rev.,
Aa 500 5.75%, 1/1/20, Ser. C... 476,175
Santa Cruz Cnty.,
Unified
Sch. Dist. No. 1
Nogales,
Cruz Cnty.,
A.M.B.A.C.,
Aaa 770 Zero Coupon, 1/1/06..... 417,771
Aaa 700 Zero Coupon, 7/1/06..... 369,236
Scottsdale Ind. Dev.
Auth. Rev.,
Mem. Hosp., Ser. A,
8.50%, 9/1/07,
Aaa 2,100 A.M.B.A.C............. 2,304,666
Scottsdale, Gen. Oblig.,
Aa1 500 5.50%, 7/1/09........... 488,810
Aa1 1,000D 6.00%, 7/1/10........... 1,058,750
Aa1 1,000 4.00%, 7/1/13, Ser. D... 750,090
Tempe, Gen. Oblig.,
Aa $ 500 5.25%, 7/1/13........... $ 460,155
Tempe Impvt. Dist. Auth.
Rev.,
Papago Park Ctr.,
Dist. No. 166,
A1 500 7.10%, 1/1/06........... 520,855
Tempe Union High Sch.
Dist.
No. 213, Ref.,
7.00%, 7/1/08,
Aaa 1,000 F.G.I.C............... 1,142,420
Tolleson Mun. Fin. Corp.
Rev.,
Citizen Util. Co.,
AAA* 400 9.20%, 9/1/05........... 415,708
Tucson Wtr. Rev.,
Aaa 1,000 8.60%, 7/1/00, E.T.M.... 1,160,480
A1 1,000 5.50%, 7/1/09........... 959,690
7.00%, 7/1/10, Ser. C,
Aaa 500 M.B.I.A............... 528,625
Univ. Arizona Revs.
Sys.,
A1 1,750 6.25%, 6/1/11, Ser. B... 1,809,377
Virgin Islands Pub. Fin.
Auth. Rev.,
Hwy. Trans. Trust Fund,
7.25%, 10/1/18, Ser.
NR 600 A..................... 619,596
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
7.75%, 10/1/06, Ser.
NR 440 91.................... 471,412
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser. A... 521,050
-----------
Total long-term
investments
(cost $52,844,973).... 56,701,566
-----------
</TABLE>
-7- See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--0.9%
Goodyear, Gen. Oblig.,
Baa1 $ 100 10.00%, 7/1/95.......... $ 101,722
Pinal Cnty. Ind. Dev.
Auth.
Hlth. Care, Ctrl.
Rev.,
3.75%, 3/1/95,
P-1 400 F.R.D.D............... 400,000
-----------
Total short-term
investments
(cost $499,625)....... 501,722
-----------
Total Investments--99.1%
(cost $53,344,598; Note
4).................... 57,203,288
Other assets in excess
of
liabilities--0.9%..... 520,107
-----------
Net Assets--100%........ $57,723,395
-----------
-----------
</TABLE>
(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.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's rating.
D Prerefunded issues are secured by escrowed cash
and/or
direct U.S. guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a
description of Moody's and Standard & Poor's ratings.
-8- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1995
-----------------
<S> <C>
Investments, at value (cost $53,344,598)............................................... $57,203,288
Cash................................................................................... 43,491
Interest receivable.................................................................... 680,074
Receivable for Fund shares sold........................................................ 3,000
Other assets........................................................................... 1,311
-----------------
Total assets......................................................................... 57,931,164
-----------------
Liabilities
Payable for Fund shares reacquired..................................................... 138,448
Management fee payable................................................................. 19,747
Dividends payable...................................................................... 18,117
Accrued expenses....................................................................... 15,453
Distribution fee payable............................................................... 14,704
Deferred trustee fees.................................................................. 1,300
-----------------
Total liabilities.................................................................... 207,769
-----------------
Net Assets............................................................................. $57,723,395
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 49,910
Paid-in capital in excess of par..................................................... 54,670,230
-----------------
54,720,140
Accumulated net realized loss on investments......................................... (855,435)
Net unrealized appreciation of investments........................................... 3,858,690
-----------------
Net assets, February 28, 1995........................................................ $57,723,395
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($28,386,321 / 2,453,723 shares of beneficial interest issued and outstanding)..... $11.57
Maximum sales charge (3.0% of offering price)........................................ .36
-----------------
Maximum offering price to public..................................................... $11.93
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($29,326,585 / 2,536,383 shares of beneficial interest issued and outstanding)..... $11.56
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($10,489 / 907 shares of beneficial interest issued and outstanding)............... $11.56
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1995
----------------
<S> <C>
Income
Interest............................ $1,878,628
----------------
Expenses
Management fee, net waiver of
$4,575.............................. 137,284
Distribution fee--Class A........... 4,856
Distribution fee--Class B........... 117,553
Distribution fee--Class C........... 35
Custodian's fees and expenses....... 39,000
Transfer agent's fees and
expenses............................ 16,000
Registration fees................... 16,000
Reports to shareholders............. 13,000
Audit fee........................... 5,300
Legal fees.......................... 5,000
Trustees' fees...................... 1,600
Miscellaneous....................... 5,304
----------------
Total expenses.................... 360,932
----------------
Net investment income................. 1,517,696
----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions............. (402,508)
Financial futures contract
transactions........................ (136,439)
----------------
(538,947)
----------------
Net change in unrealized
appreciation/depreciation of:
Investments......................... 625,007
Financial futures contracts......... 23,750
----------------
648,757
----------------
Net gain on investments............... 109,810
----------------
Net Increase in Net Assets
Resulting from Operations............. $1,627,506
----------------
----------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 1,517,696 $ 3,162,438
Net realized gain (loss)
on investment
transactions.......... (538,947) 757,503
Net change in unrealized
appreciation/depreciation
of investments........ 648,757 (4,585,506)
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ 1,627,506 (665,565)
------------ ------------
Dividends and distributions (Note 1):
Dividends from net
investment income
Class A............... (282,644) (386,495)
Class B............... (1,234,816) (2,775,943)
Class C............... (236) --
------------ ------------
(1,517,696) (3,162,438)
------------ ------------
Distributions from net realized gains
Class A............... (36,415) (74,328)
Class B............... (254,495) (618,468)
Class C............... (52) --
------------ ------------
(290,962) (692,796)
------------ ------------
Series share transactions
(net of share
conversions) (Note 5):
Net proceeds from shares
sold.................. 3,206,642 10,037,346
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 962,676 2,064,510
Cost of shares
reacquired.............. (6,043,600) (11,709,424)
------------ ------------
Net increase (decrease)
in net assets from
Series share
transactions.......... (1,874,282) 392,432
------------ ------------
Total decrease............ (2,055,434) (4,128,367)
Net Assets
Beginning of period....... 59,778,829 63,907,196
------------ ------------
End of period............. $ 57,723,395 $ 59,778,829
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-10-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Arizona Series (the "Series") commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in "investment grade" tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series 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 poli-
cies followed by the Fund, and the Series, 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 Trustees.
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.
All securities are valued as of 4:15 P.M., New York time.
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 Series 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 Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain(loss) on financial futures contracts. The Series invests in financial
futures contracts in order to hedge its existing portfolio securities or
securities the Series intends to purchase, against fluctuations in value caused
by changes in prevailing interest rates. Should interest rates move
unexpectedly, the Series 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of 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: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series 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
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
-11-
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
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 1% of the average daily net assets of the Series.
Effective January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the
Series' average daily net assets) of its management fee, which amounted to
$4,575 ($0.001 per share for Class A, B and C shares; .02% of average net
assets). The Series' is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively
the "Distributors"). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the "Class A, B and C Plans"), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the six months ended February 28, 1995.
PMFD has advised the Series that it has received approximately $65,900 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1995. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the six months ended February 28, 1995,
it received approximately $34,900 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. ("PMFS"), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1995, the Series incurred fees of
approximately $11,400 for the services of PMFS. As of February 28, 1995,
approximately $2,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1995 were $7,663,280 and $9,839,080, respectively.
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of February 28, 1995, net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes is $3,858,690 (gross
unrealized appreciation--$4,223,613 gross unrealized depreciation--$364,923).
Note 5. Capital The Series offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 3.0%. 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. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
-12-
<PAGE>
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1995 and the fiscal year ended
August 31, 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28, 1995:
Shares sold................... 30,755 $ 345,119
Shares issued in reinvestment
of dividends and
distributions............... 19,309 217,346
Shares reacquired............. (101,135) (1,128,211)
---------- ------------
Net decrease in shares
outstanding before
conversion.................. (51,071) (565,746)
Shares issued upon conversion
from Class B................ 1,842,385 20,984,765
---------- ------------
Net increase in shares
outstanding................. 1,791,314 $ 20,419,019
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold................... 156,225 $ 1,879,629
Shares issued in reinvestment
of dividends and
distributions............... 29,257 350,410
Shares reacquired............. (55,416) (665,858)
---------- ------------
Net increase in shares
outstanding................. 130,066 $ 1,564,181
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28, 1995:
Shares sold................... 253,915 $ 2,851,515
Shares issued in reinvestment
of dividends and
distributions............... 66,646 745,052
Shares reacquired............. (439,506) (4,915,389)
---------- ------------
Net decrease in shares
outstanding before
conversion.................. (118,945) (1,318,827)
Shares reacquired upon
conversion into Class A..... (1,842,385) (20,984,765)
---------- ------------
Net decrease in shares
outstanding................. (1,961,330) $(22,303,587)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold................... 679,458 $ 8,157,517
Shares issued in reinvestment
of dividends and
distributions............... 142,601 1,714,100
Shares reacquired............. (930,146) (11,043,566)
---------- ------------
Net decrease in shares
outstanding................. (108,087) $ (1,171,949)
---------- ------------
---------- ------------
<CAPTION>
Class C
------------------------------
<S> <C> <C>
Six months ended February 28, 1995:
Shares sold................... 865 $ 10,008
Shares issued in reinvestment
of dividends and
distributions............... 25 278
---------- ------------
Net increase in shares
outstanding................. 890 $ 10,286
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold................... 17 $ 200
---------- ------------
Net increase in shares
outstanding................. 17 $ 200
---------- ------------
---------- ------------
</TABLE>
---------------
* Commencement of offering of Class C shares.
-13-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------
January 22,
Six Months 1990D
Ended Year Ended August 31, through
February 28, --------------------------------------- August 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
------------ ------ ------ ------ ------ -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 11.59 $12.44 $11.88 $11.32 $10.80 $ 10.99
------------ ------ ------ ------ ------ -----------
Income from investment operations
Net investment income..................... .32@ .65 .67 .68 .69 .42
Net realized and unrealized gain (loss) on
investment transactions................. .04 (.72) .68 .56 .52 (.19)
------------ ------ ------ ------ ------ -----------
Total from investment operations........ .36 (.07) 1.35 1.24 1.21 .23
------------ ------ ------ ------ ------ -----------
Less distributions
Dividends from net investment income...... (.32) (.65) (.67) (.68) (.69) (.42)
Distributions from net realized gains..... (.06) (.13) (.12) -- -- --
------------ ------ ------ ------ ------ -----------
Total distributions..................... (.38) (.78) (.79) (.68) (.69) (.42)
------------ ------ ------ ------ ------ -----------
Net asset value, end of period............ $ 11.57 $11.59 $12.44 $11.88 $11.32 $ 10.80
------------ ------ ------ ------ ------ -----------
------------ ------ ------ ------ ------ -----------
TOTAL RETURN#:............................ 3.26% (.59)% 11.79% 11.23% 11.45% 2.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $28,386 $7,675 $6,622 $2,146 $1,508 $436
Average net assets (000).................. $9,794 $7,141 $3,613 $1,758 $937 $260
Ratios to average net assets:
Expenses, including distribution fees... .95%*@ .89% .92% 1.02% 1.02% .96%*
Expenses, excluding distribution fees... .85%*@ .79% .82% .92% .92% .86%*
Net investment income................... 5.82%*@ 5.40% 5.58% 5.81% 6.13% 6.36%*
Portfolio turnover rate................... 14% 33% 14% 42% 25% 49%
</TABLE>
---------------
* Annualized.
D 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.
@ Net of management fee waiver.
See Notes to Financial Statements.
-14-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------------- Class C
Six ------------
Months
Ended Six Months
February Year Ended August 31, Ended
28, ------------------------------------------------------- February 28,
1995 1994 1993 1992 1991 1990 1995
<S> <C> <C> <C> <C> <C> <C> <C>
-------- ------- ------- ------- ------- ------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 11.58 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $11.58
-------- ------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income..................... .30 @ .60 .62 .63 .64 .65 .29@
Net realized and unrealized gain (loss) on
investment transactions................. .04 (.73) .69 .55 .52 (.17) .04
-------- ------- ------- ------- ------- ------- ------
Total from investment operations........ .34 (.13) 1.31 1.18 1.16 .48 .33
-------- ------- ------- ------- ------- ------- ------
Less distributions
Dividends from net investment income...... (.30) (.60) (.62) (.63) (.64) (.65) (.29)
Distributions from net realized gains..... (.06) (.13) (.12) -- -- -- (.06)
-------- ------- ------- ------- ------- ------- ------
Total distributions..................... (.36) (.73) (.74) (.63) (.64) (.65) (.35)
-------- ------- ------- ------- ------- ------- ------
Net asset value, end of period............ $ 11.56 $ 11.58 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $11.56
-------- ------- ------- ------- ------- ------- ------
-------- ------- ------- ------- ------- ------- ------
TOTAL RETURN#:............................ 3.08% (1.08)% 11.42% 10.68% 11.02% 4.49% 2.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $29,327 $52,104 $57,286 $51,697 $57,209 $59,216 $10
Average net assets (000).................. $47,411 $55,526 $53,656 $53,477 $58,973 $60,359 $9
Ratios to average net assets:
Expenses, including distribution fees... 1.34%*@ 1.29% 1.32% 1.42% 1.41% 1.30% 1.60%*@
Expenses, excluding
distribution fees..................... .84%*@ .79% .82% .92% .91% .82% .85%*@
Net investment income................... 5.25%*@ 5.40% 5.18% 5.42% 5.77% 5.99% 5.08%*@
Portfolio turnover rate................... 14% 33% 14% 42% 25% 49% 14%
<CAPTION>
August 1,
1994D
through
August 31,
1994
<S> <C>
-----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 11.60
-----------
Income from investment operations
Net investment income..................... .04
Net realized and unrealized gain (loss) on
investment transactions................. (.02)
-----------
Total from investment operations........ .02
-----------
Less distributions
Dividends from net investment income...... (.04)
Distributions from net realized gains..... --
-----------
Total distributions..................... (.04)
-----------
Net asset value, end of period............ $ 11.58
-----------
-----------
TOTAL RETURN#:............................ 0.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $200@@
Average net assets (000).................. $199@@
Ratios to average net assets:
Expenses, including distribution fees... 1.90%*
Expenses, excluding
distribution fees..................... 1.14%*
Net investment income................... 6.34%*
Portfolio turnover rate................... 33%
</TABLE>
---------------
* Annualized.
D Commencement of offering of Class C 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.
@ Net of management fee waiver.
@@ Figures are actual and not rounded to the nearest thousand.
See Notes to Financial Statements.
-15-
<PAGE>
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
The accompanying financial statements as of February 28, 1995, were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
74435M101 MF117E2
74435M200 (LOGO) Cat. #6426313
74435M598
<PAGE>
SEMI ANNUAL REPORT February 28, 1995
Prudential
Municipal
Series Fund
-------------------------
(ICON)
Georgia Series
(LOGO)
<PAGE>
Letter to Shareholders
April 3, 1995
Dear Shareholder:
A powerful rally swept through the tax-exempt municipal bond market this
winter, lifting the value of your shares as interest rates fell and
newly-issued tax-exempt bonds have become scarce. We are pleased to
report that your Prudential Municipal Series Fund -- Georgia Series has
earned a positive total return, performing better than the average Georgia
municipal bond fund as measured by Lipper Analytical Services, Inc.
Less Means More...
For You!
Prudential mutual fund shareholders will be
seeing total returns increase in the months
to come, thanks to a reduction in Fund management
expenses. Prudential Mutual Funds lowered the
rate on January 1, 1995, to 0.45% from 0.50%.
It is our way of showing you that we appreciate
your business and that we remain committed to
managing the Fund for your benefit.
<TABLE>
CUMULATIVE TOTAL RETURNS1
As of February 28, 1995
<CAPTION>
Six Months 1 Year 5 Years 10 Years Since Inception2
<S> <C> <C> <C> <C> <C>
Class A 3.1% 1.2% 41.9% N/A 42.5%
Class B 2.8% 0.7% 38.9% 118.9% 133.2%
Class C 2.6% N/A N/A N/A 2.5%
Lipper GA
Muni. Avg3 2.4% 0.4% 42.2% 118.7% 129.8%
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS1
As of March 31, 1995
<CAPTION>
1 Year 5 Years 10 Years Since Inception2
<S> <C> <C> <C> <C>
Class A 3.3% 6.8% N/A 6.6%
Class B 1.0% 6.9% 8.2% 8.5%
Class C N/A N/A N/A 2.3%
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
1 Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account
sales charges. The average annual returns do take into account applicable
sales charges. The Series charges a maximum front-end sales load of 3%
for Class A shares. Class B shares are subject to a contingent deferred
sales charge of 5%, 4%, 3%, 2%, 1% and 1% for six years. Class C shares
have a 1% CDSC for one year. Class B shares will automatically convert
to Class A shares on a quarterly basis, after approximately seven years.
2Inception dates: 1/22/90 Class A; 9/25/84 Class B; 8/1/94 Class C.
3Lipper average returns are for 26 funds for six months, 22 funds for one
year, 6 funds for five years, 1 funds for 10 years, and 1 funds since
inception of Class B shares on 9/25/84.
-1-
<PAGE>
Our Objective.
The Series seeks maximum income exempt from Georgia state and federal income
taxes consistent with preservation of capital. Certain shareholders may be
subject to the federal alternative minimum tax. The Series will invest
primarily in Georgia state, municipal and local government obligations and
obligations of U.S. territories (such as Puerto Rico, the U.S. Virgin Islands
and Guam), the income from which is also exempt from federal and Georgia
state income taxes.
New Year Opens With Bond Rally.
What a difference six months can make! When we last reported to you, the
tax-exempt bond market was in turmoil because interest rates were rising
sharply, and prices (which move in the opposite direction of interest rates)
were falling sharply.
Volatility escalated last year when the Federal Reserve started to increase
short-term interest rates in a pre-emptive strike against inflation. By
November, after the Federal Reserve's sixth increase in the federal funds
rate (the interbank overnight lending rate), investors began to believe that
the economy was showing signs of slowing. As a result, long-term interest
rates in the tax-exempt bond market started to fall.
Long-term rates fell dramatically, and have continued to do so even though
the Federal Reserve raised short-term rates again on February 1, 1995. In
fact, on March 2, the Bond Buyer's Revenue Bond Index sank to 6.3% -- its
lowest since last June. That's more than a full percentage point below its
1994 high -- 7.4% recorded on November 17, 1994.
On the Hill:
In 1995, Congress will most likely consider an
initiative that would restore full income
tax deductibility for individual retirement
account (IRA) contributions for middle-income
wage earners. In addition, Congress may also
consider the creation of a new tax-deferred
savings account called the "American Dream Savings
Account." Prudential Mutual Funds supports both
of these proposals, and we urge you to share
your opinion with your Congressional representatives.
We will keep you updated on these initiatives as
they make their way through the legislative process.
What We Did As Interest Rates Moved.
During this period of fluctuation, the Series sought to stabilize asset
values by maintaining a balance between bonds with higher coupons and
those with lower coupons, sometimes called premium and discount bonds.
The higher yielding premium bonds help cushion the impact of rising
interest rates while the lower coupon or discount bonds offer price
appreciation potential when interest rates decline.
-2-
<PAGE>
Smaller Supply Supports Market, Too.
The tax-exempt municipal bond market has also been helped recently by a
scarcity of new supply. Last year's higher interest rates made many
issuers reluctant to borrow money. In fact, the Revenue Bond Index
rose dramatically to 6.9% from 5.5% -- nearly one and a half percentage
points. As a result, the level of new bonds issued nationwide fell by
44% and in Georgia by 38%.
As bond prices fell late last year, the Series looked for bargains, and
then put its cash to work, reducing cash as a percentage of assets to
virtually zero from 4%. In addition, the Series sold its housing bonds,
because they were expected to decline in value because supply would
increase, and purchased revenue bonds in the health care sector because
supply of hospital bonds was decreasing.
A Tax Reminder...
As a result of the Revenue Reconciliation Act
of 1993, it is possible that this year you may
have some taxable income from your normally
tax-exempt municipal bond fund. The law stipulates
that the portion of any gain realized on the sale
or retirement of a tax-exempt bond purchased at
a market discount to its face value may be taxed
as ordinary income. The law affects bonds
purchased after April 30, 1993.
Georgia: A Winner Prepares for the 1996 Olympics.
Georgia is among the states with the highest credit ratings, and it
continues to enjoy stable economic growth. Its economy is well diversified
among the manufacturing, trade and service sectors. Much of the state's
growth has been focused on Atlanta, where the 1996 Olympic Games will
be played.
The state's budget has been quite stable as well. A lottery approved by
voters in 1992 was so successful that it netted $360 million in 1994, far
more than double the $139 million projected. The proceeds will help finance
education. The state's budget is balanced, and is healthy enough to fund
new programs and prisons. In fact, income tax cuts and the exemption of
food from the sales tax may be considered this year. This favorable budget
outlook makes bonds that can be repaid with state appropriations
more attractive.
The Outlook.
Tax-exempt municipal bonds have rallied substantially this winter. In fact,
the Lehman Brothers Municipal Bond Index has increased 2.8% over the last
six months. That is a substantial relief to investors who weathered sharply
rising interest rates and falling bond prices in 1994.We expect long-term
interest rates to stabilize in the year ahead, as investors continue to
gain confidence that the Federal Reserve is satisfied that it has inflation
under control. In addition, we believe the supply of tax-exempt municipals
will continue to contract, which should also provide an additional reward
to investors by supporting prices.
-3-
<PAGE>
As always, it is a pleasure to work for you. We thank you for remaining
with the Prudential Municipal Series Fund -- Georgia Series through a
most difficult 1994. We appreciate the confidence you have shown in us.
Fund Update
Starting in February 1995, Class B shareholders
may have begun to notice a change in their
Fund holdings. That's when Class B shares
began to automatically convert to Class A
shares, on a quarterly basis, approximately
seven years after purchase. As you may know,
Class A shares generally carry lower annual
distribution expenses than Class B shares.
Accordingly, after conversion you will earn
higher total returns on your investment than
you would have as a Class B shareholder.
Following the May cycle, conversions of eligible
Class B shares and special exchanges of Class B
and C shares will take place each calendar quarter
(March, June, September and December) starting in
September 1995.
Sincerely,
Lawrence C. McQuade
President
Marie Conti
Portfolio Manager
-4-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their
investment portfolio. If you are contemplating putting cash into the
bond market -- in taxable or tax-exempt securities -- you might want
to consider some of the following points. We talked with Prudential
Mutual Funds chief fixed income strategist Dennis Bushe about why bonds
and bond mutual funds may make sense in today's investment environment.
Q. Why are bonds an attractive buy right now?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between
2.5% and 3.0%. Today's investors receive over 4.5% in total inflation-
adjusted, annualized total return. Of course, these numbers are just for
illustration, but they show how much higher interest rates improve bond
total returns when inflation is only 2.7%, as measured by the Consumer
Price Index. And beating inflation is one primary goal of long-term
investing.
Q. Why buy a bond fund instead of an individual bond?
A. One of the biggest risks to bond investing is credit quality. Of
course you can avoid virtually all credit risk in a government bond fund,
but some investors need higher income than Uncle Sam provides. Bond funds
help manage this risk, and that may be especially important in 1995. First
of all, if the U.S. economy is beginning to slow down, as many economists
believe, then credit quality is a concern. A credit team becomes very
valuable, carefully selecting bonds in different sectors and industries
for bond portfolios. In addition, few individual investors have the
resources or clout to continually monitor companies, unearth possible
credit problems before they surface, and negotiate favorable terms with
troubled issuers -- a bond fund does. Finally, the diversification of
a bond fund may help investors avoid wide price swings if one holding
does experience financial difficulties.
-5-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
GEORGIA SERIES February 28, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--98.2%
Atlanta, Gen. Oblig.,
Aa $ 585 7.10%, 12/1/10.......... $ 644,325
Atlanta Urban Res. Fin.
Auth.,
Clark Atlanta Univ.
Dorm. Proj.,
NR 935D 9.25%, 6/1/10........... 1,131,032
Atlanta Wtr. & Swr.
Rev.,
Aa 500 4.75%, 1/1/23........... 407,210
Burke Cnty. Dev. Auth.,
Georgia Pwr. Co.,
Aaa 500 6.625%, 10/1/24......... 512,945
Clarke Cnty. Sch. Dist.,
Aaa 425 5.50%, 7/1/08,
F.G.I.C............... 418,260
Clayton Cnty. Wtr.
Auth.,
Wtr. & Sewage Rev.,
Aaa 500D 6.65%, 5/1/12........... 548,880
Cobb Cnty. Kennestone
Hosp.,
Auth. Rev.,
5.00%, 4/1/24, Ser. A,
M.B.I.A............... 632,895
Aaa 750
Columbus Hosp. Auth.
Rev.,
Antic. Cert., St.,
Francis Hosp.,
Aaa 500D 8.25%, 1/1/07, B.I.G.... 540,000
DeKalb Cnty. Wtr. & Swr.
Rev.,
Aa 750 5.25%, 10/1/23.......... 666,030
DeKalb Private Hosp.
Auth. Rev.,
Wesley Svcs. Inc.
Proj.,
Aa3 500 8.25%, 9/1/15........... 526,200
Douglasville-Douglas
Cnty.
Wtr. & Swr. Auth.
Rev.,
Aaa 750 5.625%, 6/1/15,
A.M.B.A.C............. 719,730
Forsyth Cnty. Sch. Dist.
Dev. Rev.,
A1 500 6.75%, 7/1/16, Ser. A... 548,570
Fulco Hosp. Auth. Rev.,
Antic.
Cert., Baptist Hlth.,
Baa1 750 6.375%, 9/1/22, Ser.
B..................... 648,465
Shepherd Spinal Ctr.
Proj.,
Aa3 750 7.75%, 10/1/08, Ser.
A..................... 790,140
Fulton Cnty. Bldg. Auth. Rev.,
Human Res. & Gov't. Facs. Proj.,
Aa $ 250 7.00%, 1/1/10........... $ 269,790
Judicial Ctr. Proj.,
Aa 1,325 Zero Coupon, 1/1/11..... 524,196
Fulton Cnty. Sch. Dist.
Rev.,
Lindbrook Square
Fndtn.,
Aa 750@ 6.375%, 5/1/17.......... 804,315
Georgia Metro. Atl.
Rapid Trans. Auth.
Rev.,
Aaa 500 6.90%, 7/1/20........... 536,155
Georgia Mun. Elec. Auth.
Pwr.
Rev. Ref.,
A1 250 5.30%, 1/1/07, Ser. Z... 234,890
A1 250 6.00%, 1/1/14, Ser. A... 246,095
A1 475 6.25%, 1/1/17, Ser. B... 485,222
Georgia Mun. Gas Auth.
Rev.,
Southern Storage Gas
Proj.,
A-* 600 6.40%, 7/1/14........... 593,370
Green Cnty. Dev. Auth.,
Ind. Park Rev.,
NR 635 6.875%, 2/1/04.......... 688,442
Hancock County Georgia,
AA* 500 6.70%, 4/1/15........... 518,580
Henry Cnty. Sch. Dist.
Dev. Rev.,
A 750 6.45%, 8/1/11, Ser. A... 787,297
Houston Cnty. Georgia
Sch. Dist.,
Intergovernmental
Contract Trust,
Aaa 250 6.00%, 3/1/14,
M.B.I.A............... 251,598
Marietta Dev. Auth.
Rev.,
Life Coll. Inc. Proj.,
Aaa 500 7.20%, 12/1/09,
C.G.I.C............... 538,460
Peach Cnty. Sch. Dist.,
Aaa 500 6.40%, 2/1/19,
M.B.I.A............... 515,970
Puerto Rico Comnwlth.,
Gen Oblig.,
Aaa 750 5.50%, 7/1/13,
M.B.I.A............... 725,550
Aaa 450DD 7.382%, 7/1/20,
F.S.A................. 429,750
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
Savannah Hosp. Auth.
Rev.,
Candler Hosp.,
Baa $ 500 7.00%, 1/1/23........... $ 481,025
Toombs Cnty. Hosp.,
Dr. John Meadows Mem.
Hosp.,
BBB* 500 7.00%, 12/1/17.......... 478,055
Virgin Islands Pub. Fin.
Auth.
Rev., Hwy. Trans.
Trust Fund,
NR 200 7.25%, 10/1/18, Ser.
A..................... 206,532
-----------
Total Investments--98.2%
(cost $17,427,804; Note
4).................... 18,049,974
Other assets in excess
of
liabilities--1.8%..... 324,032
-----------
Net Assets--100%........ $18,374,006
-----------
-----------
</TABLE>
(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.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
* Standard & Poor's rating.
@ Pledged as initial margin on futures contracts.
D Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
DD Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1995
-----------------
<S> <C>
Investments, at value (cost $17,427,804)............................................... $18,049,974
Cash................................................................................... 41,387
Interest receivable.................................................................... 305,359
Deferred expenses and other assets..................................................... 594
-----------------
Total assets....................................................................... 18,397,314
-----------------
Liabilities
Management fee payable................................................................. 6,288
Dividends payable...................................................................... 5,967
Distribution fee payable............................................................... 4,538
Due to broker-variation margin......................................................... 2,250
Accrued expenses....................................................................... 2,186
Deferred trustee's fees................................................................ 1,300
Payable for Series shares reacquired................................................... 779
-----------------
Total liabilities.................................................................. 23,308
-----------------
Net Assets............................................................................. $18,374,006
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 16,369
Paid-in capital in excess of par..................................................... 17,840,278
-----------------
17,856,647
Accumulated net realized loss on investments......................................... (74,248)
Net unrealized appreciation on investments........................................... 591,607
-----------------
Net assets, February 28, 1995........................................................ $18,374,006
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($10,012,285 / 891,724 shares of beneficial interest issued and outstanding)....... $11.23
Maximum sales charge (3.0% of offering price)........................................ .35
-----------------
Maximum offering price to public..................................................... $11.58
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($8,361,519 / 745,122 shares of beneficial interest issued and outstanding)........ $11.22
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($202 / 18 shares of beneficial interest issued and outstanding)................... $11.22
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income February 28, 1995
-----------------
<S> <C>
Income
Interest........................... $ 627,125
-----------------
Expenses
Management fee (net of fee waiver
of $1,456)......................... 45,073
Distribution fee--Class A.......... 1,063
Distribution fee--Class B.......... 41,213
Distribution fee--Class C.......... 1
Custodian's fees and expenses...... 32,000
Registration fees.................. 14,000
Reports to shareholders............ 12,000
Transfer agent's fees and
expenses........................... 8,000
Audit fee.......................... 5,300
Legal fees......................... 5,000
Trustees' fees..................... 1,600
Miscellaneous...................... 2,627
-----------------
Total expenses................... 167,877
Less: expense subsidy (Note 5)....... (6,080)
-----------------
Net expenses....................... 161,797
-----------------
Net investment income................ 465,328
-----------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ (70,082)
Financial futures transactions..... 68,524
-----------------
(1,558)
-----------------
Net change in unrealized appreciation
on:
Investments........................ (8,530)
Financial futures contracts........ (47,719)
-----------------
(56,249)
-----------------
Net loss on investments.............. (57,807)
-----------------
Net Increase in Net Assets
Resulting from Operations............ $ 407,521
-----------------
-----------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1995 1994
------------ -----------
<S> <C> <C>
Operations
Net investment income... $ 465,328 $ 982,702
Net realized loss on
investment
transactions.......... (1,558) (3,540)
Net change in unrealized
appreciation of
investments........... (56,249) (1,407,842)
------------ -----------
Net increase (decrease)
in net assets
resulting from
operations............ 407,521 (428,680)
------------ -----------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A............... (60,081) (55,820)
Class B............... (405,243) (926,882)
Class C............... (4) --
------------ -----------
(465,328) (982,702)
------------ -----------
Distributions from net
realized gains
Class A............... -- (15,680)
Class B............... -- (302,050)
------------ -----------
-- (317,730)
------------ -----------
Series share transactions
(net of
share conversion) (Note
6)
Net proceeds from shares
sold.................. 565,062 3,261,528
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 302,268 863,092
Cost of shares
reacquired............ (3,138,928) (3,609,847)
------------ -----------
Net increase (decrease)
in net assets from
Series share
transactions.......... (2,271,598) 514,773
------------ -----------
Total decrease............ (2,329,405) (1,214,339)
Net Assets
Beginning of period....... 20,703,411 21,917,750
------------ -----------
End of period............. $ 18,374,006 $20,703,411
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Georgia Series (the "Series") commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in "investment grade" tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting pol-
icies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Series 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 Trustees.
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.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series 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 Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of 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: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series 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
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
-10-
<PAGE>
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a manage-
ment 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 1% of the average daily net assets of the Series.
Effective January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the
Series' average daily net assets) of its management fee, which amounted to
$1,456 ($0.001 per share). The Series is not required to reimburse PMF for such
waiver.
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 and Class C shares of the Fund (collectively
the "Distributors"). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution, (the "Class A, B and C Plans") regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the six months ended February 28, 1995.
PMFD has advised the Series that it has received approximately $4,400 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1995. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the six months ended February 28, 1995,
it received approximately $71,100 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. ("PMFS"), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1995, the Series incurred fees of
approximately $7,000 for the services of PMFS. As of February 28, 1995,
approximately $1,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1995 were $1,497,595 and $3,506,800, respectively.
The cost basis of investments for federal income tax purposes at February 28,
1995 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes is $622,170 (gross unrealized appreciation--$907,300, gross
unrealized depreciation--$285,130).
At February 28, 1995, the Series sold 6 financial futures contracts on the
Municipal Bond Index expiring in March 1995. The value at disposition of such
contracts was $593,250. The value of such contracts on February 28, 1995 was
$623,813, thereby resulting in an unrealized loss of $30,563.
The Fund elected to treat net capital losses of approximately $45,000
incurred in the ten month period ended August 31, 1994 as having occurred in the
current fiscal year.
Note 5. Expense Beginning January 1, 1995,
Subsidy PMF has agreed to subsidize
expenses so that total Series' operating expenses
do not exceed 1.35%, 1.75% and 2.00% of the average daily net assets of the
Class A, Class
-11-
<PAGE>
B and Class C shares, respectively. Prior to January 1, 1995, PMF subsidized
1.40%, 1.80% and 2.05% of the average daily net assets of the Class A, Class B
and Class C shares, respectively. For the six months ended February 28, 1995,
PMF subsidized $6,080 ($0.004 per share; 0.06% of average net assets) of the
Series' expenses.
Note 6. Capital The Series currently offers
Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 3.0%. 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. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Commencing
in February 1995, Class B shares automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the six months ended
February 28, 1995 and the fiscal year ended August 31, 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------ ---------- ------------
<S> <C> <C>
Six months ended
February 28, 1995:
Shares sold................... 4,728 $ 50,728
Shares issued in reinvestment
of
dividends................... 3,314 36,425
Shares reacquired............. (22,535) (238,098)
---------- ------------
Net decrease in shares
outstanding before
conversion.................. (14,493) (150,945)
Shares issued upon conversion
from Class B................ 800,662 8,855,319
---------- ------------
Net increase in shares
outstanding................. 786,169 $ 8,704,374
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold................... 40,971 $ 479,185
Shares issued in reinvestment
of
dividends and
distributions............... 3,476 40,440
Shares reacquired............. (30,202) (352,696)
---------- ------------
Net increase in shares
outstanding................. 14,245 $ 166,929
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
------------------------------ ---------- ------------
<S> <C> <C>
Six months ended
February 28, 1995:
Shares sold................... 47,971 $ 514,334
Shares issued in reinvestment
of
dividends................... 24,776 265,841
Shares reacquired............. (271,182) (2,900,830)
---------- ------------
Net decrease in shares
outstanding before
conversion.................. (198,435) (2,120,655)
Shares reacquired upon
conversion into Class A..... (800,662) (8,855,319)
---------- ------------
Net decrease in shares
outstanding................. (999,097) $(10,975,974)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold................... 237,894 $ 2,782,143
Shares issued in reinvestment
of
dividends and
distributions............... 70,614 822,652
Shares reacquired............. (281,823) (3,257,151)
---------- ------------
Net increase in shares
outstanding................. 26,685 $ 347,644
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class C
------------------------------
<S> <C> <C>
Six months ended
February 28, 1995:
Shares issued in reinvestment
of
dividends................... -- $ 2
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold................... 18 $ 200
---------- ------------
---------- ------------
---------------
* Commencement of offering of Class C shares.
</TABLE>
-12-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------
January 22,
Six Months 1990DD
Ended Year Ended August 31, Through
February 28, --------------------------------------- August 31,
1995 1994 1993 1992 1991 1990
------------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 11.19 $12.12 $11.69 $11.39 $11.05 $ 11.26
------------ ------ ------ ------ ------ -----------
Income from investment operations
Net investment income........................ .28D .57 .62 .65D .64 .41
Net realized and unrealized gain (loss) on
investment
transactions............................... .04 (.76) .85 .54 .43 (.21)
------------ ------ ------ ------ ------ -----------
Total from investment operations........... .32 (.19) 1.47 1.19 1.07 .20
------------ ------ ------ ------ ------ -----------
Less distributions
Dividends from net investment income......... (.28) (.57) (.62) (.65) (.64) (.41)
Distributions from net realized gains........ -- (.17) (.42) (.24) (.09) --
------------ ------ ------ ------ ------ -----------
Total distributions........................ (.28) (.74) (1.04) (.89) (.73) (.41)
------------ ------ ------ ------ ------ -----------
Net asset value, end of period............... $ 11.23 $11.19 $12.12 $11.69 $11.39 $ 11.05
------------ ------ ------ ------ ------ -----------
------------ ------ ------ ------ ------ -----------
TOTAL RETURN#:............................... 3.06% (1.58)% 13.28% 10.84% 10.03% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $ 10,012 $1,182 $1,107 $ 177 $ 102 $ 83
Average net assets (000)..................... $ 2,144 $1,134 $ 475 $ 155 $ 98 $ 21
Ratios to average net assets:
Expenses, including distribution fees...... 1.38%*/D 1.30% 1.27% 1.24%D 1.70% 1.46%*
Expenses, excluding distribution fees...... 1.28%*/D 1.20% 1.17% 1.14%D 1.60% 1.36%*
Net investment income...................... 5.33%*/D 4.92% 5.29% 5.68%D 5.67% 5.92%*
Portfolio turnover........................... 8% 27% 41% 58% 33% 49%
---------------
</TABLE>
* Annualized.
D Net of expense subsidy/fee waiver.
DD 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.
See Notes to Financial Statements.
-13-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------------
Six Months
Ended Year Ended August 31,
February 28, -------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 11.19 $ 12.12 $ 11.69 $ 11.39 $ 11.05 $ 11.23
------------ ------- ------- ------- ------- -------
Income from investment operations
Net investment income........................ .26D .52 .57 .61D .60 .65
Net realized and unrealized gain (loss) on
investment
transactions............................... .03 (.76) .85 .54 .43 (.18)
------------ ------- ------- ------- ------- -------
Total from investment operations........... .29 (.24) 1.42 1.15 1.03 .47
------------ ------- ------- ------- ------- -------
Less distributions
Dividends from net investment income......... (.26) (.52) (.57) (.61) (.60) (.65)
Distributions from net realized gains........ -- (.17) (.42) (.24) (.09) --
------------ ------- ------- ------- ------- -------
Total distributions........................ (.26) (.69) (.99) (.85) (.69) (.65)
------------ ------- ------- ------- ------- -------
Net asset value, end of period............... $ 11.22 $ 11.19 $ 12.12 $ 11.69 $ 11.39 $ 11.05
------------ ------- ------- ------- ------- -------
------------ ------- ------- ------- ------- -------
TOTAL RETURN#:............................... 2.77% (1.98)% 12.83% 10.40% 9.57% 4.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $ 8,362 $19,522 $20,811 $17,702 $17,722 $20,310
Average net assets (000)..................... $ 16,622 $20,492 $18,437 $17,436 $19,008 $22,614
Ratios to average net assets:
Expenses, including distribution fees...... 1.78%*/D 1.70% 1.67% 1.64%D 2.08% 1.67%
Expenses, excluding distribution fees...... 1.28%*/D 1.20% 1.17% 1.14%D 1.58% 1.22%
Net investment income...................... 4.93%*/D 4.52% 4.89% 5.28%D 5.36% 5.85%
Portfolio turnover........................... 8% 27% 41% 58% 33% 49%
---------------
<CAPTION>
Class C
---------------------------
August 1,
Six Months 1994DD
Ended Through
February 28, August 31,
1995 1994
------------ ----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 11.19 $ 11.23
------------ ----------
Income from investment operations
Net investment income........................ .24D .04
Net realized and unrealized gain (loss) on
investment
transactions............................... .03 (.04)
------------ ----------
Total from investment operations........... .27 --
------------ ----------
Less distributions
Dividends from net investment income......... (.24) (.04)
Distributions from net realized gains........ -- --
------------ ----------
Total distributions........................ (.24) (.04)
------------ ----------
Net asset value, end of period............... $ 11.22 $ 11.19
------------ ----------
------------ ----------
TOTAL RETURN#:............................... 2.58% (0.06)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $ 202@ $ 200@
Average net assets (000)..................... $ 193@ $ 199@
Ratios to average net assets:
Expenses, including distribution fees...... 2.03%*/D 2.05%*
Expenses, excluding distribution fees...... 1.28%*/D 1.30%*
Net investment income...................... 4.68%*/D 4.68%*
Portfolio turnover........................... 8% 27%
---------------
</TABLE>
* Annualized.
D Net of expense subsidy/fee waiver.
DD Commencement of offering of Class C 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.
@ Figures are actual and are not rounded to the nearest thousand.
See Notes to Financial Statements.
-14-
<PAGE>
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
The accompanying financial statements as of February 28, 1995, were
not audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
74435M309
74435M408 MF118E2
74435M580 (LOGO) Cat. #642851X
<PAGE>
SEMI ANNUAL REPORT February 28, 1995
Prudential
Municipal
Series Fund
------------------------
(PICTURE)
Minnesota Series
(LOGO)
<PAGE>
Letter to Shareholders
April 3, 1995
Dear Shareholder:
A powerful rally swept through the tax-exempt municipal bond market this
winter, lifting the value of your shares as interest rates fell and
newly-issued tax-exempt bonds became scarce. We are pleased to report
that your Prudential Municipal Series Fund -- Minnesota Series has produced
a positive total return. The Series did finish behind the average Minnesota
municipal bond fund as measured by Lipper Analytical Services, Inc., because
it held securities with maturities that were shorter than the average.
(GRAPH)
Less Means More...
For You!
Prudential mutual fund shareholders will
be seeing total returns increase in the
months to come, thanks to a reduction
in Fund management expenses. Prudential
Mutual Funds lowered the rate on January
1, 1995, to 0.45% from 0.50%. It is our
way of showing you that we appreciate your
business and that we remain committed
to managing the Fund for your benefit.
<TABLE>
CUMULATIVE TOTAL RETURNS1
As of February 28, 1995
<CAPTION>
Six Months 1 Year 5 Years 10 Years Since Inception2
<S> <C> <C> <C> <C> <C>
Class A 2.2% 0.6% 36.8% N/A 37.7%
Class B 2.0% 0.2% 34.1% 108.5% 118.9%
Class C 1.8% N/A N/A N/A 1.7%
Lipper MN
Muni. Avg3 2.46% 1.07% 41.40% 124.65% 140.06%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS1
As of March 31, 1995
1 Year 5 Years 10 Years Since Inception2
<S> <C> <C> <C> <C>
Class A 2.1% 6.0% N/A 5.9%
Class B -0.2% 6.0% 7.7% 7.8%
Class C N/A N/A N/A 1.3%
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
1Source: Prudential Mutual Fund Management Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account
sales charges. The average annual returns do take into account applicable
sales charges. The Series charges a maximum front-end sales load of 3% for
Class A shares. Class B shares are subject to a contingent deferred sales
charge of 5%, 4%, 3%, 2%, 1% and 1% for six years. Class C shares have a
1% CDSC for one year. Class B shares will automatically convert to Class
A shares on a quarterly basis, after approximately seven years.
2Inception dates: 1/22/90 Class A; 10/4/84, Class B; 8/1/94 Class C.
3Lipper average returns are for 32 funds for six months, 29 funds for one
year, 16 funds for five years, 3 funds for 10 years, and 3 funds since
inception of Class B shares on 10/4/84.
-1-
<PAGE>
Our Objective.
The Series seeks maximum income exempt from Minnesota state and federal
income taxes consistent with preservation of principal. Certain taxpayers
may be subject to the federal alternative minimum tax, however. The Series
will invest primarily in Minnesota state, municipal and local government
obligations and obligations of U.S. territories (such as Puerto Rico,
the U.S. Virgin Islands and Guam), the income from which is also exempt
from federal and Minnesota state income taxes.
(GRAPH)
On the Hill...
In 1995, Congress will most likely consider
an initiative that would restore full income tax
deductibility for individual retirement account
(IRA) contributions for middle-income wage
earners. In addition, Congress may also
consider the creation of a new tax-deferred
savings account called the "American Dream
Savings Account." Prudential Mutual Funds
supports both of these proposals, and we
urge you to share your opinion with your
Congressional representatives. We will keep
you updated on these initiatives as they make
their way through the legislative process.
New Year Opens With Bond Rally.
What a difference six months can make! When we last reported to you,
the tax-exempt bond market was in turmoil because interest rates were
rising sharply, and prices (which move in the opposite direction of
interest rates) were falling sharply.
Volatility escalated last year when the Federal Reserve started to
increase short-term interest rates in a pre-emptive strike against
inflation. By November, after the Federal Reserve's sixth increase
in the federal funds rate (the interbank overnight lending rate),
investors began to believe that the economy was showing signs of
slowing. As a result, long-term interest rates in the tax-exempt bond
market started to fall.
Long-term rates fell dramatically, and have continued to do so even though
the Federal Reserve raised short-term rates again on February 1, 1995.
In fact, on March 2, the Bond Buyer's Revenue Bond Index sank to 6.3% -- its
lowest since last June. That's more than a full percentage point below its
1994 high -- 7.4% recorded on November 17, 1994.
What We Did As Interest Rates Moved.
During this period of fluctuation, the Series sought to stabilize asset
values by maintaining a balance between bonds with higher coupons and
those with lower coupons, sometimes called premium and discount bonds.
The higher yielding premium bonds help cushion the impact of rising interest
rates while the lower coupon or discount bonds offer price appreciation
potential when interest rates decline.The Series took advantage of last year's
lower bond prices by increasing its holdings in pre-refunded bonds to nearly
23% of assets, up from 17% six months ago. In addition, to increase its
yield, the Series has purchased undervalued utility bonds, raising their
share of assets to 17% from 13%, while selling health care and education
bonds.
-2-
<PAGE>
Smaller Supply Supports Market, Too.
The tax-exempt municipal bond market has also been helped recently by a
scarcity of new supply. Last year's higher interest rates made many
issuers reluctant to borrow money. In fact, the Revenue Bond Index rose
dramatically to 6.9% from 5.5% -- nearly one and a half percentage points.
As a result, the level of new bonds issued nationwide fell by 44% and in
Minnesota by 52%.
A Tax Reminder...
As a result of the Revenue Reconciliation Act of
1993, it is possible that this year you may have
some taxable income from your normally tax-exempt
municipal bond fund. The law stipulates that
the portion of any gain realized on the sale or
retirement of a tax-exempt bond purchased at a
market discount to its face value may be taxed
as ordinary income. The law affects bonds
purchased after April 30, 1993.
Minnesota: Stable Economic Growth.
Over the past decade, Minnesota's economy has performed better than that
of the Great Plains Region as well as the nation in terms of income and
employment. The state's economy is well diversified among manufacturing,
services, agriculture and housing. Its unemployment rate was 3.1% in
November, two full percentage points lower than the national average
of 5.3%.
The state generally operates with a long-term fiscal planning horizon, so
it avoids structural deficits. The budget is balanced and includes a cash
reserve of $500 million. No tax increases were approved in 1994. The state's
fiscally conservative governor has pledged to avoid new taxes in the future.
Minnesota enjoys an excellent credit rating.
The Outlook.
Tax-exempt municipal bonds have rallied substantially this winter. In fact,
the Lehman Brothers Municipal Bond Index has increased 2.8% over the last
six months. That is a substantial relief to investors who weathered sharply
rising interest rates and falling bond prices in 1994.
We believe long-term interest rates will stabilize in the year ahead, as
investors continue to gain confidence that the Federal Reserve is satisfied
that it has inflation under control. In addition, we expect the supply of
tax-exempt municipals to continue to contract, which should also provide
an additional reward to investors by supporting prices.
-3-
<PAGE>
As always, it is a pleasure to work for you. We thank you for remaining
with the Prudential Municipal Series Fund -- Minnesota Series through a
most difficult 1994. We appreciate the confidence you have shown in us.
Fund Update
Starting in February 1995, Class B shareholders
may have begun to notice a change in their Fund
holdings. That's when Class B shares began to
automatically convert to Class A shares, on a
quarterly basis, approximately seven years after
purchase. As you may know, Class A shares
generally carry lower annual distribution expenses
than Class B shares. Accordingly, after
conversion you will earn higher total returns
on your investment than you would have as a Class B
shareholder.
Following the May cycle, conversions of eligible
Class B shares and special exchanges of Class B
and C shares will take place each calendar quarter
(March, June, September and December) starting in
September 1995.
Sincerely,
Lawrence C. McQuade
President
Carla Wrocklage
Portfolio Manager
-4-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their
investment portfolio. If you are contemplating putting cash into the
bond market -- in taxable or tax-exempt securities -- you might want to
consider some of the following points. We talked with Prudential Mutual
Funds chief fixed income strategist Dennis Bushe about why bonds and bond
mutual funds may make sense in today's investment environment.
Q. Why are bonds an attractive buy right now?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between 2.5%
and 3.0%. Today's investors receive over 4.5% in total inflation-adjusted,
annualized total return. Of course, these numbers are just for illustration,
but they show how much higher interest rates improve bond total returns
when inflation is only 2.7%, as measured by the Consumer Price Index. And
beating inflation is one primary goal of long-term investing.
Q. Why buy a bond fund instead of an individual bond?
A. One of the biggest risks to bond investing is credit quality. Of course
you can avoid virtually all credit risk in a government bond fund, but some
investors need higher income than Uncle Sam provides. Bond funds help manage
both this risk, and that may be especially important in 1995. First of all,
if the U.S. economy is beginning to slow down, as many economists believe,
then credit quality is a concern. A credit team becomes very valuable,
carefully selecting bonds in different sectors and industries for bond
portfolios. In addition, few individual investors have the resources or
clout to continually monitor companies, unearth possible credit problems
before they surface, and negotiate favorable terms with troubled issuers -- a
bond fund does. Finally, the diversification of a bond fund may help investors
avoid wide price swings if one holding does experience financial difficulties.
-5-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MINNESOTA SERIES February 28, 1995 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.9%
Anoka Hennepin Indpt.
Sch. Dist., No. 11,
Ser. C,
Zero Coupon, 2/1/12,
Aaa $ 1,575 C.G.I.C.............. $ 575,285
Breckenridge Hosp.
Facs. Rev.,
Franciscan Sisters
Healthcare,
A-* 800D 9.375%, 9/1/17, Ser.
B1................... 900,536
Dakota Cnty. Hsg. &
Redev. Auth.,
Burnsville & Inner
Grove, Sngl. Fam.
Mtge.,
Aaa 10 9.375%, 5/1/18,
F.G.I.C.............. 10,739
Metropolitan Council of Minneapolis,
Hubert H. Humphrey Metrodome,
A 500 6.00%, 10/1/09......... 505,410
St. Paul Met. Area,
Aaa 750 6.25%, 12/1/06, Ser.
A.................... 785,190
Aaa 500 6.75%, 9/1/10, Ser.
D.................... 527,405
Minneapolis Cmnty. Dev.
Agcy.,
St. Paul Hsg. &
Redev. Auth. Rev.,
Aa 10 9.875%, 12/1/15........ 10,399
Tax Increment Rev.,
M.B.I.A.,
Aaa 750 Zero Coupon, 9/1/01.... 531,892
Aaa 1,000 Zero Coupon, 3/1/06.... 542,110
Aaa 1,000 Zero Coupon, 9/1/07.... 493,290
Minneapolis Hosp. Rev.,
Lifespan Inc., Ser.
B,
A1 820D 8.70%, 12/1/02......... 915,989
A 800 8.125%, 8/1/17......... 882,456
Minneapolis-St. Paul
Hsg. Fin.
Brd. Rev., Sngl. Fam.
Mtge.,
AAA* 920 7.30%, 8/1/31,
G.N.M.A.............. 958,631
Minneapolis-St. Paul
Met. Arpts.,
Aaa 1,000 7.80%, 1/1/14, Ser.
7.................... 1,096,990
Minnesota Pub. Facs.
Auth.,
Wtr. Poll. Ctrl.
Rev.,
Aa+* 500 6.90%, 3/1/03, Ser.
A.................... 546,865
Aa+* 650 7.00%, 3/1/09.......... 698,750
Minnesota St., Gen.
Oblig.,
Aa1 $ 500 6.00%, 10/1/13......... $ 504,315
Minnesota St. Higher
Ed. Facs. Auth. Rev.,
Macalester Coll.,
Aa 500 6.40%, 3/1/22.......... 506,740
St. Mary's Coll.,
Baa 625 6.10%, 10/1/16......... 594,075
Univ. of St. Thomas,
A1 300 5.60%, 9/1/14.......... 282,042
Northern Mun. Pwr.
Agcy.,
Elec. Sys. Rev.,
A 370 7.25%, 1/1/16, Ser.
A.................... 389,817
5.50%, 1/1/18, Ser. B,
Aaa 750 A.M.B.A.C............ 716,175
Northfield Coll. Fac.
Rev.,
St. Olaf Coll.,
A 370 6.30%, 10/1/12......... 379,061
Ramsey Cnty., Gen.
Oblig.,
Aaa 500 7.25%, 2/1/04.......... 530,960
Robbinsdale Hosp. Rev.,
North Memorial Med.
Ctr.,
5.55%, 5/15/19,
Aaa 1,000 A.M.B.A.C............ 935,550
Rochester Hlth. Care
Facs.
Rev., Mayo Med. Ctr.,
NR 500D 8.30%, 11/15/07, Ser.
A.................... 559,445
Science Museum,
St. Paul, Cert. of
Part.,
AAA* 1,215D 7.50%, 12/15/01........ 1,317,227
Southern Mun. Pwr.
Agcy. Pwr. Supply
Sys. Rev.,
Aaa 195D 5.50%, 1/1/15.......... 183,977
5.50%, 1/1/15, Ser. B,
Aaa 305 A.M.B.A.C............ 293,571
Zero Coupon, 1/1/20,
Aaa 3,250 Ser. A, M.B.I.A...... 719,973
St. Louis Park Hosp.
Rev.,
Methodist Hosp., Ser.
C,
7.25%, 7/1/18,
Aaa 800D/@ A.M.B.A.C............ 890,488
</TABLE>
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<C> <C> <S> <C>
St. Paul Hsg. & Redev.
Auth.,
Ramsey Med. Ctr.
Proj.,
5.55%, 5/15/23,
Aaa $ 500 A.M.B.A.C............ $ 461,565
Tax Increment Rev.,
Aaa 1,000 5.25%, 9/1/05,
A.M.B.A.C............ 983,350
St. Paul Port Auth.,
Energy Park Tax
Increment Rev.,
Baa 820D 8.00%, 12/1/07......... 918,105
Univ. of Minnesota
Rev.,
A1 1,000 6.00%, 2/1/11, Ser.
A.................... 1,018,470
Western Mun. Pwr.
Agcy.,
Supply Rev.,
A1 500 5.50%, 1/1/15, Ser.
A.................... 468,430
-----------
Total long-term
investments
(cost $21,138,576)..... 22,635,273
-----------
SHORT-TERM INVESTMENTS--0.9%
Beltrami Cnty. Environ.
Ctl. Rev.,
Northwood Panel Brd.
Prog.,
A-1* 200 3.90%, 3/1/95, F.R.D.D.
(cost $200,000)...... 200,000
-----------
Total Investments--98.8%
(cost $21,338,576; Note
4)................... 22,835,273
Other assets in excess
of
liabilities--1.2%.... 284,221
-----------
Net Assets--100%....... $23,119,494
-----------
-----------
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of such securities is considered to
be the later of the next date on which the
security can be redeemed at par or the next date
on which the rate of interest is adjusted.
D Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
@ Pledged as initial margin on financial futures
contracts.
* Standard & Poor's rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a
description of Moody's and Standard & Poor's ratings.
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1995
-----------------
<S> <C>
Investments, at value (cost $21,338,576)............................................... $22,835,273
Interest receivable.................................................................... 360,850
Other assets........................................................................... 619
-----------------
Total assets......................................................................... 23,196,742
-----------------
Liabilities
Payable for Series shares reacquired................................................... 25,310
Accrued expenses....................................................................... 14,008
Bank overdraft......................................................................... 13,943
Management fee payable................................................................. 7,935
Dividends payable...................................................................... 6,385
Distribution fee payable............................................................... 6,331
Due to broker - variation margin....................................................... 2,036
Deferred trustee's fees................................................................ 1,300
-----------------
Total liabilities.................................................................... 77,248
-----------------
Net Assets............................................................................. $23,119,494
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 20,101
Paid-in capital in excess of par..................................................... 22,182,127
-----------------
22,202,228
Accumulated net realized loss on investments......................................... (550,525)
Net unrealized appreciation on investments........................................... 1,467,791
-----------------
Net assets, February 28, 1995........................................................ $23,119,494
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($10,103,796 / 878,428 shares of beneficial interest issued and outstanding)....... $11.50
Maximum sales charge (3.0% of offering price)........................................ .36
-----------------
Maximum offering price to public..................................................... $11.86
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($13,015,396 / 1,131,681 shares of beneficial interest issued and outstanding)..... $11.50
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($301.65 / 26.23 shares of beneficial interest issued and outstanding)............. $11.50
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1995
------------
<S> <C>
Income
Interest.............................. $ 772,349
------------
Expenses
Management fee, net of waiver of
$1,846................................ 56,800
Distribution fee--Class A............. 1,074
Distribution fee--Class B............. 53,307
Custodian's fees and expenses......... 34,000
Transfer agent's fees and expenses.... 15,900
Registration fees..................... 14,800
Reports to shareholders............... 13,900
Audit fee............................. 5,300
Legal fees............................ 5,000
Trustees' fees........................ 1,600
Miscellaneous......................... 408
------------
Total expenses...................... 202,089
------------
Net investment income................... 570,260
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions............... (479,810)
Financial futures transactions........ (39,813)
------------
(519,623)
------------
Net change in unrealized appreciation
on:
Investments........................... 407,828
Financial futures contracts........... (8,219)
------------
399,609
------------
Net loss on investments................. (120,014)
------------
Net Increase in Net Assets
Resulting from Operations............... $ 450,246
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income.... $ 570,260 $ 1,216,366
Net realized gain (loss)
on investment
transactions........... (519,623) 193,802
Net change in unrealized
appreciation on
investments............ 399,609 (1,803,545)
------------ ------------
Net increase (decrease)
in net
assets resulting from
operations............. 450,246 (393,377)
------------ ------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A................ (58,660) (57,132)
Class B................ (511,595) (1,159,234)
Class C................ (5) --
------------ ------------
(570,260) (1,216,366)
------------ ------------
Distributions from net
realized gains
Class A................ (3,744) (6,669)
Class B................ (82,924) (189,576)
Class C................ (1) --
------------ ------------
(86,669) (196,245)
------------ ------------
Series share transactions
(net of conversion) (Note
5)
Net proceeds from shares
subscribed............. 419,862 3,930,513
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 436,738 949,351
Cost of shares
reacquired............... (3,306,413) (4,757,735)
------------ ------------
Net increase (decrease)
in net assets from
Series share
transactions........... (2,449,813) 122,129
------------ ------------
Total decrease............. (2,656,496) (1,683,859)
Net Assets
Beginning of period........ 25,775,990 27,459,849
------------ ------------
End of period.............. $ 23,119,494 $ 25,775,990
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Minnesota Series (the "Series")
commenced investment operations in October, 1984. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in "investment grade" tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund and the Series in the
preparation of its financial statements.
Securities Valuations: The Series 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 Trustees.
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.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series 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 Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain(loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of 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: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series 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
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
-10-
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with 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 and employees of the Fund,
and 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 1% of the average daily net assets of the Series.
Effective January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the
Series' average daily net assets) of its management fee, which amounted to
$1,846. The Series is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively
the "Distributors"). The Fund compensates the Distributors for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution, (the "Class A, B and C Plans") regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the six months ended February 28, 1995.
PMFD has advised the Series that it has received approximately $600 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1995. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the six months ended February 28, 1995,
it received approximately $30,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. ("PMFS"), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the six months ended February 28, 1995, the Series incurred fees of
approximately $11,000 for the services of PMFS. As of February 28, 1995,
approximately $2,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1995, were $1,619,204 and $4,185,464, respectively.
At February 28, 1995 the Series sold 50 financial futures contracts on the
Municipal Bond Index expiring in March, 1995. The value at disposition of such
contracts was $424,531. The value of such contracts on February 28, 1995 was
$453,437, thereby resulting in an unrealized loss of $28,906.
The cost basis of investments for federal income tax purposes at February 28,
1995 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes was $1,496,697 (gross unrealized appreciation--$1,565,988; gross
unrealized depreciation--$69,291).
Note 5. Capital The Series currently offers
Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 3.0%. 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. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Commencing
in February 1995, Class B shares automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
-11-
<PAGE>
Transactions in shares of beneficial interest for the six months ended
February 28, 1995 and the fiscal year ended August 31, 1994 were as follows:
<TABLE>
<S> <C> <C>
Class A Shares Amount
------------- ------------
Six months ended February 28,
1995:
Shares sold..................... 5,856 $ 66,445
Shares issued in reinvestment of
dividends and distributions... 3,962 44,709
Shares reacquired............... (37,716) (424,517)
------------- ------------
Net decrease in shares
outstanding
before conversion............. (27,898) (313,363)
Shares issued upon conversion
from Class B.................. 794,998 9,015,275
------------- ------------
Net increase in shares
outstanding................... 767,100 $ 8,701,912
------------- ------------
------------- ------------
Year ended August 31, 1994:
Shares sold..................... 57,307 $ 690,269
Shares issued in reinvestment of
dividends and distributions... 4,480 53,440
Shares reacquired............... (23,024) (272,744)
------------- ------------
Net increase in shares
outstanding................... 38,763 $ 470,965
------------- ------------
------------- ------------
<CAPTION>
Class B Shares Amount
<S> <C> <C>
------------- ------------
Six months ended February 28,
1995:
Shares sold..................... 31,394 $ 353,317
Shares issued in reinvestment of
dividends and distributions... 35,250 392,029
Shares reacquired............... (258,707) (2,881,896)
------------- ------------
Net decrease in shares
outstanding
before conversion............. (192,063) (2,136,550)
Shares reacquired upon
conversion into Class A....... (794,998) (9,015,275)
------------- ------------
Net decrease in shares
outstanding................... (987,061) $(11,151,825)
------------- ------------
------------- ------------
Year ended August 31, 1994:
Shares sold..................... 267,959 $ 3,240,044
Shares issued in reinvestment of
dividends and distributions... 74,796 895,911
Shares reacquired............... (378,895) (4,484,991)
------------- ------------
Net decrease in shares
outstanding................... (36,140) $ (349,036)
------------- ------------
------------- ------------
<CAPTION>
Class C
<S> <C> <C>
Six months ended February 28,
1995:
Shares sold..................... 9 $ 100
------------- ------------
------------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold..................... 17 $ 200
------------- ------------
------------- ------------
---------------
* Commencement of offering of Class C shares.
</TABLE>
-12-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------
Six January 22,
Months 1990D
Ended Year Ended August 31, Through
February 28, --------------------------------------- August 31,
1995 1994 1993 1992 1991 1990
------------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 11.56 $12.33 $11.78 $11.40 $10.98 $ 11.14
------------ ------ ------ ------ ------ ------------
Income from investment operations:
Net investment income.................. .29DD .58 .62 .66 .64 .39
Net realized and unrealized gain (loss)
on investment transactions........... (.02) (.68) .57 .38 .42 (.16)
------------ ------ ------ ------ ------ ------------
Total from investment operations..... .27 (.10) 1.19 1.04 1.06 .23
------------ ------ ------ ------ ------ ------------
Less distributions
Dividends from net investment
income............................... (.29) (.58) (.62) (.66) (.64) (.39)
Distributions from net realized
gains................................ (.04) (.09) (.02) -- -- --
------------ ------ ------ ------ ------ ------------
Total distributions.................. (.33) (.67) (.64) (.66) (.64) (.39)
------------ ------ ------ ------ ------ ------------
Net asset value, end of period......... $ 11.50 $11.56 $12.33 $11.78 $11.40 $ 10.98
------------ ------ ------ ------ ------ ------------
------------ ------ ------ ------ ------ ------------
TOTAL RETURN#:......................... 2.16% (0.87)% 10.45% 9.38% 9.93% 2.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 10,104 $1,287 $894 $402 $229 $130
Average net assets (000)............... $ 2,165 $1,179 $616 $291 $202 $87
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.35%*/DD 1.25% 1.29% 1.22% 1.41% 1.46%*
Expenses, excluding distribution
fees............................... 1.25%*/DD 1.15% 1.19% 1.11% 1.31% 1.33%*
Net investment income................ 5.22%*/DD 4.84% 5.15% 5.69% 5.73% 5.80%*
Portfolio turnover..................... 7% 21% 27% 32% 56% 30%
</TABLE>
---------------
* Annualized.
D Commencement of offering of Class A shares.
DD Net of fee waiver.
# 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 return for periods of less than
one full year are not annualized.
See Notes to Financial Statements.
-13-
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------------
Six
Months
Ended Year Ended August 31,
February 28, -------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 11.56 $ 12.33 $ 11.78 $ 11.41 $ 10.98 $ 11.14
------------ ------- ------- ------- ------- -------
Income from investment operations:
Net investment income.................. .27DD .53 .58 .61 .60 .62
Net realized and unrealized gain (loss)
on investment transactions........... (.02) (.68) .57 .37 .43 (.16)
------------ ------- ------- ------- ------- -------
Total from investment operations..... .25 (.15) 1.15 .98 1.03 .46
------------ ------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income............................... (.27) (.53) (.58) (.61) (.60) (.62)
Distributions from net realized
gains................................ (.04) (.09) (.02) -- -- --
------------ ------- ------- ------- ------- -------
Total distributions.................. (.31) (.62) (.60) (.61) (.60) (.62)
------------ ------- ------- ------- ------- -------
Net asset value, end of period......... $ 11.50 $ 11.56 $ 12.33 $ 11.78 $ 11.41 $ 10.98
------------ ------- ------- ------- ------- -------
------------ ------- ------- ------- ------- -------
TOTAL RETURN#:......................... 1.97% (1.26)% 9.99% 8.83% 9.64% 4.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 13,015 $24,489 $26,565 $24,746 $23,600 $24,080
Average net assets (000)............... $ 21,499 $26,113 $25,387 $24,038 $23,997 $23,558
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.75%*/DD 1.65% 1.69% 1.62% 1.81% 1.78%
Expenses, excluding distribution
fees............................... 1.25%*/DD 1.15% 1.19% 1.12% 1.31% 1.28%
Net investment income................ 4.82%*/DD 4.44% 4.75% 5.29% 5.33% 5.49%
Portfolio turnover..................... 7% 21% 27% 32% 56% 30%
<CAPTION>
Class C
-----------
Six August 1,
Months 1994D
Ended Through
February 28, August 31,
1995 1994
------ ----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $11.56 $11.63
------ ----------
Income from investment operations:
Net investment income.................. .24DD .04
Net realized and unrealized gain (loss)
on investment transactions........... (.02) (.07)
------ ----------
Total from investment operations..... .22 (.03)
------ ----------
Less distributions
Dividends from net investment
income............................... (.24) (.04)
Distributions from net realized
gains................................ (.04) --
------ ----------
Total distributions.................. (.28) (.04)
------ ----------
Net asset value, end of period......... $11.50 $11.56
------ ----------
------ ----------
TOTAL RETURN#:......................... 1.76% (.38)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $302@ $199@
Average net assets (000)............... $198@ $200@
Ratios to average net assets:
Expenses, including distribution
fees............................... 2.00%/DD 2.15%*
Expenses, excluding distribution
fees............................... 1.25%*/DD 1.40%*
Net investment income................ 4.57%*DD 3.86%*
Portfolio turnover..................... 7% 21%
</TABLE>
---------------
* Annualized.
D Commencement of offering of Class C shares.
DD Net of fee waiver.
# 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 return for periods of less than one
full year are not annualized.
@ Figures are actual and not rounded to nearest thousand.
See Notes to Financial Statements.
-14-
<PAGE>
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Ronald Amblard, Assistant Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
The accompanying financial statements as of February 28, 1995, were not
audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
74435M697
74435M713 MF121E2
74435M549 (LOGO) Cat. #642188U
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VII 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 shareholder, 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 (Exhibit 7 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 maintains 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 6(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 6(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 16. EXHIBITS.
1. Articles of Restatement. Incorporated by reference to Exhibit No. 1 to
Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A
filed via EDGAR on February 28, 1995 (File No. 2-66407).
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No. 2 to
Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A
filed via EDGAR on March 1, 1994 (File No. 2-66407).
4. Plan of Reorganization, filed herewith as Appendix B to the Prospectus and
Proxy Statement.*
5. Instruments defining rights of shareholders. Incorporated by reference to
Exhibits 1 and 2.
6. (a) Management Agreement, as amended, between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit No. 5(b)
to Post-Effective Amendment No. 16 to the Registration Statement on Form
N-1A filed on February 27, 1990 (File No. 2-66407).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation. Incorporated by reference to
Exhibit No. 5(b) to Post-Effective Amendment No. 13 to the Registration
Statement on Form N-1A filed on February 24, 1989 (File No. 2-66407).
C-1
<PAGE>
7. (a) Distribution Agreement for Class A shares. Incorporated by reference to
Exhibit No. 6(b) to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).
(b) Distribution Agreement for Class B shares. Incorporated by reference to
Exhibit No. 6(c) to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).
(c) Distribution Agreement for Class C shares. Incorporated by reference to
Exhibit No. 6(d) to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).
9. Revised Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit No. 8(b) to
Post-Effective Amendment No. 17 to the Registration Statement on Form N-1A
filed on February 28, 1991 (File No. 2-66407).
10. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit No. 15(a) to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A filed via EDGAR on February 28, 1995
(File No. 2-66407).
(b) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A filed via EDGAR on February 28, 1995
(File No. 2-66407).
(c) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A filed via EDGAR on February 28, 1995
(File No. 2-66407).
11. Opinion and Consent of Counsel.*
12. Tax Opinions of Counsel.*
14. (a) Consent of Independent Accountants to Prudential National Municipals
Fund, Inc.*
(b) Consent of Independent Auditors to Prudential Municipal Series Fund.*
17. (a) Proxy.*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the 1940
Act.*
(c) Prospectus of the Registrant dated February 28, 1995.*
(d) Annual reports to shareholders of Prudential Municipal Series Fund
(Arizona Series, Georgia Series and Minnesota Series) for the fiscal year
ended August 31, 1994, filed herewith in the Registrant's Statement of
Additional Information.*
(e) Statement of Additional Information of the Registrant dated February 28,
1995, filed herewith in the Registrant's Statement of Additional
Information.*
(f) Semi-Annual report to shareholders of the Registrant for the six months
ended June 30, 1995, filed herewith in the Registrant's Statement of
Additional Information.*
(g) President's Letter.*
(h) Semi-annual reports to shareholders of Prudential Municipal Series Fund
(Arizona, Georgia and Minnesota Series) for the six-months ended February
28, 1995, filed herewith in the Registrant's Statement of Additional
Information.*
------------------------
*Filed herewith.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of New York and State of
New York, on the 15th day of September, 1995.
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
By: /s/ Richard A. Redeker
------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------ ---------------------------------------- ------------------
<S> <C> <C>
/s/ Grace Torres Treasurer and Principal Financial and September 15, 1995
------------------------------ Accounting Officer
GRACE TORRES
/s/ Delayne D. Gold Director September 15, 1995
------------------------------
DELAYNE D. GOLD
/s/ Arthur Hauspurg Director September 15, 1995
------------------------------
ARTHUR HAUSPURG
/s/ Harry A. Jacobs, Jr. Director September 15, 1995
------------------------------
HARRY A. JACOBS, JR.
/s/ Stephen P. Munn Director September 15, 1995
------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker President and Director September 15, 1995
------------------------------
RICHARD A. REDEKER
/s/ Louis A. Weil, III Director September 15, 1995
------------------------------
LOUIS A. WEIL, III
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE NO.
NUMBER
1. Articles of Restatement. Incorporated by reference to Exhibit No. 1
to Post-Effective Amendment No. 23 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1995 (File No. 2-66407).
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A filed via EDGAR on March 1, 1994 (File No. 2-66407).
4. Plan of Reorganization, filed herewith as Appendix B to the
Prospectus and Proxy Statement.*
5. Instruments defining rights of shareholders. Incorporated by
reference to Exhibits 1 and 2.
6. (a) Management Agreement, as amended, between the Registrant and
Prudential Mutual Fund Management, Inc. Incorporated by reference to
Exhibit No. 5(b) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed on February 27, 1990 (File
No. 2-66407).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed on February 24, 1989
(File No. 2-66407).
7. (a) Distribution Agreement for Class A shares. Incorporated by
reference to Exhibit No. 6(b) to Post-Effective Amendment No. 23 to
the Registration Statement on Form N-1A filed via EDGAR on February
28, 1995 (File No. 2-66407).
(b) Distribution Agreement for Class B shares. Incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 23 to
the Registration Statement on Form N-1A filed via EDGAR on February
28, 1995 (File No. 2-66407).
(c) Distribution Agreement for Class C shares. Incorporated by
reference to Exhibit No. 6(d) to Post-Effective Amendment No. 23 to
the Registration Statement on Form N-1A filed via EDGAR on February
28, 1995 (File No. 2-66407).
9. Revised Custodian Contract between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to Exhibit No. 8(b)
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A filed on February 28, 1991 (File No. 2-66407).
10. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 23
to the Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 23
to the Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 23
to the Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
11. Opinion and Consent of Counsel.*
12. Tax Opinions of Counsel.*
14. (a) Consent of Independent Accountants to Prudential National
Municipals Fund, Inc.*
(b) Consent of Independent Auditors to Prudential Municipal Series
Fund.*
17. (a) Proxy.*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under
the 1940 Act.*
(c) Prospectus of the Registrant dated February 28, 1995.*
(d) Annual reports to shareholders of Prudential Municipal Series
Fund (Arizona Series, Georgia Series and Minnesota Series) for the
fiscal year ended August 31, 1994, filed herewith in the Registrant's
Statement of Additional Information.*
(e) Statement of Additional Information of the Registrant dated
February 28, 1995, filed herewith in the Registrant's Statement of
Additional Information.*
(f) Semi-Annual report to shareholders of the Registrant for the six
months ended June 30, 1995, filed herewith in the Registrant's
Statement of Additional Information.*
(g) President's Letter.*
(h) Semi-annual reports to shareholders of Prudential Municipal
Series Fund (Arizona, Georgia and Minnesota Series) for the
six-months ended February 28, 1995, filed herewith in the
Registrant's Statement of Additional Information.*
--------------------------------
*Filed herewith.
<PAGE>
SULLIVAN & CROMWELL EXHIBIT 11
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC)
CABLE ADDRESS: LADYCOURT, NEW YORK
FACSIMILE: (212) 558-3588 (125 Broad Street)
(212) 558-3792 (250 Park Avenue)
125 BROAD STREET, NEW YORK 10004-2498
__________
250 PARK AVENUE, NEW YORK 10177-0021
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
September 14, 1995
Prudential National Municipals Fund, Inc.,
One Seaport Plaza,
New York, New York 10292.
Dear Sirs:
We have acted as counsel to Prudential National Municipals Fund, Inc.
(the "Fund"), in connection with the proposed reorganization (the
"Reorganization") described in the form of Agreement and Plan of Reorganization
and Liquidation between the Fund and Prudential Municipal Series Fund, (the
"Agreement") set forth as Appendix B to the Prospectus and Proxy Statement
included in the Registration Statement of the Fund on Form N-14 (the
"Registration Statement").
For the purposes of the opinion set forth below, we have examined such
corporate records, certificates and other documents, and such questions of law,
as we have considered necessary or appropriate for the purposes of this opinion.
<PAGE>
Prudential National Municipal Funds, Inc. -2-
Upon the basis of such examination, we advise you that, in our
opinion, when the Agreement is executed and delivered by the Fund and Prudential
Municipal Series Fund and when the shares (the "Securities") of Common Stock,
par value $.01 per share, of the Fund are issued and sold as contemplated by the
Agreement, following effectiveness of the Registration Statement, for the
consideration stated in the Agreement, which consideration shall in each event
be at least equal to the net asset value and par value per Security, they will
be validly issued, fully paid and nonassessable by you.
The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Laws of the State of Maryland, and we are
expressing no opinion as to the effect of the laws of any other jurisdiction.
Also, we have relied as to certain matters on information obtained
from public officials, officers of the Fund and other sources believed by us to
be responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Act.
Very truly yours,
/s/ Sullivan & Cromwell
Sullivan & Cromwell
<PAGE>
EXHIBIT 12
SEPTEMBER 13, 1995
Prudential Municipal Series Fund Prudential National Municipals Fund, Inc.
- Georgia Series One Seaport Plaza
One Seaport Plaza New York, New York 10292
New York, New York 10292
Re: REORGANIZATION OF THE PRUDENTIAL MUNICIPAL SERIES FUND - GEORGIA
SERIES AND THE PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Ladies and Gentlemen:
We are outside counsel to Prudential Municipal Series Fund (the "Municipal
Series Fund"). An Agreement and Plan of Reorganization (the "Agreement") has
been proposed pursuant to which the Municipal Series Fund will transfer to
Prudential National Municipals Fund, Inc. (the "National Municipals Fund")
substantially all of the assets of the Georgia Series (the "Series") in exchange
solely for voting shares ("shares") of the National Municipals Fund and the
assumption by the National Municipals Fund of the liabilities, if any, of the
Series incurred in the ordinary course of business followed by the constructive
distribution of such stock of the National Municipals Fund to the holders of the
shares of beneficial interest Class A, Class B and Class C of the Series in
liquidation of the Series (the "Reorganization"). You have requested our
opinion as to certain federal income tax consequences of the Reorganization.
The opinion that follows is based on the Internal Revenue Code of 1986 as
amended through the date hereof (the "Code"), judicial decisions, administrative
rulings and regulations and such other sources of legal authority as we deemed
necessary to consult in rendering this opinion. The opinion is also based on
factual representations set forth herein and on our understanding that the
Reorganization will take place substantially as set out in the Agreement and as
described in the Proxy Statement (the "Proxy Statement") included in the
Registration Statement on Form N-14, as amended, filed by the National
Municipals Fund with the Securities and Exchange Commission (the "Registration
Statement") for the meeting of shareholders of the Series to be held on
October 16, 1995.
<PAGE>
Page 2
SUMMARY OF THE TRANSACTION
In the Reorganization, the Series will transfer substantially all of its
assets and liabilities to the National Municipals Fund in exchange for shares of
the National Municipals Fund. The Series will then liquidate and distribute to
its shareholders as a liquidating distribution all of such shares of the
National Municipals Fund in exchange for and in cancellation of the Series
shares of beneficial interest Class A, Class B and Class C.
BUSINESS PURPOSE
Our opinion is based in part upon our understanding that the primary
business purpose of this transaction is to achieve certain cost savings by
combining the assets of the Series and the National Municipals Fund as is
represented below. A full description of the business purposes of the
Reorganization is set out in the Proxy Statement.
REPRESENTATIONS
In rendering our opinion we are, with your permission, assuming that the
transaction will occur substantially as described in the Agreement and the Proxy
Statement. We are also relying on the following additional representations
which have been certified to us by either the Series, the National Municipals
Fund or both:
1. The primary business purpose of this transaction is to achieve certain
cost savings by combining the assets of the Series and the National Municipals
Fund. The Series has experienced high expense ratios, an inability to attract
new assets and difficulty in obtaining suitable investments. Furthermore, the
Series does not enjoy the economies of scale enjoyed by a larger fund.
2. The fair market value of the National Municipals Fund shares received
by each the Series shareholder will be approximately equal to the fair market
value of the Series shares of beneficial interest Class A, Class B and Class C
surrendered in exchange therefor.
3. No cash or property, other than the National Municipals Fund shares,
will be transferred to the Series or distributed to the Series shareholders
pursuant to the Reorganization.
4. There is no plan or intention on the part of any shareholder of the
Series who owns 5% or more of the shares of beneficial interest of the Series
and to the best of the knowledge of management of the Series, there is no plan
or intention on the part of the shareholders of the Series to sell, exchange,
or otherwise dispose of a number of shares of the National Municipals Fund
received in the transaction that would reduce the Series shareholders'
ownership of the National Municipals Fund to a number of shares having a value,
as of the date of the transaction, of less than 50 percent of the value of all
of the formerly outstanding shares of beneficial interest Class A, Class B and
Class C of the Series as of the
<PAGE>
Page 3
same date. Although Section 9.4 of the Municipal Series Fund's Declaration of
Trust provides for certain dissenters' rights, the management of the Series has
been told that the staff of the Securities and Exchange Commission believes that
the Investment Company Act supersedes such dissenters' rights and that a
shareholder can redeem shares only at their net asset value. No cash will be
exchanged for the Series shares of beneficial interest Class A, Class B and
Class C in lieu of fractional shares of the National Municipals Fund. Moreover,
shares of beneficial interest Class A, Class B and Class C of the Series and
shares of the National Municipals Fund held by the Series shareholders, and
otherwise sold, redeemed, or disposed of prior or subsequent to the transaction
will be taken into account for purposes of this representation, except for
shares of beneficial interest Class A, Class B and Class C in the Series and the
National Municipals Fund redeemed by the Series or the National Municipals Fund
in the ordinary course of their respective businesses as open-end investment
companies.
5. The National Municipals Fund will acquire at least 90 percent of the
fair market value of the net assets and at least 70 percent of the fair market
value of the gross assets held by the Series pursuant to the Reorganization.
For purposes of this representation, amounts used by the Series to pay its
reorganization expenses, and all redemptions and distributions (except for
distributions and redemptions occurring in the ordinary course of the Series'
business as an open-end investment company) made by the Series immediately
preceding the transfer will be included as assets of the Series held immediately
prior to the transaction.
6. The National Municipals Fund has no plan or intention to reacquire any
of its shares issued in the transaction, except for shares redeemed in the
ordinary course of its business as an open-end investment company.
7. The National Municipals Fund has no plan or intention to sell or
otherwise dispose of any of the assets of the Series acquired in the
transaction, except for dispositions made in the ordinary course of business.
Following the Reorganization, the National Municipals Fund will continue the
historic business of the Series of investing in municipal obligations including
obligations of the State of Georgia, the interest on which is excludable from
gross income for federal income tax purposes.
8. As soon as practicable after the closing date, and in any event within
30 days thereafter, the Series will, in pursuance of the Agreement, distribute
the shares it receives in the Reorganization, and its other properties, and will
then be liquidated for federal income tax purposes.
9. In no event will the Series dispose of to third parties (other than in
the ordinary course of business) and/or retain after the Reorganization assets
which in the aggregate, will result in less than 50 percent of the historic
business assets of the Series being transferred to the National Municipals Fund
in the Reorganization.
<PAGE>
Page 4
10. Neither the Series nor persons who were shareholders of the Series
immediately before the closing date of the Reorganization will own, immediately
after the closing date of the reorganization National Municipals Fund shares
constituting "control" of National Municipals Fund within the meaning of Section
304(c) or Section 368(c) of the Code.
11. All expenses incurred in connection with the Reorganization will be
borne pro rata by the Series and the National Municipals Fund in proportion to
their assets.
12. There is no intercorporate indebtedness existing between the National
Municipals Fund and the Series that was issued, acquired, or will be settled at
a discount.
13. The National Municipals Fund and the Series are investment companies
as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code, and are both
regulated investment companies within the meaning of Section 851 of the Code.
14. The National Municipals Fund does not own, directly or indirectly, nor
has it owned during the past five years, directly or indirectly, any shares of
beneficial interest Class A, Class B and Class C of the Series.
15. The liabilities, if any, and the unreimbursed distribution expenses of
the Series to be assumed by the National Municipals Fund in the Reorganization
plus the liabilities, if any, to which the transferred assets are subject were
incurred by the Series in the ordinary course of business and are associated
with the assets to be transferred.
16. The fair market and the adjusted basis value of the Series' assets
transferred to the National Municipals Fund will equal or exceed the sum of the
liabilities, if any, to which the transferred assets are subject.
17. The amount of cash, if any, retained by the Series to meet expenses,
plus liabilities, if any, of the Series to be assumed by the National Municipals
Fund in the Reorganization, plus the liabilities, if any, to which the
transferred assets are subject, will not equal or exceed 20 percent of the fair
market value of all property held by the Series immediately prior to the
Reorganization.
18. The Series is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
19. In connection with the Reorganization, the Series has not and will not
distribute to its creditors any of the Series' shares of beneficial interest
Class A, Class B or Class C, the National Municipals Fund shares or rights to
acquire the Series shares of beneficial interest Class A, Class B or Class C or
the National Municipals Fund shares.
<PAGE>
Page 5
20. It is anticipated that there will be no amount remaining in the hands
of the Series after the payment of the liabilities of the Series.
OPINION
Based upon the foregoing, and based upon our review of the relevant legal
authorities, it is our opinion that:
1. For federal income tax purposes the Reorganization will constitute a
"reorganization" within the meaning of Code Section 368(a)(1)(C). The Series
and the National Municipals Fund will each be "a party to a reorganization"
within the meaning of Code Section 368(b).
2. No gain or loss will be recognized by the shareholders of the Series
upon receipt of the National Municipals Fund shares solely in exchange for and
in cancellation of the Series shares of beneficial interest, as described above
and in the Agreement. Code Section 354(a)(1).
3. No gain or loss will be recognized to the Series on the transfer of
substantially all of its assets to the National Municipals Fund solely in
exchange for shares of the National Municipals Fund and the assumption by the
National Municipals Fund of the liabilities, if any, of the Series. Code
Sections 361(a) and 357(a). In addition, no gain or loss will be recognized to
the Series on the distribution of such shares to the Series' shareholders in
liquidation of the Series. Code Section 361(a)(1)(A).
4. No gain or loss will be recognized to the National Municipals Fund
upon the receipt of the assets of the solely in exchange for shares of the
National Municipals Fund and the assumption of the Series' liabilities, if any.
Code Section 1032(a).
5. The basis of the Series assets in the hands of the National Municipals
Fund will be the same as the basis of such assets in the hands of the Series
immediately prior to the Reorganization. Code Section 362(b).
6. The holding period of the Series assets in the hands of National
Municipals Fund will include the period during which such assets were held by
the Series immediately prior to the Reorganization. Code Section 1223(2).
7. The basis of the National Municipals Fund shares to be received by
shareholders of the Series will, in each instance, be the same as the basis of
the shares of beneficial interest Class A, Class B and Class C of the Series
held by such shareholders and cancelled in the Reorganization. Code
Section 358(a)(1).
8. The holding period of the National Municipals Fund shares to be
received by the shareholders of the Series will include the holding period of
the shares of beneficial interest of
<PAGE>
Page 6
the Series cancelled pursuant to the Reorganization, provided that the National
Municipals Fund shares are held as capital assets on the date of the
Reorganization. Code Section 1223(1).
You should be aware that this opinion is not binding on the Internal
Revenue Service or the courts and that no ruling of the Internal Revenue Service
has been requested. No opinion is expressed concerning the state, local or
foreign tax consequences of the Reorganization.
This opinion is being delivered to you pursuant to paragraph 8.6 of the
Agreement.
We hereby give you our consent to your inclusion of this opinion as an
exhibit to the Registration Statement on Form N-14, as amended, filed by the
National Municipals Fund with the Securities and Exchange Commission. 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,
as amended, or the Rules and Regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ Gardner, Carton & Douglas
<PAGE>
SEPTEMBER 13, 1995
Prudential Municipal Series Fund Prudential National Municipals Fund, Inc.
- Arizona Series One Seaport Plaza
One Seaport Plaza New York, New York 10292
New York, New York 10292
Re: REORGANIZATION OF THE PRUDENTIAL MUNICIPAL SERIES FUND - ARIZONA
SERIES AND THE PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Ladies and Gentlemen:
We are outside counsel to Prudential Municipal Series Fund (the "Municipal
Series Fund"). An Agreement and Plan of Reorganization (the "Agreement") has
been proposed pursuant to which the Municipal Series Fund will transfer to
Prudential National Municipals Fund, Inc. (the "National Municipals Fund")
substantially all of the assets of the Arizona Series (the "Series") in exchange
solely for voting shares ("shares") of the National Municipals Fund and the
assumption by the National Municipals Fund of the liabilities, if any, of the
Series incurred in the ordinary course of business followed by the constructive
distribution of such stock of the National Municipals Fund to the holders of the
shares of beneficial interest Class A, Class B and Class C of the Series in
liquidation of the Series (the "Reorganization"). You have requested our
opinion as to certain federal income tax consequences of the Reorganization.
The opinion that follows is based on the Internal Revenue Code of 1986 as
amended through the date hereof (the "Code"), judicial decisions, administrative
rulings and regulations and such other sources of legal authority as we deemed
necessary to consult in rendering this opinion. The opinion is also based on
factual representations set forth herein and on our understanding that the
Reorganization will take place substantially as set out in the Agreement and as
described in the Proxy Statement (the "Proxy Statement") included in the
Registration Statement on Form N-14, as amended, filed by the National
Municipals Fund with the Securities and Exchange Commission (the "Registration
Statement") for the meeting of shareholders of the Series to be held on
October 16, 1995.
<PAGE>
Page 2
SUMMARY OF THE TRANSACTION
In the Reorganization, the Series will transfer substantially all of its
assets and liabilities to the National Municipals Fund in exchange for shares of
the National Municipals Fund. The Series will then liquidate and distribute to
its shareholders as a liquidating distribution all of such shares of the
National Municipals Fund in exchange for and in cancellation of the Series
shares of beneficial interest Class A, Class B and Class C.
BUSINESS PURPOSE
Our opinion is based in part upon our understanding that the primary
business purpose of this transaction is to achieve certain cost savings by
combining the assets of the Series and the National Municipals Fund as is
represented below. A full description of the business purposes of the
Reorganization is set out in the Proxy Statement.
REPRESENTATIONS
In rendering our opinion we are, with your permission, assuming that the
transaction will occur substantially as described in the Agreement and the Proxy
Statement. We are also relying on the following additional representations
which have been certified to us by either the Series, the National Municipals
Fund or both:
1. The primary business purpose of this transaction is to achieve certain
cost savings by combining the assets of the Series and the National Municipals
Fund. The Series has experienced high expense ratios, an inability to attract
new assets and difficulty in obtaining suitable investments. Furthermore, the
Series does not enjoy the economies of scale enjoyed by a larger fund.
2. The fair market value of the National Municipals Fund shares received
by each the Series shareholder will be approximately equal to the fair market
value of the Series shares of beneficial interest Class A, Class B and Class C
surrendered in exchange therefor.
3. No cash or property, other than the National Municipals Fund shares,
will be transferred to the Series or distributed to the Series shareholders
pursuant to the Reorganization.
4. There is no plan or intention on the part of any shareholder of the
Series who owns 5% or more of the shares of beneficial interest of the Series
and to the best of the knowledge of management of the Series, there is no plan
or intention on the part of the shareholders of the Series to sell, exchange,
or otherwise dispose of a number of shares of the National Municipals Fund
received in the transaction that would reduce the Series shareholders'
ownership of the National Municipals Fund to a number of shares having a value,
as of the date of the transaction, of less than 50 percent of the value of all
of the formerly
<PAGE>
Page 3
outstanding shares of beneficial interest Class A, Class B and Class C of the
Series as of the same date. Although Section 9.4 of the Municipal Series
Fund's Declaration of Trust provides for certain dissenters' rights, the
management of the Series has been told that the staff of the Securities and
Exchange Commission believes that the Investment Company Act supersedes such
dissenters' rights and that a shareholder can redeem shares only at their net
asset value. No cash will be exchanged for the Series shares of beneficial
interest Class A, Class B and Class C in lieu of fractional shares of the
National Municipals Fund. Moreover, shares of beneficial interest Class A,
Class B and Class C of the Series and shares of the National Municipals Fund
held by the Series shareholders, and otherwise sold, redeemed, or disposed of
prior or subsequent to the transaction will be taken into account for purposes
of this representation, except for shares of beneficial interest Class A,
Class B and Class C in the Series and the National Municipals Fund redeemed by
the Series or the National Municipals Fund in the ordinary course of their
respective businesses as open-end investment companies.
5. The National Municipals Fund will acquire at least 90 percent of the
fair market value of the net assets and at least 70 percent of the fair market
value of the gross assets held by the Series pursuant to the Reorganization.
For purposes of this representation, amounts used by the Series to pay its
reorganization expenses, and all redemptions and distributions (except for
distributions and redemptions occurring in the ordinary course of the Series'
business as an open-end investment company) made by the Series immediately
preceding the transfer will be included as assets of the Series held immediately
prior to the transaction.
6. The National Municipals Fund has no plan or intention to reacquire any
of its shares issued in the transaction, except for shares redeemed in the
ordinary course of its business as an open-end investment company.
7. The National Municipals Fund has no plan or intention to sell or
otherwise dispose of any of the assets of the Series acquired in the
transaction, except for dispositions made in the ordinary course of business.
Following the Reorganization, the National Municipals Fund will continue the
historic business of the Series of investing in municipal obligations including
obligations of the State of Arizona, the interest on which is excludable from
gross income for federal income tax purposes.
8. As soon as practicable after the closing date, and in any event within
30 days thereafter, the Series will, in pursuance of the Agreement, distribute
the shares it receives in the Reorganization, and its other properties, and will
then be liquidated for federal income tax purposes.
9. In no event will the Series dispose of to third parties (other than in
the ordinary course of business) and/or retain after the Reorganization assets
which in the aggregate, will result in less than 50 percent of the historic
business assets of the Series being transferred to the National Municipals Fund
in the Reorganization.
<PAGE>
Page 4
10. Neither the Series nor persons who were shareholders of the Series
immediately before the closing date of the Reorganization will own, immediately
after the closing date of the reorganization National Municipals Fund shares
constituting "control" of National Municipals Fund within the meaning of Section
304(c) or Section 368(c) of the Code.
11. All expenses incurred in connection with the Reorganization will be
borne pro rata by the Series and the National Municipals Fund in proportion to
their assets.
12. There is no intercorporate indebtedness existing between the National
Municipals Fund and the Series that was issued, acquired, or will be settled at
a discount.
13. The National Municipals Fund and the Series are investment companies
as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code, and are both
regulated investment companies within the meaning of Section 851 of the Code.
14. The National Municipals Fund does not own, directly or indirectly, nor
has it owned during the past five years, directly or indirectly, any shares of
beneficial interest Class A, Class B and Class C of the Series.
15. The liabilities, if any, and the unreimbursed distribution expenses of
the Series to be assumed by the National Municipals Fund in the Reorganization
plus the liabilities, if any, to which the transferred assets are subject were
incurred by the Series in the ordinary course of business and are associated
with the assets to be transferred.
16. The fair market value and the adjusted basis of the Series' assets
transferred to the National Municipals Fund will equal or exceed the sum of the
liabilities, if any, to which the transferred assets are subject.
17. The amount of cash, if any, retained by the Series to meet expenses,
plus liabilities, if any, of the Series to be assumed by the National Municipals
Fund in the Reorganization, plus the liabilities, if any, to which the
transferred assets are subject, will not equal or exceed 20 percent of the fair
market value of all property held by the Series immediately prior to the
Reorganization.
18. The Series is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
19. In connection with the Reorganization, the Series has not and will not
distribute to its creditors any of the Series' shares of beneficial interest
Class A, Class B and Class C, the National Municipals Fund shares or rights to
acquire the Series shares of beneficial interest Class A, Class B or Class C or
the National Municipals Fund shares.
<PAGE>
Page 5
20. It is anticipated that there will be no amount remaining in the hands
of the Series after the payment of the liabilities of the Series.
OPINION
Based upon the foregoing, and based upon our review of the relevant legal
authorities, it is our opinion that:
1. For federal income tax purposes the Reorganization will constitute a
"reorganization" within the meaning of Code Section 368(a)(1)(C). The Series
and the National Municipals Fund will each be "a party to a reorganization"
within the meaning of Code Section 368(b).
2. No gain or loss will be recognized by the shareholders of the Series
upon receipt of the National Municipals Fund shares solely in exchange for and
in cancellation of the Series shares of beneficial interest, as described above
and in the Agreement. Code Section 354(a)(1).
3. No gain or loss will be recognized to the Series on the transfer of
substantially all of its assets to the National Municipals Fund solely in
exchange for shares of the National Municipals Fund and the assumption by the
National Municipals Fund of the liabilities, if any, of the Series. Code
Sections 361(a) and 357(a). In addition, no gain or loss will be recognized to
the Series on the distribution of such shares to the Series' shareholders in
liquidation of the Series. Code Section 361(a)(1)(A).
4. No gain or loss will be recognized to the National Municipals Fund
upon the receipt of the assets of the solely in exchange for shares of the
National Municipals Fund and the assumption of the Series' liabilities, if any.
Code Section 1032(a).
5. The basis of the Series assets in the hands of the National Municipals
Fund will be the same as the basis of such assets in the hands of the Series
immediately prior to the Reorganization. Code Section 362(b).
6. The holding period of the Series assets in the hands of National
Municipals Fund will include the period during which such assets were held by
the Series immediately prior to the Reorganization. Code Section 1223(2).
7. The basis of the National Municipals Fund shares to be received by
shareholders of the Series will, in each instance, be the same as the basis of
the shares of beneficial interest Class A, Class B and Class C of the Series
held by such shareholders and cancelled in the Reorganization. Code
Section 358(a)(1).
<PAGE>
Page 6
8. The holding period of the National Municipals Fund shares to be
received by the shareholders of the Series will include the holding period of
the shares of beneficial interest of the Series cancelled pursuant to the
Reorganization, provided that the National Municipals Fund shares are held as
capital assets on the date of the Reorganization. Code Section 1223(1).
You should be aware that this opinion is not binding on the Internal
Revenue Service or the courts and that no ruling of the Internal Revenue Service
has been requested. No opinion is expressed concerning the state, local or
foreign tax consequences of the Reorganization.
This opinion is being delivered to you pursuant to paragraph 8.6 of the
Agreement.
We hereby give you our consent to your inclusion of this opinion as an
exhibit to the Registration Statement on Form N-14, as amended, filed by the
National Municipals Fund with the Securities and Exchange Commission. 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,
as amended, or the Rules and Regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ Gardner, Carton & Douglas
<PAGE>
SEPTEMBER 13, 1995
Prudential Municipal Series Fund Prudential National Municipals Fund, Inc.
- Minnesota Series One Seaport Plaza
One Seaport Plaza New York, New York 10292
New York, New York 10292
Re: REORGANIZATION OF THE PRUDENTIAL MUNICIPAL SERIES FUND - MINNESOTA
SERIES AND THE PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Ladies and Gentlemen:
We are outside counsel to Prudential Municipal Series Fund (the "Municipal
Series Fund"). An Agreement and Plan of Reorganization (the "Agreement") has
been proposed pursuant to which the Municipal Series Fund will transfer to
Prudential National Municipals Fund, Inc. (the "National Municipals Fund")
substantially all of the assets of the Minnesota Series (the "Series") in
exchange solely for voting shares ("shares") of the National Municipals Fund and
the assumption by the National Municipals Fund of the liabilities, if any, of
the Series incurred in the ordinary course of business followed by the
constructive distribution of such stock of the National Municipals Fund to the
holders of the shares of beneficial interest Class A, Class B and Class C of the
Series in liquidation of the Series (the "Reorganization"). You have requested
our opinion as to certain federal income tax consequences of the Reorganization.
The opinion that follows is based on the Internal Revenue Code of 1986 as
amended through the date hereof (the "Code"), judicial decisions, administrative
rulings and regulations and such other sources of legal authority as we deemed
necessary to consult in rendering this opinion. The opinion is also based on
factual representations set forth herein and on our understanding that the
Reorganization will take place substantially as set out in the Agreement and as
described in the Proxy Statement (the "Proxy Statement") included in the
Registration Statement on Form N-14, as amended, filed by the National
Municipals Fund with the Securities and Exchange Commission (the "Registration
Statement") for the meeting of shareholders of the Series to be held on
October 16 , 1995.
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SUMMARY OF THE TRANSACTION
In the Reorganization, the Series will transfer substantially all of its
assets and liabilities to the National Municipals Fund in exchange for shares of
the National Municipals Fund. The Series will then liquidate and distribute to
its shareholders as a liquidating distribution all of such shares of the
National Municipals Fund in exchange for and in cancellation of the Series
shares of beneficial interest Class A, Class B and Class C.
BUSINESS PURPOSE
Our opinion is based in part upon our understanding that the primary
business purpose of this transaction is to achieve certain cost savings by
combining the assets of the Series and the National Municipals Fund as is
represented below. A full description of the business purposes of the
Reorganization is set out in the Proxy Statement.
REPRESENTATIONS
In rendering our opinion we are, with your permission, assuming that the
transaction will occur substantially as described in the Agreement and the Proxy
Statement. We are also relying on the following additional representations
which have been certified to us by either the Series, the National Municipals
Fund or both:
1. The primary business purpose of this transaction is to achieve certain
cost savings by combining the assets of the Series and the National Municipals
Fund. The Series has experienced high expense ratios, an inability to attract
new assets and difficulty in obtaining suitable investments. Furthermore, the
Series does not enjoy the economies of scale enjoyed by a larger fund.
2. The fair market value of the National Municipals Fund shares received
by each the Series shareholder will be approximately equal to the fair market
value of the Series shares of beneficial interest Class A, Class B and Class C
surrendered in exchange therefor.
3. No cash or property, other than the National Municipals Fund shares,
will be transferred to the Series or distributed to the Series shareholders
pursuant to the Reorganization.
4. There is no plan or intention on the part of any shareholder of the
Series who owns 5% or more of the shares of beneficial interest of the Series
and to the best of the knowledge of management of the Series, there is no plan
or intention on the part of the shareholders of the Series to sell, exchange,
or otherwise dispose of a number of shares of the National Municipals Fund
received in the transaction that would reduce the Series shareholders'
ownership of the National Municipals Fund to a number of shares having a value,
as of the date of the transaction, of less than 50 percent of the value of all
of the formerly outstanding shares of beneficial interest Class A, Class B and
Class C of the Series as of the
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same date. Although Section 9.4 of the Municipal Series Fund's Declaration of
Trust provides for certain dissenters' rights, the management of the Series has
been told that the staff of the Securities and Exchange Commission believes that
the Investment Company Act supersedes such dissenters' rights and that a
shareholder can redeem shares only at their net asset value. No cash will be
exchanged for the Series shares of beneficial interest Class A, Class B and
Class C in lieu of fractional shares of the National Municipals Fund. Moreover,
shares of beneficial interest Class A, Class B and Class C of the Series and
shares of the National Municipals Fund held by the Series shareholders, and
otherwise sold, redeemed, or disposed of prior or subsequent to the transaction
will be taken into account for purposes of this representation, except for
shares of beneficial interest Class A, Class B and Class C in the Series and the
National Municipals Fund redeemed by the Series or the National Municipals Fund
in the ordinary course of their respective businesses as open-end investment
companies.
5. The National Municipals Fund will acquire at least 90 percent of the
fair market value of the net assets and at least 70 percent of the fair market
value of the gross assets held by the Series pursuant to the Reorganization.
For purposes of this representation, amounts used by the Series to pay its
reorganization expenses, and all redemptions and distributions (except for
distributions and redemptions occurring in the ordinary course of the Series'
business as an open-end investment company) made by the Series immediately
preceding the transfer will be included as assets of the Series held immediately
prior to the transaction.
6. The National Municipals Fund has no plan or intention to reacquire any
of its shares issued in the transaction, except for shares redeemed in the
ordinary course of its business as an open-end investment company.
7. The National Municipals Fund has no plan or intention to sell or
otherwise dispose of any of the assets of the Series acquired in the
transaction, except for dispositions made in the ordinary course of business.
Following the Reorganization, the National Municipals Fund will continue the
historic business of the Series of investing in municipal obligations including
obligations of the State of Minnesota, the interest on which is excludable from
gross income for federal income tax purposes.
8. As soon as practicable after the closing date, and in any event within
30 days thereafter, the Series will, in pursuance of the Agreement, distribute
the shares it receives in the Reorganization, and its other properties, and will
then be liquidated for federal income tax purposes.
9. In no event will the Series dispose of to third parties (other than in
the ordinary course of business) and/or retain after the Reorganization assets
which in the aggregate, will result in less than 50 percent of the historic
business assets of the Series being transferred to the National Municipals Fund
in the Reorganization.
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10. Neither the Series nor persons who were shareholders of the Series
immediately before the closing date of the Reorganization will own, immediately
after the closing date of the reorganization National Municipals Fund shares
constituting "control" of National Municipals Fund within the meaning of Section
304(c) or Section 368(c) of the Code.
11. All expenses incurred in connection with the Reorganization will be
borne pro rata by the Series and the National Municipals Fund in proportion to
their assets.
12. There is no intercorporate indebtedness existing between the National
Municipals Fund and the Series that was issued, acquired, or will be settled at
a discount.
13. The National Municipals Fund and the Series are investment companies
as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code, and are both
regulated investment companies within the meaning of Section 851 of the Code.
14. The National Municipals Fund does not own, directly or indirectly, nor
has it owned during the past five years, directly or indirectly, any shares of
beneficial interest Class A, Class B and Class C of the Series.
15. The liabilities, if any, and the unreimbursed distribution expenses of
the Series to be assumed by the National Municipals Fund in the Reorganization
plus the liabilities, if any, to which the transferred assets are subject were
incurred by the Series in the ordinary course of business and are associated
with the assets to be transferred.
16. The fair market value and the adjusted basis of the Series' assets
transferred to the National Municipals Fund will equal or exceed the sum of the
liabilities, if any, to which the transferred assets are subject.
17. The amount of cash, if any, retained by the Series to meet expenses,
plus liabilities, if any, of the Series to be assumed by the National Municipals
Fund in the Reorganization, plus the liabilities, if any, to which the
transferred assets are subject, will not equal or exceed 20 percent of the fair
market value of all property held by the Series immediately prior to the
Reorganization.
18. The Series is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
19. In connection with the Reorganization, the Series has not and will not
distribute to its creditors any of the Series' shares of beneficial interest
Class A, Class B and Class C, the National Municipals Fund shares or rights to
acquire the Series shares of beneficial interest Class A, Class B or Class C or
the National Municipals Fund shares.
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20. It is anticipated that there will be no amount remaining in the hands
of the Series after the payment of the liabilities of the Series.
OPINION
Based upon the foregoing, and based upon our review of the relevant legal
authorities, it is our opinion that:
1. For federal income tax purposes the Reorganization will constitute a
"reorganization" within the meaning of Code Section 368(a)(1)(C). The Series
and the National Municipals Fund will each be "a party to a reorganization"
within the meaning of Code Section 368(b).
2. No gain or loss will be recognized by the shareholders of the Series
upon receipt of the National Municipals Fund shares solely in exchange for and
in cancellation of the Series shares of beneficial interest, as described above
and in the Agreement. Code Section 354(a)(1).
3. No gain or loss will be recognized to the Series on the transfer of
substantially all of its assets to the National Municipals Fund solely in
exchange for shares of the National Municipals Fund and the assumption by the
National Municipals Fund of the liabilities, if any, of the Series. Code
Sections 361(a) and 357(a). In addition, no gain or loss will be recognized to
the Series on the distribution of such shares to the Series' shareholders in
liquidation of the Series. Code Section 361(a)(1)(A).
4. No gain or loss will be recognized to the National Municipals Fund
upon the receipt of the assets of the solely in exchange for shares of the
National Municipals Fund and the assumption of the Series' liabilities, if any.
Code Section 1032(a).
5. The basis of the Series assets in the hands of the National Municipals
Fund will be the same as the basis of such assets in the hands of the Series
immediately prior to the Reorganization. Code Section 362(b).
6. The holding period of the Series assets in the hands of National
Municipals Fund will include the period during which such assets were held by
the Series immediately prior to the Reorganization. Code Section 1223(2).
7. The basis of the National Municipals Fund shares to be received by
shareholders of the Series will, in each instance, be the same as the basis of
the shares of beneficial interest Class A, Class B and Class C of the Series
held by such shareholders and cancelled in the Reorganization. Code
Section 358(a)(1).
8. The holding period of the National Municipals Fund shares to be
received by the shareholders of the Series will include the holding period of
the shares of beneficial interest of
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the Series cancelled pursuant to the Reorganization, provided that the
National Municipals Fund shares are held as capital assets on the date of the
Reorganization. Code Section 1223(1).
You should be aware that this opinion is not binding on the Internal
Revenue Service or the courts and that no ruling of the Internal Revenue Service
has been requested. No opinion is expressed concerning the state, local or
foreign tax consequences of the Reorganization.
This opinion is being delivered to you pursuant to paragraph 8.6 of the
Agreement.
We hereby give you our consent to your inclusion of this opinion as an
exhibit to the Registration Statement on Form N-14, as amended, filed by the
National Municipals Fund with the Securities and Exchange Commission. 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,
as amended, or the Rules and Regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ Gardner, Carton & Douglas
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this registration statement on Form N-14 (the "N-14
Registration Statement") of our report dated February 21, 1995, relating to the
financial statements and financial highlights of Prudential National Municipals
Fund, Inc. (the "Report"), appearing in the Statement of Additional Information
constituting part of Post-Effective Amendment No. 23 to the registration
statement on Form N-1A (the "N-1A Registration Statement") which is part of the
N-14 Registration Statement. We also consent to the use of the Report in the N-
1A Registration Statement; the incorporation by reference of the Report into the
Prospectus which constitutes part of the N-1A Registration Statement; and, to
the incorporation by reference of the Report in the Prospectus and Proxy
Statement constituting part of the N-14 Registration Statement. We also consent
to the references to us in the N-1A Registration Statement under the heading
"Custodian and Transfer and Dividend Disbursing Agent and Independent
Accountants" in the Statement of Additional Information and under the heading
"Financial Highlights" in the Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
New York, New York
September 14, 1995
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CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Pre-Effective Amendment No. 1 to Registration Statement
No. 33-61953 of Prudential National Municipals Fund, Inc. of our reports on the
financial statements of the Arizona Series, the Georgia Series and the Minnesota
Series of Prudential Municipal Series Fund dated October 17, 1994, which are a
part of such Registration Statement, and to the references to us under the
headings "Financial Highlights" in the Prospectus of each Series dated December
30, 1994, which are incorporated by reference in such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
September 14, 1995
<PAGE>
PRUDENTIAL MUNICIPAL PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
SERIES FUND OF TRUSTEES
(ARIZONA SERIES) The undersigned hereby appoints S. Jane Rose,
ONE SEAPORT PLAZA Deborah A. Docs and Grace Torres as Proxies,
NEW YORK, NEW YORK 10292 each with the power of substitution, and
hereby authorizes each of them to represent
and to vote, as designated below, all the
shares of beneficial interest of the
Prudential Municipal Series Fund (Arizona
Series) held of record by the undersigned on
August 11, 1995 at the Special Meeting of
Shareholders to be held on October 16, 1995,
or any adjournment thereof.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval of the Agreement and Plan of Reorganization
/ / APPROVE
/ / DISAPPROVE
/ / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting.
(OVER)
<PAGE>
(CONTINUED FROM OTHER SIDE)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name
by authorized person.
Dated ------------------------------------ , 1995
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Signature
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Signature if held jointly
<PAGE>
PRUDENTIAL MUNICIPAL PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
SERIES FUND OF TRUSTEES
(GEORGIA SERIES) The undersigned hereby appoints S. Jane Rose,
ONE SEAPORT PLAZA Deborah A. Docs and Grace Torres as Proxies,
NEW YORK, NEW YORK 10292 each with the power of substitution, and
hereby authorizes each of them to represent
and to vote, as designated below, all the
shares of beneficial interest of the
Prudential Municipal Series Fund (Georgia
Series) held of record by the undersigned on
August 11, 1995 at the Special Meeting of
Shareholders to be held on October 16, 1995,
or any adjournment thereof.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval of the Agreement and Plan of Reorganization
/ / APPROVE
/ / DISAPPROVE
/ / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting.
(OVER)
<PAGE>
(CONTINUED FROM OTHER SIDE)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership name
by authorized person.
Dated ------------------------------------ , 1995
----------------------------------------------
Signature
----------------------------------------------
Signature if held jointly
<PAGE>
PRUDENTIAL MUNICIPAL PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
SERIES FUND OF TRUSTEES
(MINNESOTA SERIES) The undersigned hereby appoints S. Jane Rose,
ONE SEAPORT PLAZA Deborah A. Docs and Grace Torres as Proxies,
NEW YORK, NEW YORK 10292 each with the power of substitution, and
hereby authorizes each of them to represent
and to vote, as designated below, all the
shares of beneficial interest of the
Prudential Municipal Series Fund (Minnesota
Series) held of record by the undersigned on
August 11, 1995 at the Special Meeting of
Shareholders to be held on October 16, 1995,
or any adjournment thereof.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval of the Agreement and Plan of Reorganization
/ / APPROVE
/ / DISAPPROVE
/ / ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting.
(OVER)
<PAGE>
(CONTINUED FROM OTHER SIDE)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such. If a corporation,
please sign in full corporate name by
president or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Dated ------------------------------------ , 1995
----------------------------------------------
Signature
----------------------------------------------
Signature if held jointly
<PAGE>
EXHIBIT 17(B)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1980
REGISTRATION NO. 2-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. ------------ / /
POST-EFFECTIVE AMENDMENT NO. ------------ / /
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. ------------ / /
(Check appropriate box or boxes)
------------------------
CHANCELLOR HIGH YIELD MUNICIPALS, INC.
(Exact name of reigistrant as specified in charter)
100 GOLD STREET 10038
NEW YORK, NEW YORK (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, including Area Code (212) 791-7123
ROBERT H. WADSWORTH
100 GOLD STREET
NEW YORK, NEW YORK 10038
(Name and Address of Agent for Service)
COPY TO:
JOHN E. BAUMGARDNER, JR, ESQ.
SULLIVAN & CROMWELL
125 BROAD STREET
NEW YORK, NEW YORK, 10004
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
------------------------
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HEREBY ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES OF ITS COMMON STOCK,
PAR VALUE $.01 PER SHARE. THE AMOUNT OF THE REGISTRATION FEE IS $500.00.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
Prudential National Municipals Fund, Inc.
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Prospectus dated February 28, 1995
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Prudential National Municipals Fund, Inc. (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. There can be no assurance that the Fund's investment objective will
be achieved. See "How the Fund is Managed-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 Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated February 28, 1995, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<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, Inc.?
Prudential National Municipals Fund, Inc. 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. There can be no assurance that the Fund's objective will be
achieved. See "How the Fund Invests-Investment Objective and Policies" at page
8.
Risk Factors and Special Characteristics
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. See "How the Fund
Invests-Investment Objective and Policies" at page 8. The Fund may also engage
in various hedging strategies, including derivatives. See "How the Fund
Invests-Hedging Strategies-Risks of Hedging Strategies" at page 13.
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, 1995, PMF served as manager or administrator to 69 investment companies,
including 39 mutual funds, with aggregate assets of approximately $45 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 15.
Who Distributes the Fund's Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .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 and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is currently paid for its services at an
annual rate of .75 of 1% of the average daily net assets of the Class C shares.
See "How the Fund is Managed-Distributor" at page 16.
2
<PAGE>
What is the Minimum Investment?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
employee savings plans. 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 23 and "Shareholder
Guide-Shareholder Services" at page 31.
How Do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities
Incorporated (Prudential Securities or PSI), 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 (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its
Shares" at page 19 and "Shareholder Guide-How to Buy Shares of the Fund" at
page 23.
What Are My Purchase Alternatives?
The Fund offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of the offering
price.
- Class B Shares: 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. Although
Class B shares are subject to higher ongoing distribution-related expenses
than Class A shares, Class B shares will automatically convert to Class A
shares (which are subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like Class B shares, Class
C shares are subject to higher ongoing distribution-related expenses than
Class A shares but do not convert to another class.
See "Shareholder Guide-Alternative Purchase Plan" at page 24.
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.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide-How to Sell Your Shares" at page 27.
How Are Dividends and Distributions Paid?
The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of 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 20.
3
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Shareholder Transaction Expenses-
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)........................ 3% None None
Maximum Sales Load or Deferred
Sales Load Imposed on
Reinvested Dividends................... None None None
Deferred Sales Load (as a percent- 5% during the first year,
age of original purchase price or decreasing by 1% annually
redemption proceeds, whichever to 1% in the fifth and sixth 1% on redemptions made
is lower).............................. None years and 0% the seventh year* within one year of purchase
Redemption Fees........................ None None None
Exchange Fees.......................... None None None
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares**
-------------- ------------------------------ ---------------------------
Management Fees........................ .47% .47% .47%
12b-1 Fees -........................... .10%-- .50% .75--
Other Expenses......................... .20% .20% .20%
-------------- ------------------------------ ---------------------------
Total Fund Operating Expenses.......... .77% 1.17% 1.42%
============== ============================== ===========================
<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............................................................................ $38 $54 $72 $123
Class B............................................................................ $62 $67 $74 $115
Class C**.......................................................................... $24 $45 $78 $170
You would pay the following expenses on the same investment assuming no redemption:
Class A............................................................................ $38 $54 $72 $123
Class B............................................................................ $12 $37 $64 $126
Class C**.......................................................................... $14 $45 $78 $170
</TABLE>
The above example with respect to Class A and Class B shares is based on data
for the Fund's fiscal year ended December 31, 1994. The above example with
respect to Class C shares is based on expenses expected to have been incurred
if Class C shares had been in existence during the entire fiscal year ended
December 31, 1994. 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 various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund Is Managed." "Other Expenses" includes operating expenses of
the Fund, such as directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees.
------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide-Conversion Feature-Class
B Shares."
** Estimated based on expenses expected to have been incurred if Class C shares
had been in existence during the entire fiscal year ended December 31, 1994.
- 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
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 and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% per annum and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to Class A and Class C shares of the Fund to no more than .10 of 1%
and .75 of 1% of the average daily net asset value of the Class A and Class
C shares, respectively, for the year ending December 31, 1995. Total
operating expenses without such limitations would be .97% and 1.67% for
Class A and Class C shares, respectively. See "How the Fund is
Managed-Distributor."
FUND EXPENSES
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 LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other
supplemental data for each of the periods indicated. The information is based
on data contained in the financial statements.
<TABLE>
<CAPTION>
Class A
----------------------------------
Year Ended January 22,
December 31, 1990-
---------------------------------- through
December
31, 1990 1994 1993 1992 1991
----------- --------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $16.30 $15.94 $16.00 $15.09 $14.98
--------- -------- ------- ------- -----------
Income from investment operations:
Net investment income.......................... .81 .90 .94 .97 .90
Net realized and unrealized gain (loss) on
investment transactions........................ (1.78) 1.05 .43 .91 .11
--------- -------- ------- ------- -----------
Total from investment operations............... (.97) 1.95 1.37 1.88 1.01
--------- ------- ------- -----------
--------
Less distributions:
Dividends from net investment income........... (.81) (.90) (.94) (.97) (.90)
Distributions from net realized capital gains.. (.10) (.69) (.49) - -
--------- -------- ------- ------- -----------
Total distributions............................ (.91) (1.59) (1.43) (.97) (.90)
--------- -------- ------- ------- -----------
Net asset value, end of period................. $14.42 $16.30 $15.94 $16.00 $15.09
========= ======== ======= ======= ===========
TOTAL RETURN: --............................... (6.04)% 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $12,721 $14,167 $7,700 $3,819 $1,846
Average net assets (000)....................... $14,116 $11,786 $5,401 $2,697 $1,161
Ratios to average net assets:
Expenses, including distribution fees.......... .77% .69% .72% .75% .75%*
Expenses, excluding distribution fees.......... .67% .59% .62% .65% .65%*
Net investment income.......................... 5.38% 5.49% 5.79% 6.27% 6.43%*
Portfolio turnover............................. 120% 82% 114% 59% 110%
------
<FN>
* 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>
5
<PAGE>
The following financial highlights with respect to each of the five years in
the period ended December 31, 1994, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the years indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the years indicated)
(Class B Shares)
Class B
--------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988* 1987 1986 1985
---- ---- ---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year.............. $16.33 $15.97 $16.02 $15.11 $15.15 $15.04 $14.57 $16.18 $15.37 $13.86
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Income from investment
operations:
Net investment income ......... .75 .84 .88 .91 .90 .96 1.03 1.05 1.18 1.28
Net realized and unrealized
gain (loss) on investment
transactions................... (1.78) 1.05 .44 .91 (.04) .11 .47 (1.55) 1.59 1.52
-------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations..................... (1.03) 1.89 1.32 1.82 .86 1.07 1.50 (.50) 2.77 2.80
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Less distributions:
Dividends from net investment
income......................... (.75) (.84) (.88) (.91) (.90) (.96) (1.03) (1.05) (1.18) (1.28)
Distributions from net realized
capital gains.................. (.10) (.69) (.49) - - - - (.06) (.78) (.01)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total distributions............ (.85) (1.53) (1.37) (.91) (.90) (.96) (1.03) (1.11) (1.96) (1.29)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value,
end of year................... $14.45 $16.33 $15.97 $16.02 $15.11 $15.15 $15.04 $14.57 16.18 $15.37
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN: -............... (6.39)% 12.15% 8.50% 12.42% 5.96% 7.43% 10.49% (3.14)% 18.78% 21.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (000) ................... $672,272 $848,299 $828,702 $874,338 $882,212 $1,033,173 $1,066,159 $1,046,293 $1,103,508 $558,662
Average net assets (000)...... $751,623 $854,919 $829,830 $862,249 $940,215 $1,027,726 $1,081,122 $1,126,394 $859,796 $377,053
Ratios to average net assets:
Expenses, including
distribution fees.............. 1.17% 1.09% 1.12% 1.15% 1.13% 1.01% 1.02% 1.01% .90% .73%
Expenses, excluding
distribution fees.............. .67% .59% .62% .65% .64% .66% .66% .65% .62% .65%
Net investment income.......... 4.96% 5.09% 5.39% 5.87% 6.03% 6.45% 6.86% 6.83% 7.13% 8.39%
Portfolio turnover............. 120% 82% 114% 59% 110% 198% 152% 105% 117% 124%
------
<FN>
* 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.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period indicated)
(Class C Shares)
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
Class C
---------------
August 1,
1994*
through
December 31,
PER SHARE OPERATING PERFORMANCE: 1994
------------
<S> <C>
Net asset value, beginning of period... $15.13
------------
Income from investment operations:
Net investment income.................. .29
Net realized and unrealized loss on
investment transactions................ (.69)
------------
Total from investment operations....... (.40)
------------
Less distributions:
Dividends from net investment income... (.29)
------------
Net asset value, end of period......... $14.44
============
TOTAL RETURN:-......................... (2.63)%
RATIOS/SUPPLEMENTAL DATA:--
Net assets, end of period (000)........ $141
Average net assets (000)............... $103
Ratios to average net assets:
Expenses, including distribution fees.. 1.51%**
Expenses, excluding distribution fees.. .76%**
Net investment income.................. 4.84%**
Portfolio turnover..................... 120%
------
<FN>
* Commencement of offering of Class C shares.
** Annualized.
- 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.
-- Since the Fund did not commence a public offering of Class C shares until
August 1, 1994, historical expenses and ratios of expenses to average net
assets of Class A or Class B shares are not necessarily indicative of future
expenses and related ratios of Class C shares.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
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, 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. There can be no assurance that such objective will be
achieved. See "Investment Objective and Policies" in the Statement of
Additional Information.
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 fundamental
may be modified by the Board of Directors.
The Municipal Bonds in which the Fund may invest include 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.
The Municipal Notes in which the Fund may invest include tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes.
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
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."
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
characteristics as well. A more complete description of these and other
Municipal Bond and Note ratings is contained in Appendix A to the Statement of
Additional Information.
8
<PAGE>
As of December 31, 1994, the composition of the Fund's portfolio by rating
category was as follows:
Percentage of
Ratings Total Investments
------- -----------------
AAA/Aaa 43.66%
AA/Aa 15.89%
A/A 22.86%
BBB/Baa 14.28%
B/B -
CCC/Caa -
CC/Ca -
C/C -
Unrated 3.31%
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
rating 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.
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 market fluctuation from
changes in interest rates than do those with shorter maturities. 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
medium grade Municipal Bonds. As a result of these changing conditions in the
municipal securities markets, the investment adviser has invested a substantial
portion of the Fund's assets in higher quality Municipal Bonds. The investment
adviser intends to invest in medium grade Municipal Bonds to the extent 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 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
9
<PAGE>
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.
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 opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect
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 "Hedging Strategies" below.
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.
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.
HEDGING STRATEGIES
The Fund may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its investments. These strategies
currently include the purchase of put or tender options on Municipal Bonds and
Notes and the purchase and sale of financial futures contracts and options
thereon and municipal bond index futures contracts. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objective and Policies-Additional Investment Policies"
in the Statement of Additional Information. New financial products and risk
management techniques continue to be developed and the Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.
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
10
<PAGE>
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 purchase 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 underlying 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 taxable
obligations, there may be occasions when, as a result of maturities of
portfolio securities or sales of Fund shares or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income. In
addition, there may be occasions when, in order to raise cash to meet
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
requirements 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 marketable, 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
occasion, 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
circumstances. 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.
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
interest on Municipal Bonds and Notes and for providing state and local
governments with federal credit assistance. Reevaluation of the Fund's
investment objectives and structure might be necessary in the future due to
market conditions which may result from future changes in the tax laws.
11
<PAGE>
Futures Contracts and Options Thereon
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 specified
quantity of a financial instrument or the cash value of a securities index.
Presently, futures contracts are available in several types of fixed income
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 11/2-2%
of the contract amount, called the "initial margin." Additionally, during 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
delivery of the underlying securities, these obligations are typically
cancelled or closed out before the scheduled settlement date. The closing is
accomplished by purchasing (or selling) an identical futures contract to offset
a short (or long) position. Such an offsetting transaction cancels the
contractual obligations established by the original futures transaction. Other
financial futures contracts call for cash settlements rather than delivery of
securities. 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 always
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
conditions, 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
Commodity Futures Trading Commission regulations) if immediately thereafter the
sum of initial and net cumulative variation margins on its outstanding futures
contracts, together with premiums paid on options thereon would exceed 20% of
its total assets. See "Investment Objective and Policies-Financial Futures
Contracts-Limitations on Purchase and Sale" 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 index
is priced daily by a group of six brokers.
The municipal bond index contract is designed to provide a way to hedge
municipal bond portfolios, since prices of existing futures on taxable
securities do not always correlate well with municipal bond prices. Because the
municipal 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
contract. 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.
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Risks of Hedging Strategies
Participation in the options and futures markets involves investment risks
and transaction costs to which the Fund would not be subject to absent the use
of these strategies. The Fund's successful use of financial futures contracts
and options on futures contracts depends upon the ability of its investment
adviser to predict movements in the direction of interest rates and other
factors affecting markets for securities. For example, if the Fund has hedged
against the possibility 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 requirements. 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 before 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 decline or for other reasons, the Fund will realize a
loss on the futures contract that is not offset by a reduction in the price of
the securities purchased. For a further discussion of the risks associated with
the use of futures contracts for hedging purposes, see "Investment Objective
and Policies-Financial Futures Contracts-Risks of Financial Futures
Transactions" in the Statement of Additional Information.
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
between 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
obligations on that date. While securities may be sold prior to the settlement
date, the Fund intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment
reasons. At the time the Fund makes the commitment to purchase a municipal
obligation on a when-issued or delayed delivery basis, it will record the
transaction and reflect the value of the obligation, each day, in determining
its net asset value. This value may fluctuate from day to day in the same
manner as values of municipal obligations otherwise held by the Fund. If the
seller defaults 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 interest
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.
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
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the facilities financed 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 infrequently. 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 adviser determines that there is a readily available
market for such securities. See "Illiquid Securities" below and "Investment
Objective and Policies-Illiquid Securities" in the Statement of Additional
Information.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Directors. See "Investment Objectives and Policies-Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand as deemed to have a maturity equal to the notice period.
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,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
However, 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 variations 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 investment
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 securities
have historically been subject to greater and more rapid price fluctuation. The
investment adviser will be free to take advantage of price volatility in order
to attempt to increase the Fund's net asset value by making appropriate sales
and purchases of portfolio securities.
Issue and Quality Classification
Securities with the same general quality rating and maturity characteristics,
but which vary according to the purpose for which they were issued, often tend
to trade at different yields. Similarly, securities issued for similar
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<PAGE>
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 response 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 issue 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
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the year ended December 31, 1994, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were .77%, 1.17% and 1.51% (annualized), 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 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. It was incorporated in May 1987 under the
laws of the State of Delaware. For the fiscal year ended December 31, 1994, 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, 1995, PMF served as the manager to 39 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $45 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), 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
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<PAGE>
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 wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
Fee Waiver and Subsidy
Effective January 1, 1995, PMF voluntarily agreed to waive .05 of 1% of its
management fee. After the waiver, the management fee is .45 of 1% of the Fund's
average daily net assets up to and including $250 million, .425 of 1% of the
next $250 million, .40 of 1% of the next $500 million, .375 of 1% of the next
$250 million, .35 of 1% of the next $250 million and .325 of 1% of the Fund's
average daily net assets in excess of $1.5 billion. PMF may hereafter agree,
from time to time, to further waive or modify any waiver of its management fee
and subsidize certain operating expenses of the Fund. The Fund is not required
to reimburse PMF for such management fee waiver or expense subsidy. Fee waivers
and expense subsidies will increase the Fund's yield and total return. See
"Fund Expenses."
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 (Prudential Securities or PSI), 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 and Class C shares of the Fund. It is an indirect,
wholly-owned subsidiary of Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C 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, Class B and Class C shares. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of 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, 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.
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<PAGE>
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
Under the Class A Plan, the Fund may pay PMFD for its distribution-related
activities 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. PMFD has agreed to limit its
distribution-related fees payable under the Class A Plan to .10 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
December 31, 1995.
For the fiscal year ended December 31, 1994, PMFD received payments of
$14,116 under the Class A Plan. This amount was primarily expended for payment
of account servicing fees to financial advisers and other persons who sell
Class A shares. For the fiscal year ended December 31, 1994. PMFD also received
approximately $92,500 in initial sales charges.
Under the Class B and Class C Plans, the Fund may pay Prudential Securities
for its distribution-related activities with respect to Class B and Class C
shares at an annual rate of up to .50 of 1% and up to 1% of the average daily
net assets of the Class B and Class C shares, respectively. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class B shares; provided that the total distribution-related fee
does not exceed .50 of 1%. The Class C Plan provides for the payment to
Prudential Securities of (i) an asset-based sales charge of up to .75 of 1% of
the average daily net assets of the Class C shares, and (ii) a service fee of
up to .25 of 1% of the average daily net assets of the Class C shares. The
service fee is used to pay for personal service and/or the maintenance of
shareholder accounts. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class C Plan to .75 of 1% of the
average daily net assets of the Class C shares for the fiscal year ending
December 31, 1995. Prudential Securities also receives contingent deferred
sales charges from certain redeeming shareholders. See "Shareholder Guide-How
to Sell Your Shares-Contingent Deferred Sales Charge."
For the fiscal year ended December 31, 1994, Prudential Securities incurred
distribution expenses of approximately $2,592,900 under the Class B Plan and
received $3,758,114 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $976,100 in contingent deferred
sales charges from redemptions of Class B shares during this period. For the
period August 1 through December 31, 1994, Prudential Securities incurred
distribution expenses of approximately $900 under the Class C Plan and received
$321 from the Fund under the Class C Plan. Prudential Securities did not
receive any contingent deferred sales charges from redemptions of Class C
shares during this period.
For the fiscal year ended December 31, 1994, the Fund paid distribution
expenses of .10%, .50% and .75% of the average net assets of the Class A, Class
B and Class C shares, respectively. The Fund records all payments made under
the Plans as expenses in the calculation of net investment income. Prior to the
date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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<PAGE>
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allowable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
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 the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources 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. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon the completion of the three year period, PSI has complied with the
terms of the agreement, no prosecution will be instituted by the United States
for the offenses charged in the complaint. If on the other hand, during the
course of the three year period, PSI violates the terms of the agreement, the
U.S. Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1852.
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<PAGE>
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
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 each class of 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, Class B and Class C shares will generally be the same. It is expected,
however, that the Fund's dividends will differ by approximately the amount of
the distribution-related expense accrual among the classes.
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<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, Class B and
Class C 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., Morningstar Publications, 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 each class of 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
reports 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 issued 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.
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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
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.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
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). Withholding at this rate is also required from dividends and
capital gain distributions (but not redemption proceeds) payable to
shareholders 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 of net capital gains, if any, at least annually.
Dividends paid by the Fund with respect to each class of 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, generally
21
<PAGE>
resulting in lower dividends for Class B and Class C shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
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 each class 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 dividends and distributions in cash. Such election should be
submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund
will notify each shareholder 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 contact your financial adviser to elect to receive
dividends and distributions in cash.
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.
As of December 31, 1994 the Fund had a capital loss carryforward for federal
income tax purposes of $19,372,500. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward amount.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on January 9, 1980. The Fund is
authorized to issue 750 million shares of common stock, $.01 par value per
share, divided into three classes, designated Class A, Class B and Class C
common stock, each of which consists of 250 million authorized shares. Each
class of common stock represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares
to submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv)
only Class B shares have a conversion feature. 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 three classes designated
Class A, Class B and Class C 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
22
<PAGE>
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 each class of 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. Except for the conversion
feature applicable to the Class B 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 and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes 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 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 for Class A and Class B
shares is $1,000 per class and $5,000 for Class C shares. The minimum
subsequent investment is $100 for all classes. All minimum investment
requirements are waived for certain employee savings plans. For purchases
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust. See "Shareholder Services"
below.
An investment in the Fund may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
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 your option, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). 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.
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<PAGE>
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) 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 may be subject to postage and handling charges
imposed by your dealer.
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, Inc., specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C 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.
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, Inc., Class A, Class B or Class C 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 three classes of shares (Class A, Class B and Class C 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 (Alternative
Purchase Plan).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other information
---------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
Maximum initial sales charge of 3% .30 of 1% (Currently being Initial sales charge waived or
Class A of the public offering price charged at a rate of .10 of 1%) reduced for certain purchases
Maximum contingent deferred sales
charge or CDSC of 5% of the lesser
of the amount invested or the Shares convert to Class A
redemption proceeds; declines to shares approximately seven
Class B zero after six years .50 of 1% years after purchase
Maximum CDSC of 1% of the lesser
of the amount invested or the
redemption proceeds on
redemptions made within one year 1% (Currently being charged Shares do not convert to
Class C of purchase at a rate of .75 of 1%) another class
</TABLE>
24
<PAGE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information-Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also
have separate exchange privileges. See "How to Exchange Your Shares" below. The
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 and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
In selecting a purchase alternative, you should consider, among other things,
(1) the length of time you expect to hold your investment, (2) the amount of
any applicable sales charge (whether imposed at the time of purchase or
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature-Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for more than 5 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C
shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on Class C
shares to exceed the initial sales charge plus cumulative annual
distribution-related fees on Class A shares. This does not take into account
the time value of money, which further reduces the impact of the higher Class C
distribution-related fee on the investment, fluctuations in net asset value,
the effect of the return on the investment over this period of time or
redemptions during which the CDSC is applicable.
All purchases of $1 million or more, either as part of a single investment or
under Rights of Accumulation or Letters of Intent, must be for Class A shares.
See "Reduction and Waiver of Initial Sales Charges" below.
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<PAGE>
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 (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
Sales Charge as Sales Charge as Dealer Concession
Percentage of Percentage of as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
---------------------- --------------- --------------- -----------------
Less than $99,999..... 3.00% 3.09% 3.00%
$100,000 to $249,999.. 2.50% 2.56% 2.50%
$250,000 to $499,999.. 1.50% 1.52% 1.50%
$500,000 to $999,999.. 1.00% 1.01% 1.00%
$1,000,000 and above.. None None None
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Directors and officers of the
Fund and other Prudential Mutual Funds, (b) employees of Prudential Securities
and PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or
one of its subsidiaries, (d) registered representatives and employees of
dealers who have entered into a selected dealer agreement with Prudential
Securities provided that purchases at NAV are permitted by such person's
employer and (e) investors who have 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, non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) and (iii) the
financial adviser served as the client's broker on the previous purchases.
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.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives 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 and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
26
<PAGE>
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 Charges" 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.
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. If you hold shares through
Prudential Securities, payment for shares presented for redemption will be
credited to your Prudential Securities account, unless you indicate otherwise.
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 "How the Fund Values its Shares." 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
27
<PAGE>
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.
90-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 90 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 or Class C 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 Charges
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. 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 or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. 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 acquired through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any CDSC will be paid to and retained
by the Distributor. See "How the Fund is Managed-Distributor" and "Waiver of
the Contingent Deferred Sales Charges-Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of 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 CDSC 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. See "How to Exchange Your Shares." The following table sets forth the
rates of the CDSC applicable to redemptions of Class B shares:
Contingent Deferred Sales
Year Since Charge as a Percentage
Purchase of Dollars Invested or
Payment Made Redemption Proceeds
------------ -------------------------
First....... 5.0%
Second...... 4.0%
Third....... 3.0%
Fourth...... 2.0%
Fifth....... 1.0%
Sixth....... 1.0%
Seventh..... None
28
<PAGE>
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 held beyond the applicable CDSC period; 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 CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B 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 Class B 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 Charges-Class B shares. 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,
provided that the shares were purchased prior to death or disability. 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 and provide the
Transfer Agent with such supporting documentation as it may deem appropriate.
The waiver will be granted subject to confirmation of your entitlement. See
"Purchase and Redemption of Fund Shares-Waiver of the Contingent Deferred Sales
Charge-Class B Shares" in the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares-Quantity
Discount-Class B Shares Purchased Prior to August 1, 1994," in the Statement of
Additional Information.
CONVERSION FEATURE-CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated
that conversions will occur during the months of February, May, August and
November. Conversions will be effected at relative net asset value without the
imposition of any additional sales charge. The first conversion of Class B
shares occurred in February 1995, when the conversion feature was first
implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each
29
<PAGE>
conversion date in accordance with the following formula: (i) the ratio of (a)
the amounts paid for Class B shares purchased at least seven years prior to the
conversion date to (b) the total amount paid for all Class B shares purchased
and then held in your account (ii) multiplied by the total number of Class B
shares purchased and then held in your account. Each time any Eligible Shares
in your account convert to Class A shares, all shares or amounts representing
Class B shares then in your account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less than
the number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
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,
Class B and Class C shares may be exchanged for Class A, Class B and Class C
shares, respectively, of another fund on the basis of the relative NAV. No
sales charge will be imposed at the time of the exchange. 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 and Class C shares may not be
exchanged into money market funds other than Prudential
30
<PAGE>
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded. See
"Conversion Feature-Class B Shares" above. 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.
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.
Neither the Fund nor its agents will be liable for any loss, liability or cost
which results from acting upon instructions reasonably believed to be genuine
under the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be returned in order for the shares to be exchanged. See
"How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares 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.
Special Exchange Privilege. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly
basis, unless the shareholder elects otherwise. It is currently anticipated
that this exchange will occur quarterly in February, May, August and November.
Eligibility for this exchange privilege will be calculated on the business day
prior to the date of the exchange. Amounts representing Class B or Class C
shares which are not subject to a CDSC include the following: (1) amounts
representing Class B or Class C shares acquired pursuant to the automatic
reinvestment of dividends and distributions, (2) amounts representing the
increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special
exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
31
<PAGE>
- 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 representative or the Transfer
Agent directly.
- Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
- 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.
32
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<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 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 Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
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
Hawaii Income 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, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
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 Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
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.
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TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS........................... 2
Risk Factors and Special Characteristics.. 2
FUND EXPENSES............................. 4
FINANCIAL HIGHLIGHTS...................... 5
HOW THE FUND INVESTS...................... 8
Investment Objective and Policies......... 8
Hedging Strategies........................ 10
Other Investments and Policies............ 13
Portfolio Management Techniques........... 14
Investment Restrictions................... 15
HOW THE FUND IS MANAGED................... 15
Manager................................... 15
Distributor............................... 16
Portfolio Transactions.................... 19
Custodian and Transfer and
Dividend Disbursing Agent................. 19
HOW THE FUND VALUES ITS SHARES............ 19
HOW THE FUND CALCULATES PERFORMANCE....... 20
TAXES, DIVIDENDS AND DISTRIBUTIONS........ 20
GENERAL INFORMATION....................... 22
Description of Common Stock............... 22
Additional Information.................... 23
SHAREHOLDER GUIDE......................... 23
How to Buy Shares of the Fund............. 23
Alternative Purchase Plan................. 24
How to Sell Your Shares................... 27
Conversion Feature-Class B Shares......... 29
How to Exchange Your Shares............... 30
Shareholder Services...................... 31
THE PRUDENTIAL MUTUAL FUND FAMILY......... A-1
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MF104A440011L
CUSIP Nos.:
Class A: 743918 20 3
Class B: 743918 10 4
Class C: 743918 30 2
ART
Prudential
National Municipals
Fund, Inc.
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[ART]
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P
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February 28, 1995
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<PAGE>
EXHIBIT 17(g)
September 18, 1995
Dear Shareholder:
You may be aware that the Trustees of Prudential Municipal Series Fund/Arizona
Series, Georgia Series and Minnesota Series have recently approved a proposal to
exchange the assets and liabilities of your Series for shares of Prudential
National Municipals Fund, Inc. The enclosed proxy materials describe this
proposal in detail. If the proposal is approved and implemented, you will
automatically become a shareholder of the Prudential National Municipals Fund.
The other Trustees and I strongly recommend that you vote FOR the proposal. We
believe that this transaction serves your interests in the following ways:
- SIMILAR STRATEGIES. The funds' investment objectives and strategies, while
not identical, are similar. Both funds invest primarily in long-term,
investment grade, tax-exempt municipal bonds. While the state Series seek
to provide income exempt from federal and state income taxes, the
Prudential National Municipals Fund will seek income exempt from only
federal income taxes. You may, however, deduct from your state income
taxes the portion of the Prudential National Municipals Fund's income that
is earned from bonds issued from your state of residence.
- GREATER INVESTMENT OPPORTUNITY. Increasingly, these Series have had
difficulty finding attractive issues due to a shrinking municipal supply,
making portfolio diversification a challenge. In contrast, the Prudential
National Municipals Fund is nationally diversified, enabling it to invest
in a wider range of municipal bond investment opportunities with less
susceptibility to the risks associated with investments concentrated in a
single state. The National Municipals Fund's investment policies and risks
are detailed in the enclosed prospectus.
- REDUCED EXPENSES. The state Series have relatively few assets and have not
been able to attract new assets. Additionally, they have operated with
relatively high expense ratios. The proposed reorganization may benefit
you in the form of reduced expenses as a percentage of net assets.
- POTENTIAL FOR HIGHER INCOME GENERALLY EXEMPT FROM FEDERAL INCOME TAXES.
Historically, the yield of the Prudential National Municipals Fund has been
higher than the yield of each of the state Series, even after the
application of the respective state income tax rates. Past performance is
no guarantee of future results.
Please read the enclosed materials carefully for more complete information.
Your vote is important, no matter how many shares you own. Voting your shares
early may permit your Series to avoid costly follow-up mail and telephone
solicitation. After you have reviewed the enclosed materials, please complete,
date and sign your proxy card and mail it in the enclosed postage-paid return
envelope today.
We value your investment and thank you for the confidence you've placed in
Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
PRESIDENT, Prudential Municipal Series Fund
