<PAGE>
As filed with the Securities and Exchange Commission on March 5, 1997
Securities Act Registration No. 2-66407
Investment Company Act Registration No. 811-2992
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 25 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 24 [X]
(Check appropriate box or boxes) [X]
-----------
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
(Exact name of registrant as specified in charter)
(formerly Prudential-Bache National Municipals Fund, Inc.)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a), of Rule 485.
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2), of Rule
485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO THE RULE 24F-2 UNDER THE INVESTMENT COMPANY
ACT OF 1940. THE RULE 24F-2 NOTICE FOR THE REGISTRANT'S MOST RECENT FISCAL
YEAR ENDED DECEMBER 31, 1996 WAS FILED ON FEBRUARY 27, 1997.
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER SHARE* OFFERING PRICE* REGISTRATION FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock
par value
$0.01 per share...... 4,685,488 $16.05 N/A $0
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* The total number of shares redeemed during the fiscal year ended December
31, 1996 amounted to 14,736,057 shares. Of this number, no shares have been
used for reduction pursuant to paragraph (a) of Rule 24e-2 in all previous
filings of post-effective amendments during the current year and no shares
have been used for reduction pursuant to paragraph (c) of Rule 24f-2 in all
previous filings during the current year. 4,685,488 ($72,523,523) of the
redeemed shares for the fiscal year ended December 31, 1996 are being used
for the reductions in the post-effective amendment being filed herein.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C>
PART A
Item 1. Cover Page............................. Cover Page
Item 2. Synopsis............................... Fund HIghlights; Fund Expenses
Item 3. Condensed Financial Information........ Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant...... Cover Page; Fund Highlights;
How the Fund Invests; General
Information
Item 5. Management of the Fund................. Fund HIghlights; Financial
Highlights; How the Fund is
Managed
Item 5a. Management's Discussion of Fund
Performance.......................... Financial Highlights
Item 6. Capital Stock and Other Securities..... Taxes, Dividends and
Distributions; General
Information
Item 7. Purchase of Securities Being Offered... Fund HIghlights; How the Fund
is Managed; How the Fund
Values its Shares; Shareholder
Guide
Item 8. Redemption or Repurchase............... Fund Highlights; General
Information; How the Fund
Values its Shares; Shareholder
Guide
Item 9. Pending Legal Proceedings.............. Not Applicable
PART B
Item 10. Cover Page............................. Cover Page
Item 11. Table of Contents...................... Table of Contents
Item 12. General Information and History........ General Information
Item 13. Investment Objectives and Policies..... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund................. Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders
of Securities......................... Not Applicable
Item 16. Investment Advisory and Other Services. Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................. Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities..... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Purchase and Redemption of
Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status............................. Taxes, Dividends and
Distributions
Item 21. Underwriters........................... Distributor
Item 22. Calculation of Performance Data........ Performance Information
Item 23. Financial Statements................... Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
1
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 6, 1997
- -------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. (the Fund), is an open-end, diversi-
fied 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 quali-
ty, i.e., obligations of issuers possessing adequate but not outstanding ca-
pacities 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 ob-
jective will be achieved. See "How the Fund is Managed--Investment Objective
and Policies." The Fund's address is Gateway Center Three, Newark, New Jersey
07102-4077 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 March 6, 1997, which information is
incorporated herein by reference (is legally considered a part of this Pro-
spectus) and is available without charge upon request to the Fund at the ad-
dress or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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.
WHAT ARE THE FUND'S 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 comparably rated by any
other Nationally Recognized Statistical Rating Organization (NRSRO) 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 and return enhancement strategies, including using derivatives,
which may be considered speculative and may result in higher risks and
costs to the Fund. See "How the Fund Invests--Hedging and Return
Enhancement Strategies" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (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, 1996, PMF served as manager or administrator to
62 investment companies, including 40 mutual funds, with aggregate assets
of approximately $55.8 billion. The Prudential Investment Corporation,
which does business under the name of Prudential Investments (PI, the
Subadviser or the investment adviser), 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 19.
WHO DISTRIBUTES THE FUND'S 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 A, Class B and Class C 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, at the rate of .50 of 1% of the average daily net assets of
the Class B shares and which is currently being charged at the 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 20.
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.
There is no minimum investment requirement for certain employee savings plans
or custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 27 and "Shareholder Guide--Shareholder Services" at page 36.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (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 23 and "Shareholder Guide--How to Buy Shares of the Fund" at
page 27.
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, unlike
Class B Shares, Class C Shares do not convert to another
class.
See "Shareholder Guide--Alternative Purchase Plan" at page 28.
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 31.
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 24.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES 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
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption None 5% during the first 1% on redemptions
proceeds, whichever is lower).. year, made within one
decreasing by 1% year of purchase
annually to 1% in
the fifth and sixth
years and 0% the
seventh year*
Redemption Fees............... None None None
Exchange Fees................. None None None
ANNUAL FUND OPERATING EXPENSES**
<CAPTION>
(as a percentage of average net assets) CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (Before
Waiver)...................... .48% .48% .48%
12b-1 Fees (After
Reduction) +................. .10%++ .50% .75++
Other Expenses................ .15% .15% .15%
--- --- ---
Total Fund Operating Expenses .73% 1.13% 1.38%
(Before Waiver).............. === ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return, and (2) redemption at the end of
each time period:
Class A................................... $37 $53 $69 $118
Class B................................... $42 $46 $62 $111
Class C................................... $24 $44 $76 $166
You would pay the following expenses on the
same investment assuming no redemption:
Class A................................... $37 $53 $69 $118
Class B................................... $12 $36 $62 $111
Class C................................... $14 $44 $76 $166
</TABLE>
The above example is based on data for the Fund's fiscal year ended Decem-
ber 31, 1996. The example should not be considered a representation of past
or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist investors in understanding the vari-
ous costs and expenses that an investor in the Fund will bear, whether di-
rectly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund Is Managed." "Other Expenses" include oper-
ating expenses of the Fund, such as directors' and professional fees, reg-
istration 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."
** Based on expenses incurred during the fiscal year ended December 31,
1996, without taking into account the management fee waiver. At the
current level of management fee waiver (.05%), Management Fees and Total
Fund Operating Expenses would be .43% and .75%, respectively, for Class
A shares, .43% and 1.15%, respectively, for Class B shares, .43% and
1.40%, respectively, for Class C shares.
+ 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 each class of 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, 1997. Total operating expenses (before management
fee waiver) and without such limitations would be .93% and 1.63% for
Class A and Class C shares, respectively. See "How the Fund is Managed--
Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights with respect to each of the five years in
the period ended December 31, 1996 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
JANUARY 22,
YEAR ENDED 1990(B)
DECEMBER 31, THROUGH
----------------------------------------------------------- DECEMBER
1996 1995 1994 1993 1992 1991 31, 1990
-------- -------- ------- ------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 15.98 $ 14.42 $ 16.30 $ 15.94 $16.00 $15.09 $14.98
-------- -------- ------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... .82(d) .81(d) .81 .90 .94 .97 .90
Net realized and
unrealized gain (loss)
on investment
transactions........... (.42) 1.57 (1.78) 1.05 .43 .91 .11
-------- -------- ------- ------- ------ ------ ------
Total from investment
operations............. .40 2.38 (.97) 1.95 1.37 1.88 1.01
-------- -------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net
investment income...... (.82) (.81) (.81) (.90) (.94) (.97) (.90)
Distributions in excess
of net investment
income................. --(e) (.01) -- -- -- -- --
Distributions from net
realized gains......... -- -- (.10) (.69) (.49) -- --
-------- -------- ------- ------- ------ ------ ------
Total distributions.... (.82) (.82) (.91) (1.59) (1.43) (.97) (.90)
-------- -------- ------- ------- ------ ------ ------
Net asset value, end of
period................. $ 15.56 $ 15.98 $ 14.42 $ 16.30 $15.94 $16.00 $15.09
======== ======== ======= ======= ====== ====== ======
TOTAL RETURN(A)......... 2.66% 16.91% (6.04)% 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)........... $502,739 $538,145 $12,721 $14,167 $7,700 $3,819 $1,846
Average net assets
(000).................. $508,159 $446,350 $14,116 $11,786 $5,401 $2,697 $1,161
Ratios to average net
assets:
Expenses, including
distribution fees..... .68%(d) .75%(d) .77% .69% .72% .75% .75%(c)
Expenses, excluding
distribution fees..... .58%(d) .65%(d) .67% .59% .62% .65% .65%(c)
Net investment income.. 5.31%(d) 5.34%(d) 5.38% 5.49% 5.79% 6.27% 6.43%(c)
Portfolio turnover rate. 46% 98% 120% 82% 114% 59% 110%
</TABLE>
- --------
(a) 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.
(b) Commencement of offering of Class A shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE YEARS INDICATED)
(CLASS B SHARES)
The following financial highlights with respect to each of the five years in
the period ended December 31, 1996 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1996(B) 1995 1994 1993 1992 1991 1990 1989 1988(B) 1987
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, be-
ginning of year...... $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04 $ 14.57 $16.18
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
..................... .76(c) .76(c) .75 .84 .88 .91 .90 .96 1.03 1.05
Net realized and
unrealized gain
(loss) on investment
transactions......... (.42) 1.58 (1.78) 1.05 .44 .91 (.04) .11 .47 (1.55)
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- ------
Total from investment
operations.......... .34 2.34 (1.03) 1.89 1.32 1.82 .86 1.07 1.50 (.50)
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- ------
LESS DISTRIBUTIONS:
Dividends from net in-
vestment income...... (.76) (.76) (.75) (.84) (.88) (.91) (.90) (.96) (1.03) (1.05)
Distributions in
excess of net
investment income.... --(d) (.01) -- -- -- -- -- -- -- --
Distributions from net
realized gains....... -- -- (.10) (.69) (.49) -- -- -- -- (.06)
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- ------
Total distributions.. (.76) (.77) (.85) (1.53) (1.37) (.91) (.90) (.96) (1.03) (1.11)
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- ------
Net asset value, end
of year.............. $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04 $14.57
======== ======== ======== ======== ======== ======== ======== ========== ========== ======
TOTAL RETURN(A)....... 2.26% 16.49% (6.39)% 12.15% 8.50% 12.42% 5.96% 7.43% 10.49% (3.14)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000) .......... $168,185 $222,865 $672,272 $848,299 $828,702 $874,338 $882,212 $1,033,173 $1,066,159 $1,046,293
Average net assets
(000)................ $193,312 $252,313 $751,623 $854,919 $829,830 $862,249 $940,215 $1,027,726 $1,081,122 $1,126,394
Ratios to average net
assets:
Expenses, including
distribution fees... 1.08%(c) 1.15%(c) 1.17% 1.09% 1.12% 1.15% 1.13% 1.01% 1.02% 1.01%
Expenses, excluding
distribution fees... .58%(c) .65%(c) .67% .59% .62% .65% .64% .66% .66% .65%
Net investment in-
come................ 4.91%(c) 4.96%(c) 4.96% 5.09% 5.39% 5.87% 6.03% 6.45% 6.86% 6.83%
Portfolio turnover
rate................. 46% 98% 120% 82% 114% 59% 110% 198% 152% 105%
</TABLE>
- -------
(a) 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 year reported and includes reinvestment of dividends
and distributions.
(b) 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.
(c) Net of management fee waiver.
(d) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS 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. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
AUGUST 1,
YEAR ENDED 1994(B)
DECEMBER 31, THROUGH
----------------- DECEMBER 31,
1996 1995 1994
------ ------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $16.02 $14.44 $15.13
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... .72(d) .72(d) .29
Net realized and unrealized gain (loss) on
investment transactions................... (.42) 1.59 (.69)
------ ------ ------
Total from investment operations.......... .30 2.31 (.40)
------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment income....... (.72) (.72) (.29)
Distributions in excess of net investment
income.................................... -- (e) (.01) --
------ ------ ------
Total distributions....................... (.72) (.73) (.29)
------ ------ ------
Net asset value, end of period............. $15.60 $16.02 $14.44
====== ====== ======
TOTAL RETURN(A)............................ 2.01% 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 772 $ 403 $ 141
Average net assets (000)................... $ 674 $ 247 $ 103
Ratios to average net assets:
Expenses, including distribution fees..... 1.33%(d) 1.40%(d) 1.51%(c)
Expenses, excluding distribution fees..... .58%(d) .65%(d) .76%(c)
Net investment income..................... 4.67%(d) 4.66%(d) 4.84%(c)
Portfolio turnover rate.................... 46% 98% 120%
</TABLE>
- --------
(a) 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.
(b) Commencement of offering of Class C shares.
(c) Annualized.
(d) Net of Management Fee waiver.
(e) Less than $.005 per share.
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 COMPARABLY RATED BY ANY OTHER NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) 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, 1996, the composition of the Fund's portfolio by rating
category was as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------- -----------------
<S> <C>
AAA/Aaa 60.2%
AA/Aa 12.1%
A/A 7.2%
BBB/Baa 18.9%
B/B --
CCC/Caa --
CC/Ca --
C/C --
Unrated 1.6%
</TABLE>
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
9
<PAGE>
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.
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.
SOME MUNICIPAL SECURITIES, SUCH AS ZERO COUPON MUNICIPAL SECURITIES, DO NOT
PAY CURRENT INTEREST BUT ARE PURCHASED AT A DISCOUNT FROM THEIR FACE VALUES.
The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon securities do not require the periodic
payment of interest. These investments benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of cash. These
investments may experience greater volatility in market value than securities
that make regular payments of interest.
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 and Return Enhancement 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 AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS THE INVESTOR, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the purchase of put or tender options on Municipal Bonds and
Notes and the purchase and sale of
10
<PAGE>
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 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, S&P or other NRSRO; (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.
11
<PAGE>
The ratings of Moody's, S&P and other NRSROs 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 OBJECTIVE AND STRUCTURE MIGHT BE NECESSARY IN THE FUTURE DUE TO
MARKET CONDITIONS WHICH MAY RESULT FROM FUTURE CHANGES IN THE TAX LAWS.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY ENGAGE IN TRANSACTIONS IN FUTURES CONTRACTS FOR RETURN
ENHANCEMENT AND RISK MANAGEMENT PURPOSES AS WELL AS 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.
FUTURES CONTRACTS
The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures
contracts) in accordance with the Fund's investment objective. A "purchase" of
a futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire a specified quantity of the securities
underlying the contract at a specified price at a specified future date. A
"sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver a specified quantity of the
securities underlying the contract at a specified price at a specified future
date. At the time a futures contract is purchased or sold, the Fund is
required to deposit cash, U.S. Government securities or other liquid
unencumbered assets with a futures commission merchant or in a segregated
custodial account representing between approximately 1 1/2% to 5% of the
contract amount, called "initial margin." Thereafter, the futures contract
will be valued daily and the payment in cash of "maintenance" or "variation
margin" may be required, resulting in the Fund paying or receiving cash that
reflects any decline or increase in the contract's value, a process known as
"mark-to-market."
Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be "cash
settled." In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling
(to offset an earlier purchase) an identical futures contract calling for
delivery or acquisition in the same month. The purchase (or sale) of an
offsetting futures contract is referred to as a "closing transaction."
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED
OPTIONS
CFTC LIMITS. In accordance with Commodity Futures Trading Commission (CFTC)
regulations, the Fund is not permitted to purchase or sell interest rate
futures contracts or options thereon for return enhancement or risk management
purposes if immediately thereafter the sum of the amounts of initial margin
deposits on a Fund's existing futures and premiums paid for options on futures
exceed 5% of the liquidation value of such Fund's total assets (the 5% CFTC
limit). This restriction does not apply to the purchase and sale of interest
rate futures contracts and options thereon for bona fide hedging purposes.
12
<PAGE>
SEGREGATION REQUIREMENTS. To the extent the Fund enters into futures
contracts, it is required by the SEC to maintain a segregated asset account
with its custodian or a futures commissions merchant sufficient to cover the
Fund's obligations with respect to such futures contracts, which will consist
of cash, U.S. government securities or other liquid, unencumbered assets from
their portfolios in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
margin deposited by the Fund with the Custodian or a futures commission
merchant with respect to such futures contracts. Offsetting the contract by
another identical contract eliminates the segregation requirement.
With respect to options on futures, there are no segregation requirements
for options that are purchased and owned by the Fund. However, written
options, since they involve potential obligations of the Fund, may require
segregation of Fund assets if the options are not "covered" as described below
under "Options on Futures Contracts." If the Fund writes a call option that is
not "covered," it must segregate and maintain with the custodian for the term
of the option cash, U.S. government securities or other liquid, unencumbered
assets equal to the fluctuating value of the optioned futures. If a Fund
writes a put option that is not "covered," the segregated amount would have to
be at all times equal in value to the exercise price of the put (less any
initial margin deposited by the Fund with the Custodian or a futures
commission merchant with respect to such option).
USE OF INTEREST RATE FUTURES CONTRACTS
Interest rate futures contracts will be used for bona fide hedging, risk
management and return enhancement purposes.
POSITION HEDGING. The Fund might sell interest rate futures contracts to
protect the Fund against a rise in interest rates which would be expected to
decrease the value of debt securities which the Fund holds. This would be
considered a bona fide hedge and, therefore, is not subject to the 5% CFTC
limit. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically
have closely correlated or are expected to closely correlate to the values of
the Fund's portfolio securities. Such a sale would have an effect similar to
selling an equivalent value of the Fund's portfolio securities. If interest
rates increase, the value of the Fund's portfolio securities will decline, but
the value of the futures contracts to the Fund will increase at approximately
an equivalent rate thereby keeping the net asset value of the Fund from
declining as much as it otherwise would have. The Fund could accomplish
similar results by selling debt securities with longer maturities and
investing in debt securities with shorter maturities when interest rates are
expected to increase. However, since the futures market may be more liquid
than the cash market, the use of futures contracts as a hedging technique
would allow the Fund to maintain a defensive position without having to sell
portfolio securities. If in fact interest rates decline rather than rise, the
value of the futures contract will fall but the value of the bonds should rise
and should offset all or part of the loss. If futures contracts are used to
hedge 100% of the bond position and correlate precisely with the bond
positions, there should be no loss or gain with a rise (or fall) in interest
rates. However, if only 50% of the bond position is hedged with futures, then
the value of the remaining 50% of the bond position would be subject to change
because of interest rate fluctuations. Whether the bond positions and futures
contracts correlate is a significant risk factor.
ANTICIPATORY POSITION HEDGING. Similarly, when it is expected that interest
rates may decline and the Fund intends to acquire debt securities, the Fund
might purchase interest rate futures contracts. The purchase of futures
contracts for this purpose would constitute an anticipatory hedge against
increases in the price of debt securities (caused by declining interest rates)
which the Fund subsequently acquires and would normally qualify as a bona fide
hedge not subject to the 5% CFTC limit. Since fluctuations in the value of
appropriately selected futures contracts should approximate that of the debt
securities that would be purchased, the Fund could take advantage of the
anticipated rise in the cost of the debt securities without actually buying
them. Subsequently,
13
<PAGE>
the Fund could make the intended purchases of the debt securities in the cash
market and concurrently liquidate the futures positions.
RISK MANAGEMENT AND RETURN ENHANCEMENT. The Fund might sell interest rate
futures contracts covering bonds. This has the same effect as selling bonds in
the portfolio and holding cash and reduces the duration of the portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates.
The longer the duration, the greater the impact of interest rate changes on
the portfolio's price.) This should lessen the risks associated with a rise in
interest rates. In some circumstances, this may serve as a hedge against a
loss of principal, but is usually referred to as an aspect of risk management.
The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest
rates fall. This is often referred to as risk management rather than hedging
but, if it works as intended, has the effect of increasing principal value. It
if does not work as intended because interest rates rise instead of fall, the
loss will be greater than would otherwise have been the case. Futures
contracts used for these purposes are not considered bona fide hedges and,
therefore, are subject to the 5% CFTC limit.
OPTIONS ON FUTURES CONTRACTS
The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (i.e., sell) "covered" put
and call options on futures contracts that are traded on commodity and futures
exchanges.
If the Fund purchased an option on a futures contract, it has the right but
not the obligation, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call or a short position
if the option is a put) at a specified exercise price at any time during the
option exercise period.
Unlike purchasing an option, which is similar to purchasing insurance to
protect against a possible rise or fall of security prices or currency values,
the writer or seller of an option undertakes an obligation upon exercise of
the option to either buy or sell the underlying futures contract at the
exercise price. A writer of a call option has the obligation upon exercise to
assume a short futures position and a writer of a put option has the
obligation to assume a long futures position. Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the
market price of the futures contract at exercise exceeds (in the case of a
call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. If there is no balance in the writer's margin
account, the option is "out of the money" and will not be exercised. The Fund,
as the writer, has income in the amount it was paid for the option. If there
is a margin balance, the Fund will have a loss in the amount of the amount of
the balance less the premium it was paid for writing the option.
When the Fund writes a put or call option on futures contracts, the option
must either be "covered" or, to the extent not "covered," will be subject to
segregation requirements. The Fund will be considered "covered" with respect
to a call option it writes on a futures contract if the Fund owns the
securities or currency which is deliverable under the futures contract or an
option to purchase that futures contract having a strike price equal to or
less than the strike price of the "covered" option. A Fund will be considered
"'covered" with respect to a put option it writes on a futures contract if it
owns an option to sell that futures contract having a strike price equal to or
greater than the strike price of the "covered" option.
14
<PAGE>
To the extent the Fund is not "covered" as described above with respect to
written options, it will segregate and maintain with its custodian for the
term of the option cash or liquid securities as described above under--
"Segregation Requirements."
USE OF OPTIONS ON FUTURES CONTRACTS
Options on interest rate futures contracts would be used for bona fide
hedging, risk management and return enhancement purposes.
POSITION HEDGING. The Fund may purchase put options on interest rate or
currency futures contracts to hedge its portfolio against the risk of a
decline in the value of the debt securities it owns as a result of rising
interest rates.
ANTICIPATORY HEDGING. The Fund may also purchase call options on futures
contracts as a hedge against an increase in the value of securities the Fund
might intend to acquire as a result of declining interest rates.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the
Fund might intend to acquire. If the futures price at expiration of the option
is above the exercise price, the Fund retains the full amount of the option
premium which provides a partial hedge against any increase that may have
occurred in the price of the debt securities the Fund intended to acquire. If
the market price of the underlying futures contract is below the exercise
price when the option is exercised, the Fund would incur a loss, which may be
wholly or partially offset by the decrease in the value of the securities the
Fund might intend to acquire.
Whether options on interest rate futures contracts are subject to or exempt
from the 5% CFTC limit depends on whether the purpose of the options
constitutes a bona fide hedge.
RISK MANAGEMENT AND RETURN ENHANCEMENT. Writing a put option that does not
relate to securities the Fund intends to acquire would be a return enhancement
strategy which would result in a loss if interest rates rise.
Similarly, writing a covered call option on a futures contract is also a
return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call option is below the exercise price,
the Fund would retain the full amount of the option premium increasing the
income of the Fund. If the futures price when the option is exercised is above
the exercise price, however, the Fund would sell the underlying securities
which was the "cover" for the contract and incur a gain or loss depending on
the cost basis for the underlying assets.
Writing a covered call option as in any return enhancement strategy can also
be considered a partial hedge against a decrease in the value of a Fund's
portfolio securities. The amount of the premium received acts as a partial
hedge against any decline that may have occurred in the Fund's debt
securities.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts would be impacted by the liquidity of these
markets. Although the Fund generally would purchase or sell only those futures
contracts and options thereon for which there appeared to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option at any
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particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it would
not be possible to effect a closing transaction in that contract or to do so
at a satisfactory price and the Fund would have to either make or take
delivery under the futures contract or, in the case of a written call option,
wait to sell the underlying securities until the option expired or was
exercised, or, in the case of a purchased option, exercise the option. In the
case of a futures contract or an option on a futures contract which the Fund
had written and which the Fund was unable to close, the Fund would be required
to maintain margin deposits on the futures contract or option and to make
variation margin payments until the contract is closed.
Risks inherent in the use of these strategies include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction
of interest rates, securities prices and markets; (2) imperfect correlation
between the price of futures contracts and options thereon and movement in the
prices of the securities being hedged; (3) the fact that the skills needed to
use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; and (6) the
possible inability of the Fund to sell a portfolio security at a time that
otherwise would be favorable for it to do so. In the event it did sell the
security and eliminated its "cover," it would have to replace its "cover" with
an appropriate futures contract or option or segregate securities with the
required value, as described under--"Segregation Requirements."
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures
contracts and options thereon when the Subadviser's expectations are not met,
assuming proper adherence to the segregation requirement, the volatility of
the Fund as a whole should be no greater than if the same strategy had been
pursued in the cash market.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition,
the hours of trading of financial futures contracts and options thereon may
not conform to the hours during which the Fund may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counterparty
risk depends on the strength of the clearing or settlement corporation
associated with the exchange. Additionally, although the exchanges provide a
means of closing out a position previously established, there can be no
assurance that a liquid market will exist for a particular contract at a
particular time. In the case of options on futures, if such a market does not
exist, the Fund, as the holder of an option on futures contracts, would have
to exercise the option and comply with the margin requirements for the
underlying futures contract to realize any profit, and if the Fund were the
writer of the option, its obligation would not terminate until the option
expired or the Fund was assigned an exercise notice.
There can be no assurance that the Fund's use of futures contracts and
related options will be successful and the Fund may incur losses in connection
with its purchase and sale of future contracts and related options.
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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 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, U.S. Government Securities, equity securities or
other liquid unencumbered assets, marked-to-market daily equal in value to its
commitments for when-issued or delayed delivery securities.
MUNICIPAL LEASE OBLIGATIONS
THE FUND MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES
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 hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days or contractual restrictions on resale 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
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 are deemed to have a maturity equal to
the notice period.
INVESTMENTS IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in shares of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to
duplicate management and advisory fees.
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BORROWING
The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 33 1/3% 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 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.
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<PAGE>
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, 1996, 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 .68%, 1.08%, and 1.33%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102-4077 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. PMF is organized in New
York as a limited liability company. It is the successor to Prudential Mutual
Fund Management Inc., which transferred its assets to PMF in September 1996.
For the fiscal year ended December 31, 1996, the Fund paid management fees to
PMF of .48% of the Fund's average daily net assets. See "Fee Waiver and
Subsidy" below and "Manager" in the Statement of Additional Information.
As of January 31, 1997, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $55.8 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), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), PI 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.
PMF continues to have responsibility pursuant to the Management Agreement for
all investment advisory services and supervises PI's performance of such
services.
The current portfolio manager of the Fund is Peter J. Allegrini, a Managing
Director of Prudential Investments. Mr. Allegrini is responsible for the day-
to-day management of the Fund's portfolio. Mr. Allegrini has managed the
Fund's portfolio since April 1996. Mr. Allegrini has been employed by PI as a
portfolio manager since July 1994 and serves as the portfolio manager of a
number of other portfolios managed by PI. He was employed by Fidelity
Investments from 1982 to 1985 as a senior bond analyst and from 1985 to 1994
as a portfolio manager, most recently of Fidelity Adviser High Income
Municipal Fund.
PMF and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
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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 SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), GATEWAY
CENTER THREE, NEWARK, NEW JERSEY 07102-4077 (PRUDENTIAL SECURITIES OR PSI), IS
A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS
THE DISTRIBUTOR OF THE 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, EACH A PLAN, AND COLLECTIVELY, THE PLANS) ADOPTED
BY THE FUND UNDER RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A
DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES
(THE DISTRIBUTOR) INCURS 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.
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 PRUDENTIAL SECURITIES 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. Prudential
Securities 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, 1997.
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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, 1997. 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, 1996, the Fund paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each such class based upon the ratio of sales of each such 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 (including Prudential
Securities) 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
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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.
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 LLC (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.
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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 will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. It is expected,
however, that the NAV per share of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.
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
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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. 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.
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% and the maximum
tax rate for ordinary income is 39.6%. The maximum long-term capital gains
rate for corporate shareholders is currently the same as the 35% maximum
corporate 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.
24
<PAGE>
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. Any such loss with respect to shares that are
held for six months or less however, will be treated as long-term capital loss
to the extent of any capital gain distributions received by the shareholder.
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 any
Class of the Fund's shares for any other Class of its 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
resulting in lower dividends for Class B and Class C shares in relation to
Class A 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 LLC, 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.
25
<PAGE>
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, 1996 the Fund had a capital loss carryforward for federal
income tax purposes of approximately $3,010,300. 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 is subject to
different sales charges and distribution and/or service fees, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class (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. In accordance with the Fund's Articles
of Incorporation, the Board of Directors may authorize the creation of
additional series of common stock and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class of shares
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, so that holders of
more than 50 percent of the shares voting can, if they choose, elect all
Directors being selected, while the holders of the remaining Shares would be
unable to elect any 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
26
<PAGE>
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. 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 LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. 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."
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 minimum initial investment is $1,000 for Class A and Class B shares 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. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange 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 third 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
27
<PAGE>
National Municipals Fund, Inc., specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value in the
Statement of Additional Information.
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
------------------------ ------------------------------- ------------------------
<C> <S> <C> <C>
Class A Maximum initial sales .30 of 1% (Currently being Initial sales charge
charge of 3% of the charged at a rate of .10 of 1%) waived or reduced for
public offering price certain purchases
Class B Maximum contingent .50 of 1% Shares convert to Class
deferred sales charge A shares approximately
(CDSC) of 5% of the seven years after
lesser of the amount purchase
invested or the
redemption proceeds;
declines to zero after
six years
Class C Maximum CDSC of 1% of 1% (Currently being charged Shares do not convert to
the lesser of the amount at a rate of .75 of 1%) another class
invested or the
redemption proceeds on
redemptions made within
one year of purchase
</TABLE>
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
is subject to different sales charges and distribution and/or service fees,
which may affect performance, (ii) each class has exclusive voting rights on
any matter submitted to shareholders that relates solely to its arrangements
and has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class
(except as noted under the heading "General Information--Description of Common
Stock"), (iii) each class has a different exchange feature and (iv) only Class
B shares have a conversion feature. 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 (if any)
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 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.
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<PAGE>
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.
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:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $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
</TABLE>
29
<PAGE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
In connection with the sale of Class A shares of NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisors and other persons which distribute shares
a finders' fee based on a percentage of the net asset value of shares sold by
such person.
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.
Other Waivers. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund), (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 of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer, (d) 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, (e) 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 (f)
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 180 days of the commencement of the financial
adviser's employment at Prudential Securities, or within one year in the case
of Benefit Plans, (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 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." The Distributor will pay sales commissions
of up to 4% of the purchase price of Class B shares to dealers, financial
advisors and other persons who sell the Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sale commissions from the combination of the CDSC and the distribution fee.
See "How the Fund is Managed--Distributor." In connection with the sale of
Class C shares, the Distributor will pay dealers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 1% of the
purchase price at the time of the sale.
30
<PAGE>
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." 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 LLC, 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
31
<PAGE>
are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charges will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the net asset
value next determined after the order is received, which must be within 90
days after the date of the redemption. Any CDSC paid in connection with such
redemption will be credited (in shares) to your account. (If less than a full
repurchase is made, the credit will be on a pro rata basis.) You must notify
the Fund's Transfer Agent, either directly or through Prudential Securities,
at the time the repurchase privilege is exercised to adjust your account for
the CDSC you previously paid. Thereafter, any redemptions will be subject to
the CDSC applicable at the time of the redemption. See "Contingent Deferred
Sales Charges" below. Exercise of the repurchase privilege will generally not
affect federal tax treatment of any gain realized upon redemption. However, if
the redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes. For
more information see "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge (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.
32
<PAGE>
See "How to Exchange Your Shares" below. The following table sets forth the
rates of the CDSC applicable to redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
YEAR SINCE CHARGE AS A PERCENTAGE
PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------ -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares 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.
33
<PAGE>
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. 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 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, Class C and
34
<PAGE>
Class Z 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 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. (The Fund or its agents
could be subject to liability if they fail to employ reasonable 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 LLC, 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 LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. 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".
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
35
<PAGE>
Class A shares for shareholders who qualify to purchase Class A shares at NAV
on a quarterly basis, unless the shareholder elects otherwise. 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 Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of a size and/or frequency engaged
in by one or more accounts acting in concert or otherwise, that have or may
have an adverse effect on the ability of the Subadviser to manage the
portfolio. The determination that such exchanges or activity may have an
adverse effect and the determination to reject any exchange order shall be in
the discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS 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 Gateway Center
Three, Newark, New Jersey 07102-4077. In addition, monthly unaudited financial
data are available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, Newark, New Jersey 07102-4077, 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.
36
<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.
<TABLE>
<S> <C>
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies 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, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
.Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
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
</TABLE>
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 8
Investment Objective and Policies......................................... 8
Hedging and Return Enhancement Strategies................................. 10
Other Investments and Policies............................................ 17
Portfolio Management Techniques........................................... 18
Investment Restrictions................................................... 18
HOW THE FUND IS MANAGED.................................................... 19
Manager................................................................... 19
Distributor............................................................... 20
Portfolio Transactions.................................................... 22
Custodian and Transfer and
Dividend Disbursing Agent................................................ 22
HOW THE FUND VALUES ITS SHARES............................................. 23
HOW THE FUND CALCULATES PERFORMANCE........................................ 23
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 24
GENERAL INFORMATION........................................................ 26
Description of Common Stock............................................... 26
Additional Information.................................................... 27
SHAREHOLDER GUIDE.......................................................... 27
How to Buy Shares of the Fund............................................. 27
Alternative Purchase Plan................................................. 28
How to Sell Your Shares................................................... 31
Conversion Feature--Class B Shares........................................ 34
How to Exchange Your Shares............................................... 35
Shareholder Services...................................................... 36
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF104A 440011L
Class A: 743918 20 3
CUSIP Nos.:Class B: 743918 10 4
Class C: 743918 30 2
PRUDENTIAL
NATIONAL MUNICIPALS
FUND, INC.
----------------------------------------------------------------------------
PROSPECTUS
MARCH 6, 1997
[LOGO OF PRUDENTIAL
APPEARS HERE]
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Additional Information
March 6, 1997
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 Gateway Center Three, Newark, New Jersey 07102-4077,
and its telephone number is (800)225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated March 6, 1997, a copy of
which may be obtained from the Fund upon request at the address or telephone
noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information....................................... B-2 26
Investment Objective and Policies......................... B-2 8
Investment Restrictions................................... B-5 18
Directors and Officers.................................... B-7 19
Manager................................................... B-10 19
Distributor............................................... B-12 20
Portfolio Transactions and Brokerage...................... B-14 22
Purchase and Redemption of Fund Shares.................... B-15 27
Shareholder Investment Account............................ B-18 27
Net Asset Value........................................... B-21 23
Taxes, Dividends and Distributions........................ B-21 24
Performance Information................................... B-23 23
Custodian and Transfer and Dividend Disbursing Agent and
Independent Accountants.................................. B-25 23
Financial Statements...................................... B-26 --
Report of Independent Accountants......................... B-44 --
Appendix A--Description of Tax-Exempt Security Ratings.... A-1 --
Appendix B--General Investment Information................ B-1 --
Appendix C--Historical Performance Data................... C-1 --
Appendix D--Information Relating to the Prudential........ D-1 --
</TABLE>
- -------------------------------------------------------------------------------
MF 104B 4440201
<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) or comparably rated by any other
Nationally Recognized Statistical Rating Organization (NRSRO); (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 comparably
rated by any other NRSRO; 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 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
B-2
<PAGE>
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.
The Fund will treat an investment in a municipal security refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded securities, except to the extent there
are amounts in excess of funds necessary for such debt service, (iii)
principal and interest on the escrowed securities will be sufficient to
satisfy all scheduled principal, interest and any premiums on the refunded
securities and a verification report prepared by a party acceptable to a
nationally recognized statistical rating agency, or counsel to the holders of
the refunded securities, so verifies, (iv) the escrow agreement provides that
the issuer of the refunded securities grants and assigns to the escrow agent,
for the equal and ratable benefit of the holders of the refunded securities,
an express first lien on, pledge of and perfected security interest in the
escrowed securities and the interest income thereon, (v) the escrow agent had
no lien of any type with respect to the escrowed securities for payment of its
fees or expenses except to the extent there are excess securities, as
described in (ii) above. The Fund will not, however, invest more than 25% of
its total assets in pre-refunded bonds of the same municipal issuer.
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 or other NRSRO; (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, 1995 and 1996 the Fund's portfolio turnover rates were 98%
and 46%, respectively.
FINANCIAL FUTURES CONTRACTS
The Fund will engage in transactions in financial futures contracts for
return enhancement and risk management purposes as well as to 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
B-3
<PAGE>
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 enter into options on future
contracts for certain bona fide hedging, risk management and return
enhancement purposes. This includes the ability to purchase put and call
options and write (i.e. sell) "covered" put and call options on futures
contracts that are traded on commodity and futures exchanges.
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, risk
management and return enhancement 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.
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
B-4
<PAGE>
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.
ILLIQUID SECURITIES
The Fund may not hold 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 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) 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.
B-5
<PAGE>
(2) Make short sales of securities.
(3) 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.
(4) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 33 1/3% 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 33 1/3% 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.
(5) 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.
(6) Purchase or sell real estate or real estate mortgage loans, although it
may purchase Municipal Bonds or Notes secured by interests in real estate.
(7) Make loans of money or securities except through the purchase of debt
obligations or repurchase agreements.
(8) Purchase securities of other investment companies, except in the open
market involving any customary brokerage commissions and as a result of which
not more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.
(9) Invest for the purpose of exercising control or management of another
company.
(10) 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.
(11) Purchase or sell commodities or commodities futures contracts except
financial futures contracts and options thereon.
(12) 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.
B-6
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, POSITION
ADDRESS AND WITH PRINCIPAL OCCUPATIONS
AGE(1) FUND DURING PAST 5 YEARS
- ----------- -------- ---------------------
<S> <C> <C>
Edward D. Director President and Director of BMC Fund, Inc., a closed-end
Beach (72) investment company, previously, Vice Chairman of
Broyhill Furniture Industries, Inc.;
Certified Public Accountant; Secretary and Treasurer of
Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; President, Treasurer
and Director of The High Yield Income Fund, Inc.
Eugene C. Director Retired President, Chief Executive Officer and Trustee
Dorsey (69) of the Gannett Foundation (now Freedom Forum); former
Publisher of four Gannett newspapers and Vice President
of Gannett Company; past Chairman of Independent Sector
(national coalition of philanthropic organizations);
former Chairman of the American Council for the Arts;
Director of the Advisory Board of Chase Manhattan Bank
of Rochester and The High Yield Income Fund, Inc.
Delayne De- Director Marketing and Management Consultant; Director of The
drick Gold High Yield Income Fund, Inc.
(58)
*Robert F. Director Comptroller, Prudential Investments (since May 1996);
Gunia (50) Executive Vice President and Treasurer, Prudential Mu-
tual Fund Management LLC (PMF); Senior Vice President
(since March 1987) of Prudential Securities Incorpo-
rated (Prudential Securities); formerly Chief Adminis-
trative Officer (July 1990-September 1996), Director
(January 1989-September 1996), Executive Vice Presi-
dent, Treasurer and Chief Financial Officer (June 1987-
September 1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989); Director of The High Yield
Income Fund, Inc.
*Harry A. Director Senior Director (since January 1986) of Prudential Secu-
Jacobs, Jr. rities; formerly Interim Chairman and Chief Executive
(75) Officer of Prudential Mutual Fund Management, Inc.
One New York (June-September 1993); formerly Chairman of the Board
Plaza of Prudential Securities (1982-1985) and Chairman of
New York, NY the Board and Chief Executive Officer of Bache Group
Inc. (1977-1982); Director of the Center for National
Policy, The First Australia Fund, Inc. and The First
Australia Prime Income Fund, Inc.; Trustee of the Tru-
deau Institute; Director of The High Yield Income Fund,
Inc.
Donald D. Director Chairman (since February 1990) and Director (since April
Lennox (78) 1989) of International Imaging Materials, Inc.; Retired
Chairman, Chief Executive Officer and Director of
Shlegel Corporation (industrial manufacturing) (March
1987-February 1989); Director of Gleason Corporation,
Personal Sound Technologies, Inc. and The High Yield
Income Fund, Inc.
*Mendel A. Director Chief Investment Officer (since October 1996) of Pruden-
Melzer CFA, tial Mutual Funds; formerly Chief Financial Officer of
CLFC, CLU Prudential Investments (November 1995-September 1996),
(35) Senior Vice President and Chief Financial Officer of
751 Broad Prudential Preferred Financial Services (April 1993-No-
Street vember 1995), Managing Director of Prudential Invest-
Newark, NJ ment Advisors (April 1991-April 1993) and Senior Vice
President of Prudential Capital Corporation (July 1989-
April 1991); Director of The High Yield Income Fund,
Inc.
</TABLE>
- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with The Prudential Insurance Company of America
(Prudential) or Prudential Securities.
B-7
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------ ------------------ ---------------------
<S> <C> <C>
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber of Com-
merce; formerly Rochester City Manager, Trustee of Cen-
ter for Governmental Research, Inc.; Director of Monroe
County Water Authority, Rochester Jobs, Inc., Blue
Cross of Rochester, Executive Service Corps of Roches-
ter, Monroe County Industrial Development Corporation,
Northeast Midwest Institute, First Financial Fund,
Inc., The Global Government Plus Fund, Inc., The High
Yield Plus Fund, Inc. and The High Yield Income Fund,
Inc.
Thomas H. O'Brien (72) Director President of O'Brien Associates (Financial and
Management Consultants) (since April 1984); formerly
President of Jamaica Water Securities Corp. (holding
company) (February 1989-August 1990); Chairman of the
Board and Chief Executive Officer (September 1987-
February 1989) of Jamaica Water Supply Company and
Director (September 1987-April 1991); Director of
Ridgewood Savings Bank; Trustee of Hofstra University;
Director of The High Yield Income Fund, Inc.
*Richard A. Redeker (53) President and Director Employee of Prudential Investments; formerly President,
Chief Executive Officer and Director (October 1993-Sep-
tember 1996) of Prudential Mutual Fund Management,
Inc.; Executive Vice President, Director and Member of
Operating Committee (October 1993-September 1996), Pru-
dential Securities; Director (since October 1993-Sep-
tember 1996), Prudential Securities Group, Inc.; Execu-
tive Vice President, The Prudential Investment Corpora-
tion (since January 1994); previously Senior Executive
Vice President and Director of Kemper Financial Servic-
es, Inc. (September 1978-September 1993); President and
Director of The High Yield Income Fund, Inc.
Nancy H. Teeters (66) Director Economist, formerly Vice President and Chief Economist
(March 1986-June 1990) of International Business Ma-
chines Corporation; Director of Inland Steel Industries
(since July 1991) and The High Yield Income Fund, Inc.
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since January
1996) and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since January
1996), Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.; 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 High
Yield Income Fund, Inc.
Susan C. Cote (42) Vice President Executive Vice President and Chief Financial Officer of
PMF (since May 1996); formerly Chief Operating Officer
and Managing Director of Prudential Investments (March
1995-May 1996) and formerly Senior Vice President-Fund
Administration (September 1983-February 1995) of PMF.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General Counsel
of PMF (since December 1996); Vice President and
General Counsel, Prudential Retirement Services (since
March 1994); formerly Associate General Counsel and
Chief Financial Services Officer, Frank Russell Company
(1988-1994).
S. Jane Rose (51) Secretary Senior Vice President and Senior Counsel of PMF; Senior
Vice President and Senior Counsel of Prudential Securi-
ties (since July 1992); formerly Vice President and As-
sociate General Counsel of Prudential Securities.
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------ ------------------ ---------------------
<S> <C> <C>
Eugene S. Stark (38) Treasurer and Principal First Vice President (January 1990-September 1996) of
Financial and Prudential Mutual Fund Management, Inc.
Accounting Officer
Stephen M. Ungerman (43) Assistant Treasurer First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996); Tax
Director of Prudential Investments and the Private
Asset Group of Prudential (since March 1996); prior
thereto, Senior Tax Manager of Price Waterhouse (1981-
January 1993).
Deborah A. Docs (39) Assistant Secretary Vice President (since December 1996) of PMF; Vice Presi-
dent and Associate General Counsel (June 1991-September
1996) of PMF; Vice President and Associate General
Counsel of Prudential Securities.
</TABLE>
- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential or Prudential Securities.
(1) Unless otherwise noted the address for each of the above persons is c/o:
Prudential Mutual Fund Management LLC, Gateway Center Three, 100 Mulberry
Street, 9th Floor, Newark, New Jersey 07102-4077.
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 LLC.
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 Prudential Investments annual compensation of $3,500, in addition to
certain out-of-pocket expenses. The amount of annual compensation paid to each
Director may change as a result of the introduction of additional funds upon
the board of directors of which the Director will be asked to serve.
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.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Lennox is
scheduled to retire on December 31, 1997, Mr. Jacobs is scheduled to retire on
December 31, 1998, and Messrs. Beach and O'Brien are scheduled to retire on
December 31, 1999.
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
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1996 and the aggregate compensation paid to such Directors
for service on the Fund's board and that of all other investment companies
registered under the Investment Company Act of 1940 managed by PMF (Fund
Complex) for the calendar year ended December 31, 1966. In October 1996,
shareholders elected a new Board of Directors. Below is listed all Directors
who have served the Fund during its most recent fiscal year as well as the new
Directors who took office after the shareholder meeting in October.
B-9
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1996
COMPENSATION
PENSION OR PAID TO BOARD
RETIREMENT ESTIMATED MEMBERS
AGGREGATE BENEFITS ACCRUED ANNUAL FROM FUNDS
COMPENSATION AS PART OF FUND BENEFITS UPON AND FUND
NAME AND POSITION FROM FUND EXPENSES RETIREMENT COMPLEX
- ------------------------ ------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Beach, Edward D.--Direc-
tor.................... -- None N/A $166,000(21/39)*
Dorsey, Eugene C.--Di-
rector**............... $7,700 None N/A $ 98,583(12/36)*
Gold, Delayne D.--Direc-
tor.................... -- None N/A $175,308(21/42)*
Gunia, Robert F.--Direc-
tor+................... -- None N/A --
Hauspurg, Arthur--Former
Director............... $7,500 None N/A $ 38,250 (5/7)*
Jacobs, Jr., Harry A.--
Director+.............. -- None N/A --
Lennox, Donald D.--
Director............... -- None N/A $ 90,000(10/22)*
Melzer, Mendel A.--Di-
rector+................ -- None N/A --
Mooney, Thomas T.--Di-
rector**............... -- None N/A $135,375(18/36)*
Munn, Stephen M.--Former
Director............... $7,500 None N/A $ 49,125 (6/8)*
O'Brien, Thomas H.--Di-
rector................. -- None N/A $ 32,250 (5/20)*
Redeker, Richard A.--Di-
rector and President+.. -- None N/A --
Teeters, Nancy H.--Di-
rector................. -- None N/A $103,583(11/28)*
Weil, III, Louis A.--Di-
rector................. $7,500 None N/A $ 91,250(13/18)*
</TABLE>
- ---------
*Indicates number of funds/portfolios in Fund Complex (including the Funds) to
which aggregate compensation relates.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each "interested" Directors, do not receive compensation
from the Fund or any fund in the Prudential Mutual Fund family. All other
Board Members listed above are deemed to be independent Board Members.
** Total compensation from all of the funds in the Fund complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $111,535 and
$139,869 for Eugene C. Dorsey and Thomas T. Mooney, respectively.
As of February 7, 1997, 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 7, 1997, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest
were: TSA Realty Associates, Limited Partnership, 555 Long Wharf Drive, New
Haven, CT 06511-6107, who held 4,716 Class C Shares (10.1%), Lawrence F. Doyle
and Christine V. Doyle JT TEN, 58 Remington Road, Ridgefield, CT 06877-4326
who held 19,712 Class C Shares (42%) and Huntington Newspapers Inc., Attn:
Larry Hensley, P.O. Box 860, Huntington, IN 46750-0860 which held 7,104 Class
C shares (15.2%).
As of February 7, 1997, Prudential Securities was the record holder for
other beneficial owners of 10,826,564 Class A shares (or 34% of the
outstanding Class A shares), 4,113,013 Class B shares (or 39% of the
outstanding Class B shares), and 37,012 Class C shares (or 79% 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 LLC (PMF or the
Manager), Gateway Center Three, Newark, New Jersey 07102-4077. 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, 1997, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $55.8 billion. According to the Investment Company
Institute, as of December 31, 1996, the Prudential Mutual Funds were the 15th
largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and Prudential.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-
owned subsidiary of PMF, serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
B-10
<PAGE>
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of
the Fund. PMF also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's Custodian, and Prudential
Mutual Fund Services LLC (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, 1996. No jurisdiction currently limits the Fund's expenses.
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,
doing business as Prudential Investments (PI), pursuant to the subadvisory
agreement between PMF and PI (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 14, 1996 and by shareholders of the Fund on
April 28, 1988.
B-11
<PAGE>
For the fiscal years ended December 31, 1996, 1995 and 1994, the Fund paid
PMF management fees of $2,996,081 (net of waiver of $351,073), $2,983,142 (net
of waiver of $349,455) and $3,633,518, respectively.
PMF has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PI will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PI 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 PI's performance of such services. PI is reimbursed by PMF for the
reasonable costs and expenses incurred by PI in furnishing those services.
Investment advisory services are provided to the Fund by a unit of the
Subadviser, known as Prudential Mutual Fund Investment Management.
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 14, 1996, 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), Gateway
Center Three, Newark, New Jersey 07102-4077, acts as the distributor of the
shares of the Fund. Prior to January 2, 1996, Prudential Mutual Fund
Distributors, Inc. (PMFD), Gateway Center Three, Newark, New Jersey 07102-
4077, acted as distributor of the Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, each a Plan and collectively the Plans)
adopted by the Fund under Rule 12b-1 under the Investment Company Act and a
distribution agreement (the Distribution Agreement), Prudential Securities
(the Distributor) incurs the expenses of distributing the Fund's Class A,
Class B and Class C shares. At a meeting held on November 3-4, 1995, the Board
of Directors approved an assignment of the Distribution Agreement to
Prudential Securities. 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 14, 1996.
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, 1996, PSI received
$508,159 under the Class A Plan. This amount was primarily expended on
commission credits to Prudential Securities and Prusec for payment of account
servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended December 31, 1996, PSI also received
approximately $33,100 in initial sales charges.
B-12
<PAGE>
CLASS B PLAN. For the fiscal year ended December 31, 1996, Prudential
Securities received $966,562 from the Fund under the Class B Plan. It is
estimated that the Distributor spent approximately $555,300 in distributing
the Fund's Class B shares, on behalf of the Fund during the year ended
December 31, 1996. It is estimated that of this amount approximately $9,500
(1.7%) was spent on printing and mailing of prospectuses to other than current
shareholders; $221,600 (39.9%) 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; and $324,200
(58.4%) on the aggregate of (i) payments of commissions to financial advisers
($224,200 or 40.4%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($100,000 or 18%). 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. For the fiscal year ended December
31, 1996, Prudential Securities received approximately $393,600 in contingent
deferred sales charges with respect to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1996 Prudential
Securities received $5,057 under the Class C Plan and spent approximately
$6,400 in distributing Class C shares. Prudential Securities also 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 fiscal
year ended December 31, 1996, Prudential Securities received approximately
$1,200 in contingent deferred sales charges with respect to Class C shares.
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. None of the
Plans 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 the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. A restated
Distribution Agreement was last approved by the Board of Directors, including
a majority of the Rule 12b-1 Directors, on May 14, 1996.
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 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
B-13
<PAGE>
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.
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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures contracts for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. The term "Manager" as used in this section
includes the "Subadviser." Fixed-income securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. The Fund
will not deal with Prudential Securities in any transaction in which
Prudential Securities acts as principal. Purchases and sales of securities on
a securities exchange, while infrequent, and purchases and sales of futures on
a commodities exchange or board of trade will be effected through brokers who
charge a commission for their services. Orders may be directed to any broker
including, to the extent and in the manner permitted by applicable law,
Prudential Securities and its affiliates.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most
favorable total cost or proceeds reasonably attainable in the circumstances.
While the Manager generally seeks reasonably competitive spreads or
commissions, the Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of the policy of obtaining most
favorable price and efficient execution, the Manager will consider research
and investment services provided by brokers or dealers who effect or are
parties to portfolio transactions of the Fund, the Manager or the Manager's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other
B-14
<PAGE>
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, 1994, 1995 and 1996.
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 assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees, which may affect
performance, (ii) each class has exclusive voting rights with respect to any
matter submitted to shareholders that relates solely to its arrangement and
has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class
(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) each class has a different exchange privilege and (iv) only Class B
shares have a conversion feature. See "Distributor" and "Shareholder
Investment Account--Exchange Privilege."
B-15
<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, 1996, the maximum offering
price of the Fund's shares is as follows:
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Net asset value and redemption price per Class A share............ $15.56
Maximum sales charge (3% of offering price)....................... .48
------
Offering price to public.......................................... $16.04
======
<CAPTION>
CLASS B
<S> <C>
Net asset value, offering price and redemption price per Class B
share*........................................................... $15.60
======
<CAPTION>
CLASS C
<S> <C>
Net asset value, offering price and redemption price per Class C
share*........................................................... $15.60
======
</TABLE>
---------
*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 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
B-16
<PAGE>
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.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certifi-
cate 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
considered disabled if he or she
is
unable to engage in any substan- A copy of the Social Security Administra-
tial gainful activity by reason of tion award letter or a letter from a physi-
any medically determinable physi- cian on the physician's letterhead stating
cal or mental impairment which can that the shareholder (or, in the case of a
be expected to result in death or trust, the grantor) is permanently disa-
to be of long-continued and indef- bled. The letter must also indicate the
inite duration. date of disability.
</TABLE>
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. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:
B-17
<PAGE>
<TABLE>
<CAPTION>
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
------------------- ---------------------- ---------------
<S> <C> <C>
First................................. 3.0% 2.0%
Second................................ 2.0% 1.0%
Third................................. 1.0% 0%
Fourth and thereafter................. 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced 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 (Short-
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.
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)
B-18
<PAGE>
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, Inc.
Prudential Tax-Free Money Fund, Inc.
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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university./1/
B-19
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals/2/.
<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................. $ 110 $ 165 $ 220 $ 275
20 Years............................. 176 264 352 440
15 Years............................. 296 444 592 740
10 Years............................. 555 833 1,110 1,388
5 Years............................. 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------
/1/Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board.
/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.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
B-20
<PAGE>
The mutual funds in the program may be purchased individually or as part of
the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, individuals should consult their
Prudential Securities Financial Advisor or Prudential/Pruco Securities
Representative concerning the appropriate blend of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.
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.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. It is expected, that the NAV of the
three classes will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the
classes.
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 LLC (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, 1996 of
approximately $3,010,300 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 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 is qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (Internal Revenue Code). 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
B-21
<PAGE>
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of securities or foreign currencies and certain
financial futures, options and forward contracts; (b) derive less than 30% of
its gross income from gains from the sale or other disposition of securities or
options thereon held for less than three months; and (c) diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of
the market value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the market value of the Fund's assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its assets is invested in the securities of any one issuer (other
than U.S. Government securities). The Fund intends to comply with the
provisions of the Internal Revenue Code that require at least 50% of the value
of its total assets at the close of each quarter of its taxable year to consist
of obligations the interest on which is exempt from federal income tax in order
to pass through tax-exempt income to its shareholders.
The Fund generally will be subject to a nondeductible excise tax of 4% to the
extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.
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 as 60% long-term capital gain or
loss and 40% 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.
Under a tax proposal in the Clinton Administration's budget plan, a portion
of the interest expense of a corporation that receives tax-exempt interest
income (including exempt-interest dividends paid by a regulated investment
company) would be nondeductible. The fraction of the corporation's interest
expense that is nondeductible would generally equal the ratio of the average
adjusted basis of the corporation's tax-exempt obligations (including shares of
any regulated investment company from which the corporation
B-22
<PAGE>
receives exempt-interest dividends) to the average adjusted basis of all the
assets used in a trade or business of the corporation. It is uncertain
whether, when or in what form this proposal or similar legislation will be
enacted into law.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations is a preference item for purposes of
computing the alternative minimum tax for both individuals and corporations.
Moreover, exempt-interest dividends, whether or not on private activity bonds,
that are held by corporations will be taken into account (i) in determining
the alternative minimum tax imposed on 75% of the excess of adjusted current
earnings over alternative minimum taxable income, (ii) in calculating the
environmental tax equal to 0.12 percent of a corporation's modified
alternative minimum taxable income in excess of $2 million, and (iii) in
determining the foreign branch profits tax imposed on the effectively
connected earnings and profits (with adjustments) of United States branches of
foreign corporations. The Fund plans to avoid to the extent possible investing
in private activity tax-exempt obligations.
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.
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, 1996 for the Fund's Class
A, Class B and Class C shares was 4.75%, 4.49% and 4.24%, 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.
B-23
<PAGE>
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, 1996 for
the Fund's Class A, Class B and Class C shares was 7.86%, 7.43% and 7.02%,
respectively.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also from time to time advertise
its average annual total return. Average annual total return is determined
separately for Class A, 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, five year and since inception periods ended December 31, 1996 was -
0.4%, 6.0% and 7.2%, 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, 1996 was -2.7%, 6.1% and 6.4%, respectively. The
average annual total return for Class C shares for the one year and since
inception periods ended December 31, 1996 was 1.0% and 6.1%, respectively.
AGGREGATE TOTAL RETURN. The Fund may from time to time advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, 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, five year and since inception periods ended December 31, 1996 was 2.7%,
38.3% and 66.9%, 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, 1996 was 2.3%, 35.7% and 85.8%, respectively. The aggregate total
return for Class C shares for the one year and since inception periods ended
December 31, 1996 was 2.0% and 15.4%, respectively.
B-24
<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]
- ---------
/1/Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation--1996
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. 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.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
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 LLC (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 of $13 per
shareholder account, a new account set-up fee of $2.00 for each manually-
established account and a monthly inactive zero balance account fee of $.20
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, 1996, the Fund incurred fees of $459,400 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-25
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==================================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS--98.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Alabama--0.5%
Jasper Wtrwks. & Swr. Brd., Wtr. & Swr. Rev., A.M.B.A.C. Aaa 6.00% 6/01/18 $ 3,350 $ 3,499,108
- ----------------------------------------------------------------------------------------------------------------------------------
Alaska--2.2%
Anchorage Alaska Gen. Oblig., A.M.B.A.C. Aaa 6.25 6/01/23 4,000 4,076,760
Anchorage Alaska Elec. Utility Rev.,
M.B.I.A. Aaa 6.50 12/01/12 3,400 3,799,670
M.B.I.A. Aaa 6.50 12/01/13 2,500 2,790,500
M.B.I.A. Aaa 6.50 12/01/14 3,455 3,870,671
------------
14,537,601
- ----------------------------------------------------------------------------------------------------------------------------------
Arizona--3.9%
Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25,
B.I.G. Aaa 7.875 8/01/14 2,250 2,869,515
Maricopa Cnty. Sch. Dist., A.M.B.A.C.,
No. 3 Tempe Elem. Aaa Zero 7/01/09 1,500 765,930
No. 3 Tempe Elem. Aaa Zero 7/01/14 1,500 560,025
Maricopa Cnty. Unified Sch. Dist.,
No. 80 Chandler, F.G.I.C. Aaa Zero 7/01/09 1,330 679,124
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/10 1,050 504,756
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/11 1,200 542,556
No. 80 Chandler, F.G.I.C. Aaa 6.25 7/01/11 1,000 1,102,770
No. 41 Gilbert, F.G.I.C. Aaa Zero 7/01/07 1,500 870,510
Phoenix St. & Hwy. User Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 3,000 1,274,490
Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 2,245 2,500,773
Pima Cnty. Unified Sch. Dist., Gen. Oblig., F.G.I.C.
No. 1, Tuscan Aaa 7.50 7/01/10 3,000 3,647,010
No. 16, Catalina Foothills Aaa Zero 7/01/09 3,455 1,764,192
Santa Cruz Cnty., Unified Sch. Dist., A.M.B.A.C.,
No. 1, Nogales Aaa Zero 1/01/06 770 487,241
No. 1, Nogales Aaa Zero 7/01/06 700 431,823
Tucson Gen. Oblig.,
Ser. A A1 7.375 7/01/11 1,000 1,210,410
Ser. A A1 7.375 7/01/12 1,100 1,335,290
Ser. A A1 7.375 7/01/13 4,500 5,473,755
------------
26,020,170
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-26
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==================================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California--6.7%
California St Univ. & Hsg. Rev., F.G.I.C. Aaa 5.75% 11/01/15 $ 7,485 $ 7,574,595
Kern California High Sch. Dist., Ser. A, M.B.I.A. Aaa 6.30 2/01/10 2,490 2,750,006
Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125 7/01/23 6,000 5,880,660
San Francisco City Swr. Rev., Cap Apprec., Ser. B,
F.G.I.C. Aaa Zero 10/01/09 2,960 1,494,948
San Jose Redev. Proj., Agcy. Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 5,000 5,389,150
Santa Margarita/Dana Point Auth., M.B.I.A.,
Impvt. Dists., 3-3A-484A Aaa 7.25 8/01/09 2,000 2,384,900
Impvt. Dists., 3-3A-484A Aaa 7.25 8/01/10 2,450 2,918,073
Impvt. Dists., 3-3A-484A Aaa 7.25 8/01/14 2,000 2,413,500
So. California Pub. Pwr. Auth. Rev., F.G.I.C. Aaa 5.45 7/01/17 6,000 5,722,440
So. Orange Cnty. Pub. Fin. Auth. Rev., F.G.I.C.,
Foothill Area. Proj. Aaa 8.00 8/15/09 3,650 4,590,824
Foothill Area. Proj. Aaa 6.50 8/15/10 2,000 2,255,560
West Contra Costa Sch. Dist., Cert. of Part. Ba1 7.125 1/01/24 1,600 1,702,704
------------
45,077,360
- ----------------------------------------------------------------------------------------------------------------------------------
Colorado--5.8%
Arapahoe Cnty. Cap. Imprvmt. Trust Fund Hwy.,
Pub. Hwy. Rev., Ser. E-470 Baa Zero 8/31/15 29,800 8,428,036
Pub. Hwy. Rev., Ser. E-470 Baa 7.00 8/31/26 3,000 3,310,080
Colorado Hsg. Fin. Auth., A.M.T.,
Singl. Fam. Proj., Aa 8.00 6/01/25 4,585 5,070,964
Singl. Fam. Proj., Ser. B-1, Aa 7.90 12/01/25 2,855 3,150,093
Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa 7.65 12/01/25 5,845 6,495,724
Colorado Springs Arpt. Rev., A.M.T.,
Ser. A. BBB+(d) 6.90 1/01/12 3,700 3,916,376
Ser. A. BBB+(d) 7.00 1/01/22 7,960 8,454,714
------------
38,825,987
- ----------------------------------------------------------------------------------------------------------------------------------
Florida--3.3%
Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South
Proj., A 7.95 12/01/08 8,665 9,517,982
Florida St. Brd. of Ed.,
Admin. Cap. Outlay, Aa 9.125 6/01/14 1,260 1,774,685
Admin. Cap. Outlay, E.T.M. Aaa 9.125 6/01/14 195 276,432
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj., Ser. 9 Aa3 8.00 5/01/22 5,000 5,814,500
Jacksonville Elec. Auth., St Johns Riv. Pwr., Ser. 7 Aa1 5.50 10/01/14 5,000 4,943,750
------------
22,327,349
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-27
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==================================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Georgia--2.6%
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Fac. Rev. NR 9.25% 6/01/10 $ 5,375(b) $ 6,253,329
Burke Cnty. Dev. Auth., M.B.I.A.,
Georgia Pwr. Plant Co., Vogtle Proj., Ser. 7 Aaa 6.625 10/01/24 500 535,460
Oglethorpe Pwr. Corp. Aaa 8.00 1/01/22 5,000 5,892,350
Cobb Cnty. Kennestone Hosp. Auth. Rev., Ser. A, M.B.I.A. Aaa 5.00 4/01/24 750 679,665
DeKalb Cnty. Wtr. & Swr. Rev., Aa 5.25 10/01/23 250 233,333
DeKalb Private Hosp. Auth. Rev., Wesley Svcs. Inc. Proj. Aa3 8.25 9/01/15 500 516,555
Forsyth Cnty. Sch. Dist. Dev. Rev., Ser. A A1 6.75 7/01/16 500 576,155
Fulton Cnty. Sch. Dist. Rev., Lindbrook Square Fndtn. Aa 6.375 5/01/17 750 837,532
Georgia Mun. Elec. Auth. Pwr. Rev. Ref., Ser. B A 6.25 1/01/17 475 507,115
Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 585 636,275
Metropolitan Atlanta Rapid Tran. Auth. Rev., Sales Tax
Rev., Ser. A, M.B.I.A. Aaa 6.90 7/01/20 500 578,670
------------
17,246,439
- ----------------------------------------------------------------------------------------------------------------------------------
Illinois--3.0%
Central Lake Cnty. Jt. Actn. Agcy. Rev., F.G.I.C. Aaa 5.375 5/01/13 4,315 4,225,162
Kane & De Kalb Cntys. Cmnty. United Sch. Dist., No. 301,
A.M.B.A.C. Aaa Zero 12/01/10 3,055 1,416,451
Metropolitan Pier & Expo. Auth Hosp. Fac. Rev., McCormick
Place Convention BBB-(d) 7.00 7/01/26 12,910 14,332,811
------------
19,974,424
- ----------------------------------------------------------------------------------------------------------------------------------
Indiana--2.7%
Concord Ind. Cmnty. Schs. Bldg. Corp., Ser. A., A.M.B.A.C. Aaa 5.90 7/01/13 3,915 4,020,431
Hamilton S.E. Ind. North Del. Schl. Bldg., A.M.B.A.C. Aaa 5.40 1/15/14 4,275 4,223,358
Merrillville Ind. Multi. Sch. Bldg., M.B.I.A. Aaa 5.80 7/15/17 2,780 2,794,762
Mill Creek Indl. Cmnty., East Elem. Sch. Bldg. Corp.,
F.S.A. AAA(d) 5.80 7/15/15 3,235 3,284,463
Monroe Cnty. Ind. Cmnty. Sch. Corp., M.B.I.A. Aaa 5.25 7/01/16 4,330 4,121,987
------------
18,445,001
- ----------------------------------------------------------------------------------------------------------------------------------
Kentucky--1.8%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan Bloedel
Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,348,960
Jefferson Cnty. Poll. Ctrl. Rev., Louisville Gas & Elec.,
Ser. A, A.M.T. Aa2 7.75 2/01/19 5,700 5,984,658
------------
12,333,618
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-28
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==================================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Louisiana--4.4%
New Orleans, Gen. Oblig., A.M.B.A.C. Aaa Zero 9/01/09 $13,500 $ 6,831,810
Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90% 2/01/07 5,780 7,564,055
St. Charles Parish, Environ. Impt. Rev. Louisiana Pwr. &
Lt. Co., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,280,000
St. Charles Parish, Lousiana Poll. Ctrl. Rev.,
Lousiana Pwr. & Lt. Co. Baa3 8.25 6/01/14 4,000 4,372,240
Lousiana Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 5,000 5,495,300
------------
29,543,405
- ----------------------------------------------------------------------------------------------------------------------------------
Maryland--1.7%
Baltimore Wtr. Rev., Ser A, F.G.I.C. Aaa 5.80 7/01/15 3,600 3,694,248
Maryland St. Hlth. & Higher Ed. Facs., Auth. Rev.,
Doctor's Cmnty. Hosp. Proj. Baa 5.50 7/01/24 4,000 3,597,280
Northeast Waste Disp. Auth. Rev., Baltimore City Sludge
Corp. NR 7.25 7/01/07 3,871 4,024,950
------------
11,316,478
- ----------------------------------------------------------------------------------------------------------------------------------
Massachusetts--4.0%
Mass. St., Gen. Oblig., Ser. C, M.B.I.A. Aaa 5.625 8/01/13 5,000 5,065,400
Mass. St. Hlth. & Ed. Facs. Auth. Rev., Wellesey College Aa1 5.375 7/01/19 5,000 4,801,550
Mass. St. Wtr. Poll. Abatement, New Bedford Project Aa 5.70 2/01/15 5,000 5,038,950
Mass. St. Special Oblig. Rev., Ser. A A1 5.80 6/01/14 4,850 4,923,526
Mass. St. Wtr. Res. Auth., Ser. B, M.B.I.A. Aaa 6.25 12/01/11 6,720 7,408,733
------------
27,238,159
- ----------------------------------------------------------------------------------------------------------------------------------
Michigan--4.4%
Cheboygan Sch. Dist., M.B.I.A. Aaa 5.70 5/01/16 5,930 5,975,542
Detroit Sew. Disp. Rev., F.G.I.C. Aaa 5.70 7/01/13 4,500 4,545,270
Fowlerville Cmnty. Schools, M.B.I.A. Aaa 5.60 5/01/16 3,125 3,102,875
Holland Sch. Dist., A.M.B.A.C. Aaa Zero 5/01/12 4,000 1,715,040
Huron Valley Sch. Dist., F.G.I.C. Aaa 5.875 5/01/16 1,000 1,025,210
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg. Rev., Ser. B A+(d) 7.55 4/01/23 1,000 1,074,370
Sngl. Fam. Mtge., Ser. A. AA+(d) 7.50 6/01/15 5,185 5,460,375
Sngl. Fam. Mtge., Ser. D, A.M.T. AA+(d) 7.75 12/01/19 1,380 1,391,468
Okemos Pub. Sch. Dist., M.B.I.A.,
Cnty. of Ingham Aaa Zero 5/01/12 1,100 471,636
Cnty. of Ingham Aaa Zero 5/01/13 1,700 683,179
Royal Oak Hosp. Fin. Auth. Hosp. Rev.,
William Beaumont Hosp. Aa 5.75 1/01/13 4,000 4,055,360
------------
29,500,325
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
===================================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Minnesota--0.9%
Anoka Hennepin Indpt. Sch. Dist., No. 11, Ser. C, F.S.A. Aaa Zero 2/01/12 $ 1,575 $ 691,756
Metropolitan Council, St. Paul Area Sports Fac. Rev.,
Hubert H. Humphrey Metrodome A 6.00% 10/01/09 500 515,235
Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam.
Mtge., G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 870 912,413
Minneapolis St. Paul Met. Arpts. Comm., Ser. 7, A.M.T. Aaa 7.80 1/01/14 1,000 1,086,780
So. Minn. Mun. Pwr. Agcy. Supply Sys., Ser. A, M.B.I.A. Aaa Zero 1/01/20 3,250 886,275
St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 929 985,286
Univ. of Minnesota, Ser. A, E.T.M. Aa3 6.00 2/01/11 1,000 1,064,700
------------
6,142,445
- ------------------------------------------------------------------------------------------------------------------------------------
Missouri--1.3%
Missouri St. Hsg. Dev. Comm. Mtge Rev., Single Family Loan
Ser. A, G.N.M.A., A.M.T. AAA(d) 7.20 9/01/26 4,985 5,427,319
Sikeston Missouri Elec. Rev., M.B.I.A. Aaa 6.00 6/01/16 3,175 3,406,204
------------
8,833,523
- -----------------------------------------------------------------------------------------------------------------------------------
Nebraska--0.7%
Nebraska Edl. Fin. Auth. Rev., Creighton Univ. Proj.,
A.M.B.A.C. Aaa 5.80 1/01/10 4,500 4,667,265
- -----------------------------------------------------------------------------------------------------------------------------------
Nevada--0.9%
Clark Cnty. Passenger Fac. Charge Rev., Las Vegas McCarran
Int'l. Airport, A.M.B.A.C. Aaa 6.00 7/01/22 6,000 6,171,240
- -----------------------------------------------------------------------------------------------------------------------------------
New Hampshire--0.6%
New Hampshire Municipal Bond Bank, Ser. C, M.B.I.A. Aaa 5.75 8/15/16 4,260 4,317,382
- -----------------------------------------------------------------------------------------------------------------------------------
New Jersey--3.2%
New Jersey Hlth. Care Facs. Fin. Auth. Rev.,
St. Josephs Hosp. & Med. Ctr., Ser. A AAA(d) 5.75 7/01/16 1,250 1,263,625
New Jersey St. Hsg. & Mtge. Fin. Agcy., Ser. D, A.M.T.,
M.B.I.A. Aaa 7.70 10/01/29 2,755 2,871,206
New Jersey St. Hwy. Auth. Garden St. Pkwy. Gen. Rev. A1 6.25 1/01/14 5,900 6,185,619
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 10,000 11,284,100
------------
21,604,550
- -----------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.9%
Farmington Utility Sys. Rev., F.G.I.C. Aaa 5.75 5/15/13 5,650 5,744,524
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
===================================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New York--14.3%
Metropolitan Trans. Auth., Trans. Facs. Rev.,
Ser. A, F.S.A. Aaa 6.00% 7/01/16 $ 2,500 $ 2,612,000
Ser. O Baa1 5.75 7/01/13 5,820 5,838,508
New York City Ind. Dev. Agcy., Spec. Fac. Rev., A.M.T.,
Terminal One Group Assoc. Proj. A 6.00 1/01/19 4,500 4,445,910
Terminal One Group Assoc. Proj. A 6.125 1/01/24 5,715 5,711,228
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys. Rev.,
Ser. A, F.G.I.C. Aaa 6.75 6/15/16 21,250 23,128,287
New York St. Dev. Corp. Aaa 5.50 7/01/16 5,000 4,964,550
New York St. Local Gov't. Assist. Corp., Ser. E A 6.00 4/01/14 10,000 10,643,700
New York St. Urban Dev. Corp. Rev., F.S.A.,
Correctional Facs. Aaa 6.50 1/01/09 3,000 3,367,770
Correctional Facs., Ser. A Aaa 5.50 1/01/14 3,000 3,026,430
New York, Gen. Oblig.,
Ser. A Baa1 7.75 8/15/04 2,000 2,221,940
Ser. B Baa1 8.25 6/01/06 1,500 1,787,490
Ser. B Baa1 7.25 8/15/07 3,500 3,933,475
Ser. D Aaa 7.65 2/01/07 4,600(b) 5,301,684
Ser. D Baa1 7.65 2/01/07 400 449,408
Ser. D Baa1 8.00 8/01/03 2,020 2,278,903
Ser. D Baa1 8.00 8/01/04 1,170 1,320,977
Ser. F Baa1 8.25 11/15/02 5,000 5,663,000
Triborough Bridge & Tunl. Auth., Ser. X, M.B.I.A. Aaa 6.625 1/01/12 8,500 9,683,880
------------
96,379,140
- -----------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.6%
Mercer Cnty. Poll Ctrl. Rev., Antelope Valley Station,
A.M.B.A.C Aaa 7.20 6/30/13 9,000 10,743,660
- ----------------------------------------------------------------------------------------------------------------------------------
Ohio--2.3%
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Buckeye
Pwr. Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 12,920 15,378,030
- ----------------------------------------------------------------------------------------------------------------------------------
Oklahoma--4.7%
Central Okla. Trans. & Pkg. Auth., F.S.A. Aaa 5.30 7/01/12 3,500 3,449,110
Mcgee Creek Auth. Wtr. Rev., M.B.I.A. Aaa 6.00 1/01/23 7,000 7,562,590
Tulsa Mun. Arpt. Trust Rev., American Airlines, Inc.,
A.M.T. Baa2 7.375 12/01/20 19,000 20,278,320
------------
31,290,020
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1996 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- -----------------------------------------------------------------------------------------------------------------------------------
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pennsylvania--2.8%
Bensalem Twp. Sch. Dist., F.G.I.C. Aaa 5.875% 7/15/16 $ 2,900 $ 2,968,991
Penn. St. Higher Edl. Facs. Auth. Rev., Drexel Univ. Aaa 5.625 5/01/14 5,000 5,030,950
Penn. St. Higher Edl. Facs. Auth., College & Univ. Rev.,
Ser. B Aa 5.90 9/01/15 4,205 4,300,159
Philadelphia Wtr. & Waste Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/09 3,400 3,746,358
M.B.I.A. Aaa 6.25 8/01/11 2,500 2,741,675
------------
18,788,133
- -----------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.8%
Puerto Rico Comnwlth.,
Gen. Oblig., M.B.I.A. Aaa 7.612(c) 7/01/08 1,000 1,082,500
Gen. Oblig. Baa1 6.50 7/01/13 3,000 3,333,030
Gen. Oblig., F.S.A. Aaa 7.71 (c) 7/01/20 450 463,500
Puerto Rico Comnwlth., Hwy. & Trans. Auth., Hwy. Rev.,
Ser. V Baa1 6.625 7/01/12 4,000 4,310,880
Ser. W Baa1 5.50 7/01/13 3,000 2,993,550
Ser. W Baa1 5.50 7/01/15 2,500 2,482,800
Puerto Rico Elec. Pwr. Auth., Pwr. Rev., Ser. S Baa1 6.125 7/01/08 1,050 1,137,066
Puerto Rico Public Bldgs. Auth. Rev., Ser. L, F.S.A. Aaa 5.75 7/01/10 5,065 5,358,061
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.769(c) 1/25/07 4,100 4,212,750
------------
25,374,137
- -----------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.5%
Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 10,076,243
- -----------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.6%
Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp.,
F.G.I.C. Aaa 6.75 9/01/10 5,000 5,708,700
Mcminn Cnty. Ind. Dev. Brd. Solid Waste Rev., Calhoun
Nwsprnt. Recycling Fac., A.M.T. Baa1 7.40 12/01/22 5,000 5,399,400
------------
11,108,100
- -----------------------------------------------------------------------------------------------------------------------------------
Texas--4.2%
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 4,067,595
Ser. A Aaa 7.375 11/01/09 3,500 4,067,595
Houston Texas Wtr. & Swr. Sys. Rev., Ser. C, M.B.I.A. Aaa 5.75 12/01/15 3,315 3,346,260
New Braunfels Indpt. Sch. Dist.,
Cap. Apprec. Aaa Zero 2/01/10 2,335 1,140,858
Cap. Apprec. Aaa Zero 2/01/11 2,365 1,086,481
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
Portfolio of Investments as of PRUDENTIAL NATIONAL MUNICIPALS
December 31, 1996 FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Texas (cont'd.)
Port Corpus Christi Auth. Rev., A2 7.50% 8/01/12 $ 2,000 $ 2,216,880
San Antonio Texas Elec. & Gas Rev.,
M.B.I.A. Aaa 5.375 2/01/16 3,000 2,941,980
Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 2,595,650
So. Texas Cmnty. College District Texas, A.M.B.A.C. Aaa 5.75 8/15/15 4,310 4,357,281
Univ. Texas Univ. Rev., Fen. Sys., Ser. B Aa1 6.75 8/15/13 2,035 2,201,178
------------
28,021,758
- ---------------------------------------------------------------------------------------------------------------------------------
Vermont--1.1%
Vermont Edl. & Hlth. Bldgs. Fin. Agcy. Rev.,
Middlebury College Proj. AA(d) 5.50 11/01/16 4,000 3,963,480
Vermont Muni. Bond Bank, Ser. 1, A.M.B.A.C. Aaa 5.75 12/01/16 3,200 3,263,488
------------
7,226,968
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia--0.7%
Fairfax Cnty. Economic Dev. Auth. Aa 5.50 5/15/18 3,500 3,388,700
Virginia Polytechnic Inst. & St. Univ. Rev., Ser. A A1 5.50 6/01/16 1,300 1,295,320
------------
4,684,020
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--3.9%
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00 7/01/08 4,000 4,587,440
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 5,831,450
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 10,400 10,108,072
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/06 6,000 3,636,840
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 3,000 1,818,420
------------
25,982,222
------------
Total long-term investments (cost $626,637,453) 658,418,784
------------
SHORT-TERM INVESTMENTS--1.1%
- ---------------------------------------------------------------------------------------------------------------------------------
District Of Columbia--0.1%
Dist. of Columbia Rev., Gen. Oblig., Ser. 92A-5, F.R.D.D. VMIG1 5.00 1/02/97 700 700,000
- ---------------------------------------------------------------------------------------------------------------------------------
Nevada--0.4%
Washoe Cnty. Wtr. Fac. Rev., Sierra Pacific Power Co.
Proj., Ser. 90, F.R.D.D. P-1 5.05 1/02/97 2,200 2,200,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
Portfolio of Investments as of PRUDENTIAL NATIONAL MUNICIPALS
December 31, 1996 FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Texas--0.6%
Gulf Coast Ind. Dev. Auth., CITGO Petroleum., Ser. 95,
F.R.D.D. VMIG1 5.10% 1/02/97 $ 4,200 $ 4,200,000
------------
Total short-term investments (cost $7,100,000) 7,100,000
------------
Total Investments--99.1%
(cost $633,737,453; Note 4) 665,518,784
Other assets in excess of liabilities--0.9% 6,176,870
------------
Net Assets--100% $671,695,654
============
</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
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(e)
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
(b) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(c) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(d) Standard and Poor's Rating.
(e) 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.
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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Assets December 31, 1996
-----------------
<S> <C>
Investments, at value (cost $633,737,453)............................................................... $ 665,518,784
Interest receivable..................................................................................... 11,905,872
Receivable for Fund shares sold......................................................................... 88,492
Receivable for investments sold......................................................................... 65,355
Deferred expenses and other assets...................................................................... 18,524
---------------
Total assets......................................................................................... 677,597,027
---------------
Liabilities
Bank overdraft.......................................................................................... 12,105
Payable for investments purchased....................................................................... 4,055,215
Dividends payable....................................................................................... 746,560
Payable for Fund shares reacquired...................................................................... 467,062
Accrued expenses........................................................................................ 259,949
Management fee payable.................................................................................. 244,590
Distribution fee payable................................................................................ 115,892
---------------
Total liabilities.................................................................................... 5,901,373
---------------
Net Assets.............................................................................................. $ 671,695,654
===============
Net assets were comprised of:
Common stock, at par................................................................................. $ 431,386
Paid-in capital in excess of par..................................................................... 642,493,209
---------------
642,924,595
Accumulated net realized loss on investments......................................................... (3,010,272)
Net unrealized appreciation on investments........................................................... 31,781,331
---------------
Net assets, December 31, 1996........................................................................... $ 671,695,654
===============
Class A:
Net asset value and redemption price per share
($502,739,143 / 32,306,432 shares of common stock issued and outstanding)......................... $15.56
Maximum sales charge (3% of offering price).......................................................... .48
------
Maximum offering price to public..................................................................... $16.04
======
Class B:
Net asset value, offering price and redemption price per share
($168,184,783 / 10,782,675 shares of common stock issued and outstanding)......................... $15.60
------
Class C:
Net asset value, offering price and redemption price per share
($771,728 / 49,477 shares of common stock issued and outstanding)................................. $15.60
======
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations
=============================================================
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1996
-----------------
<S> <C>
Income
Interest.............................. $ 42,028,983
-------------
Expenses
Management fee........................ 3,347,154
Distribution fee--Class A............. 508,159
Distribution fee--Class B............. 966,562
Distribution fee--Class C............. 5,057
Transfer agent's fees and expense..... 522,000
Reports to shareholders............... 203,000
Custodian's fees and expenses......... 102,000
Registration fees..................... 70,000
Audit fees and expenses............... 51,000
Legal fees and expenses............... 40,000
Directors' fees and expenses.......... 31,000
Insurance expense..................... 13,000
Miscellaneous......................... 12,292
-------------
Total expenses..................... 5,871,224
Less: Management fee waiver........... (351,073)
Custodian fee credit............... (7,738)
-------------
Net expenses....................... 5,512,413
-------------
Net investment income.................... 36,516,570
-------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... 7,253,686
Financial futures contracts........... (680,537)
-------------
6,573,149
Net change in unrealized depreciation of
Investments........................... (26,789,525)
-------------
Net loss on investment transactions...... (20,216,376)
-------------
Net Increase in Net Assets
Resulting from Operations................ $ 16,300,194
=============
</TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets
================================================================
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets ----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Operations
Net investment income.......... $ 36,516,570 $ 36,359,209
Net realized gain on investment
transactions................ 6,573,149 15,052,304
Net change in unrealized
appreciation (depreciation)
of investments.............. (26,789,525) 63,875,111
------------ ------------
Net increase in net assets
resulting from operations... 16,300,194 115,286,624
------------ ------------
Dividends and distributions
(Note 1) Dividends from net
investment
income
Class A..................... (26,993,477) (23,828,407)
Class B..................... (9,491,599) (12,519,283)
Class C..................... (31,494) (11,519)
------------ ------------
(36,516,570) (36,359,209)
------------ ------------
Distributions in excess of net
investment income
Class A..................... (129,414) (202,311)
Class B..................... (43,154) (83,632)
Class C..................... (196) (148)
------------ ------------
(172,764) (286,091)
------------ ------------
Fund share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 132,494,761 179,852,628
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 22,304,782 22,078,855
Cost of shares reacquired...... (224,127,599) (204,293,852)
------------ ------------
Decrease in net assets from
Fund share transactions..... (69,328,056) (2,362,369)
------------ ------------
Total increase (decrease)......... (89,717,196) 76,278,955
Net Assets
Beginning of year................. 761,412,850 685,133,895
------------ ------------
End of year....................... $671,695,654 $761,412,850
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
Notes to Financial Statements 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 Net 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.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income $172,764, increase accumulated realized losses by $669,358 and increase
paid-in capital in excess of par by $496,594. The current year effect of
applying the Statement of Position was due to the sale of securities purchased
with market discount. Net investment income, net realized gains and net assets
were not affected by this change.
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, 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.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- --------------------------------------------------------------------------------
B-37
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management LLC
("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. 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 $351,073 ($0.008 per share for Class A, B and C shares). The
Fund is not required to reimburse PMF for such waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B and Class C
shares of the Fund. The Fund compensates PSI 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 PSI with respect to
Class A, B and C shares, 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 year ended December 31, 1996.
PSI has advised the Fund that it received approximately $33,100 in front-end
sales charges resulting from sales of Class A shares during the year ended
December 31, 1996. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1996, it received
approximately $393,600 and $1,200 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31,
1996 with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of December 31,
1996. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended December 31,
1996, the Fund incurred fees of approximately $459,400 for the services of PMFS.
As of December 31, 1996, $36,300 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 year ended December 31, 1996, were $317,162,651 and $389,621,965,
respectively.
The federal income tax basis of the Portfolio's investments at December 31, 1996
was $633,737,453 and, accordingly, net unrealized appreciation for federal
income tax purposes was $31,781,331 (gross unrealized appreciation--$33,314,954;
gross unrealized depreciation--$1,533,623).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1996 of approximately $3,010,300 of which $2,657,800 expires in
2002 and $352,500 expires in 2003. Such carryforward is after utilization of
approximately $6,366,600 of net taxable gains realized and recognized during the
year ended December 31, 1996. Accordingly, no capital gains distribution is
expected to be paid until net gains have been realized in excess of the
carryforward.
- --------------------------------------------------------------------------------
B-38
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
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. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
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>
Year ended December 31, 1996:
Shares sold...................... 7,874,132 $ 121,137,131
Shares issued in reinvestment of
dividends and distributions.... 1,069,965 16,527,402
Shares reacquired................ (12,415,345) (191,331,476)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (3,471,248) (53,666,943)
Shares issued upon conversion
from Class B................... 2,099,600 32,135,995
----------- -------------
Net decrease in shares
outstanding.................... (1,371,648) $ (21,530,948)
=========== =============
Year ended December 31, 1995:
Shares sold...................... 5,840,738 $ 88,549,457
Shares issued*................... 2,456,167 38,217,954
Shares issued in reinvestment of
dividends and distributions.... 946,405 14,567,998
Shares reacquired................ (9,950,451) (152,370,817)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (707,141) (11,035,408)
Shares issued upon conversion
from Class B................... 33,503,346 499,611,384
----------- -------------
Net increase in shares
outstanding.................... 32,796,205 $ 488,575,976
=========== =============
<CAPTION>
Class B Shares Amount
- ------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold...................... 698,535 $ 10,812,210
Shares issued in reinvestment of
dividends and distributions.... 371,613 5,754,354
Shares reacquired................ (2,107,215) (32,615,599)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,037,067) (16,049,035)
Shares reacquired upon conversion
into Class A................... (2,095,072) (32,135,995)
----------- -------------
Net decrease in shares
outstanding.................... (3,132,139) $ (48,185,030)
=========== =============
Year ended December 31, 1995:
Shares sold...................... 1,092,500 $ 11,070,341
Shares issued*................... 2,674,096 41,715,890
Shares issued in reinvestment of
dividends and distributions.... 493,046 7,503,598
Shares reacquired................ (3,427,668) (51,852,878)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 831,974 8,436,951
Shares reacquired upon conversion
into Class A................... (33,457,015) (499,611,384)
----------- -------------
Net decrease in shares
outstanding.................... (32,625,041) $(491,174,433)
=========== =============
<CAPTION>
Class C
- -------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold...................... 34,623 $ 545,420
Shares issued in reinvestment of
dividends and distributions.... 1,490 23,026
Shares reacquired................ (11,778) (180,524)
----------- -------------
Net increase in shares
outstanding.................... 24,335 $ 387,922
=========== =============
Year ended December 31, 1995:
Shares sold...................... 18,625 $ 287,124
Shares issued*................... 760 11,862
Shares issued in reinvestment of
dividends and distributions.... 469 7,259
Shares reacquired................ (4,510) (70,157)
----------- -------------
Net increase in shares
outstanding.................... 15,344 $ 236,088
=========== =============
</TABLE>
- ---------------
* Represents amounts issued in connection with the acquisition of the Prudential
Municipal Series Fund--Arizona Series, Georgia Series, and Minnesota Series.
B-39
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........ $ 15.98 $ 14.42 $ 16.30 $ 15.94 $16.00
-------- -------- ------- ------- ------
Income from investment operations
Net investment income..................... .82(b) .81(b) .81 .90 .94
Net realized and unrealized gain (loss) on
investment transactions................ (.42) 1.57 (1.78) 1.05 .43
-------- -------- ------- ------- ------
Total from investment operations....... .40 2.38 (.97) 1.95 1.37
-------- -------- ------- ------- ------
Less distributions
Dividends from net investment income...... (.82) (.81) (.81) (.90) (.94)
Distributions in excess of net investment
income................................. -- (c) (.01) -- -- --
Distributions from net realized gains..... -- -- (.10) (.69) (.49)
-------- -------- ------- ------- ------
Total distributions.................... (.82) (.82) (.91) (1.59) (1.43)
-------- -------- ------- ------- ------
Net asset value, end of year.............. $ 15.56 $ 15.98 $ 14.42 $ 16.30 $15.94
======== ======== ======= ======= ======
TOTAL RETURN(a):.......................... 2.66% 16.91% (6.04)% 12.60% 8.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............. $502,739 $538,145 $12,721 $14,167 $7,700
Average net assets (000).................. $508,159 $446,350 $14,116 $11,786 $5,401
Ratios to average net assets:
Expenses, including distribution
fees................................ .68%(b) .75%(b) .77% .69% .72%
Expenses, excluding distribution
fees................................ .58%(b) .65%(b) .67% .59% .62%
Net investment income.................. 5.31%(b) 5.34%(b) 5.38% 5.49% 5.79%
For Class A, B and C shares:
Portfolio turnover rate................ 46% 98% 120% 82% 114%
</TABLE>
- ---------------
(a) 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 year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class B Class C
---------------------------------------------------------------- ----------
Year Ended
December
Year Ended December 31, 31,
---------------------------------------------------------------- ----------
1996 1995 1994 1993 1992 1996
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 16.02
-------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income..................... .76(b) .76(b) .75 .84 .88 .72(b)
Net realized and unrealized gain (loss) on
investment transactions................ (.42) 1.58 (1.78) 1.05 .44 (.42)
-------- -------- -------- -------- -------- --------
Total from investment operations....... .34 2.34 (1.03) 1.89 1.32 .30
-------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment income...... (.76) (.76) (.75) (.84) (.88) (.72)
Distributions in excess of net investment
income................................. -- (c) (.01) -- -- -- -- (c)
Distributions from net realized gains..... -- -- (.10) (.69) (.49) --
-------- -------- -------- -------- -------- --------
Total distributions.................... (.76) (.77) (.85) (1.53) (1.37) (.72)
-------- -------- -------- -------- -------- --------
Net asset value, end of period............ $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 15.60
======== ======== ======== ======== ======== ========
TOTAL RETURN(a):.......................... 2.26% 16.49% (6.39)% 12.15% 8.50% 2.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $168,185 $222,865 $672,272 $848,299 $828,702 $772
Average net assets (000).................. $193,312 $252,313 $751,623 $854,919 $829,830 $674
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.08%(b) 1.15%(b) 1.17% 1.09% 1.12% 1.33%(b)
Expenses, excluding distribution
fees................................ .58%(b) .65%(b) .67% .59% .62% .58%(b)
Net investment income.................. 4.91%(b) 4.96%(b) 4.96% 5.09% 5.39% 4.67%(b)
<CAPTION>
Year Ended August 1,
December 1994(e)
31, through
-------- 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..................... .72(b) .29
Net realized and unrealized gain (loss) on
investment transactions................ 1.59 (.69)
-------- --------
Total from investment operations....... 2.31 (.40)
-------- --------
Less distributions
Dividends from net investment income...... (.72) (.29)
Distributions in excess of net investment
income................................. (.01) --
Distributions from net realized gains..... -- --
-------- --------
Total distributions.................... (.73) (.29)
Net asset value, end of period............ $ 16.02 $ 14.44
======== ========
TOTAL RETURN(a):.......................... 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $403 $141
Average net assets (000).................. $247 $103
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.40%(b) 1.51%(d)
Expenses, excluding distribution
fees................................ .65%(b) .76%(d)
Net investment income.................. 4.66%(b) 4.84%(d)
</TABLE>
- ---------------
(a)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.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
(d) Annualized.
(e) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
Report of Independent Accountants PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
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, 1996, 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, 1996 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 24, 1997
- --------------------------------------------------------------------------------
B-42
<PAGE>
Supplemental Proxy Information PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
The Annual Meeting of Shareholders of the Prudential National Municipals
Fund, Inc. was held on Wednesday, October 30, 1996 at the offices of Prudential
Securities Incorporated, One Seaport Plaza, New York, New York. The meeting was
held for the following purposes:
(1) To elect Directors as follows: Edward D. Beach, Eugene C. Dorsey, Delayne
Dedrick Gold, Robert F. Gunia, Harry A. Jacobs, Jr., Donald D. Lennox,
Mendel A. Melzer, Thomas T. Mooney, Thomas H. O'Brien, Richard A. Redeker,
Nancy H. Teeters and Louis A. Weil, III.
(2a) To approve the proposed elimination of the Fund's fundamental investment
restriction relating to investment in shares of other investment companies.
(2b) Approval of amendment to the Fund's investment restrictions to permit an
increase in the borrowing capabilities of the Fund.
(2c) Approval of amendment of the Fund's investment restriction to permit the
Fund to use futures contracts and options thereon.
(2d) Approval of elimination of the Fund's investment restriction relating to
the purchase and sale of puts and calls.
(2e) Approval of elimination of the Fund's investment restriction limiting
investment to only those securities described in the investment objectives
and policies section of the Prospectus and Statement of Additional
Information.
(2f) Approval of an amendment to the Fund's investment restriction regarding the
making of loans.
(3) To ratify the selection of Price Waterhouse LLP as independent public
accountants for the fiscal year ending December 31, 1996.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Matter Votes for Votes against Abstentions
- --------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
(1) Edward D. Beach 21,669,909 0 800,261
Eugene C. Dorsey 21,695,978 0 774,192
Delayne Dedrick Gold 21,693,106 0 777,064
Robert F. Gunia 21,719,174 0 750,996
Harry A. Jacobs, Jr. 21,621,774 0 848,396
Donald D. Lennox 21,695,643 0 774,527
Mendel A. Melzer 21,657,505 0 812,665
Thomas T. Mooney 21,725,894 0 744,276
Thomas H. O'Brien 21,722,761 0 747,409
Richard A. Redeker 21,688,529 0 781,641
Nancy H. Teeters 21,722,662 0 747,508
Louis A. Weil, III 21,677,273 0 792,897
(2a) Amending of Investment Restriction of Shares in Other Investment Companies 19,832,903 1,251,969 1,321,190
(2b) Amendment Relating to Borrowing Capabilities 19,066,451 1,978,982 1,360,629
(2c) Amendment to Permit Futures and Options Use 18,914,088 2,036,911 1,455,063
(2d) Elimination of Restriction of Puts and Calls 18,857,883 1,991,110 1,557,069
(2e) Elimination of Restrictions Described in Investment 19,652,582 1,404,919 1,348,561
(2f) Amendment Regarding the Making of Loans 19,140,722 1,832,406 1,432,934
(3) Price Waterhouse LLP 21,052,350 367,446 1,050,374
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
B-43
<PAGE>
APPENDIX I
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.
I-1
<PAGE>
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.
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>
APPENDIX II
GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks and (general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX III
HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
[MAC CHART]
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or
future performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile
than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each
year a new bond with a then-current coupon replaces the old bond. Treasury
bill returns are for a one-month bill. Treasuries are guaranteed by the
government as to the timely payment of principal and interest; equities are
not. Inflation is measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is
to outpace the erosive impact of inflation on investment returns.
III-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 to September 1995. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
[MAC CHART]
/1/LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Governmental National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) Includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
III-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[MAC CHART]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1994.
Yields represent that of an annual renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for illustrative purposes
and should not be construed to represent the yields of any Prudential Mutual
Fund.
III-3
<PAGE>
APPENDIX IV INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1995. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs
for employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs more than 92,000 persons worldwide, and maintains a
sales force of approximately 13,000 agents and 5,600 financial advisors.
Prudential is a major issuer of annuities, including variable annuities.
Prudential seeks to develop innovative products and services to meet consumer
needs in each of its business areas. Prudential uses the Rock of Gibraltar as
its symbol. The Prudential rock is a recognized brand name throughout the
world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($11.4 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for more
than 1.7 million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1996, Institutional Investor ranked Prudential the fifth
largest institutional money manager of the 300 largest money management
organizations in the United States as of December 31, 1995. As of December 31,
1995, Prudential had more than $314 billion in assets under management.
Prudential's Investments, a business group of Prudential (of which Prudential
Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the seventeen largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ---------
/1/ Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to
Prudential Jennison Series Fund, Inc. and Prudential Active Balanced Fund,
a portfolio of Prudential Dryden Fund, and Mercater Asset Management, L.P.,
as subadviser to International Stock Series, a portfolio of Prudential
World Fund, Inc., and BlackRock Financial Management, Inc. as subadviser to
The BlackRock Government Income Trust. There are multiple subadvisers for
The Target Portfolio Trust.
/2/ As of December 31, 1994.
IV-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Fund, a growth-
style equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase.3 Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
- ---------
/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/ Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
/5/ Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
/6/ As of December 31, 1994.
IV-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./7/
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+) .
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five Prudential Securities' analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------
/7/ As of December 31, 1994.
/8/ On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
IV-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights for each of the ten years in the period ended
December 31, 1996.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1996.
Statement of Assets and Liabilities at December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statement of Changes in Net Assets for the years ended December 31,
1995 and December 31, 1996.
Notes to Financial Statements.
Financial Highlights with respect to each of the five years in the
period ended December 31, 1996.
Report of Independent Accountants.
(B) EXHIBITS:
1.Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).
2.Amended and restated By-Laws. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 20 to the Registration Statement
filed on Form N-1A via EDGAR filed on March 1, 1994 (File No. 2-
66407).
4.Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits Nos. 1 and 2 above.
5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. *
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and the Prudential Investment Corporation.*
6.(a) Selected Dealer Agreement, incorporated by reference to Exhibit
6(b) to Pre-Effective Amendment No. 1 to Registration Statement on
Form N-1 (File No. 2-66407).
(b) Distribution and Service Agreement for Class A shares.
Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(c) Distribution and Service Agreement for Class B shares.
Incorporated by reference to Exhibit 6(c) to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(d) Distribution and Service Agreement for Class C shares.
Incorporated by reference to Exhibit 6(d) to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(e) Amended Distribution Agreement dated January 1, 1996.
Incorporated by reference to Exhibit 6(e) to Post-Effective Amendment
No. 24 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1986 (File No. 2-66407).
8.Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
C-1
<PAGE>
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Opinion of Sullivan & Cromwell.*
11. Consent of Independent Accountants.*
15. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 23 to
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 15(b) to Post-Effective Amendment No. 23 to
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 15(c) to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A filed via EDGAR on February 28,
1995 (File No. 2-66407).
16. (a) Schedule of Calculation of Average Annual Total Return (Class B
Shares), incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 13 to Registration Statement on Form N-1A (File No. 2-
66407).
(b) Schedule of Calculation of Average Annual Total Return (Class A
Shares), incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 17 to Registration Statement on Form N-1A (File No. 2-
66407).
(c) Schedule of Calculation of Aggregate Total Return for Class A and
Class B shares, incorporated by reference to Exhibit 16(c) to Post-
Effective Amendment No. 20 to Registration Statement on Form N-1A
(File No. 2-66407).
27. Financial Data Schedule.*
- ---------
*Filed herewith.
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 7, 1997 there were 20,770, 9,453 and 29 record holders of
Class A, Class B and Class C shares of common stock, respectively, $.01 par
value per share, of the Registrant.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-
Laws (Exhibit 2 to the Registration Statement), officers, directors, employees
and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of each Distribution
Agreement (Exhibits 6(b), 6(c) and 6(d) 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, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant intends to purchase an insurance policy insuring its officers
and directors against liabilities, and certain costs of defending claims
against such officers and directors, to the extent such officers and directors
are not found to have committed conduct constituting willful misfeasance, bad
faith, gross negligence or reckless disregard in the performance of their
duties. The insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management LLC (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management LLC.
See "How the Fund is Managed-Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by
reference.
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
C-3
<PAGE>
<TABLE>
<CAPTION>
NAME AND
ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- -------- ----------------- ---------------------
<S> <C> <C>
Brian M. Officer-in-Charge, Officer-in-Charge, President, Chief Executive
Storms President, Chief Officer and Chief Operating Officer, PMF
Executive Officer and
Chief Operating Officer
Robert F. Executive Vice President Comptroller, Prudential Investments;
Gunia and Treasurer Executive Vice President and Treasurer, PMF;
Senior Vice President of Prudential
Securities Incorporated (Prudential
Securities)
Thomas A. Executive Vice President, Executive Vice President, Secretary and
Early Secretary and General General Counsel, PMF; Vice President and
Counsel General Counsel, Prudential Retirement
Services
Susan C. Executive Vice President Executive Vice President and Chief Financial
Cote and Chief Financial Officer, PMF
Officer
Neil A. Executive Vice President Executive Vice President, PMF
McGuinness
Robert J. Executive Vice President Executive Vice President, PMF
Sullivan
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND
ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- -------- ----------------- ---------------------
<S> <C> <C>
E. Michael Chairman of the Chief Executive Officer of Prudential
Caulfield Board, President, Investments
Chief Executive
Officer and
Director
Jonathan M. Senior Vice President--Investment Management of
Greene President and Prudential Investments
Director
John R. Vice President and President of Private Asset Management Group
Strangfeld Director of Prudential
</TABLE>
C-4
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities is distributor for Prudential Jennison Series Fund,
Inc., The Target Portfolio Trust, The BlackRock Government Income Trust, The
Global Government Plus Fund, Inc., The Global Total Return Fund Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Allocation Fund, Prudential California Municipal
Fund, Command Government Fund, Command Money Fund, Command Tax-Free Fund,
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities
Trust (Short-Intermediate Term Series, Money Market Series and U.S. Treasury
Money Market Series), Prudential High Yield Fund, Inc., Prudential
Institutional Liquidity Portfolio, Inc.; Prudential Intermediate Global Income
Fund, Inc., Prudential MoneyMart Assets Inc., Prudential Mortgage Income Fund,
Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Small Companies Fund, Inc.,
Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility Fund,
Inc. and Prudential World Fund, Inc. Prudential Securities is also a depositor
for the following unit investment trusts:
Corporate Income Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
Robert C. Golden.......... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan............. Executive Vice President, Chief None
Administrative Officer and Director
George A. Murray.......... Executive Vice President and Director None
Leland B. Paton........... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff......... Executive Vice President, Chief None
Financial Officer and Director
Vincent T. Pica, II....... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons.......... Chief Executive Officer, President and None
Director
Lee B. Spencer, Jr. ...... General Counsel, Executive Vice None
President and Director
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-5
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, Newark, New Jersey 07102-4077, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey, 08837. Documents required by Rules 31a-
1 (b) (5), (6), (7), (9), (10) and (11) and 31a-1 (f) will be kept at Three
Gateway Center, documents required by Rules 31a-1 (b) (4) and (11) and 31a-1
(d) at One Seaport Plaza and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services. Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 28th day of February, 1997.
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
/s/ Richard A. Redeker
---------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Edward D. Beach Director February 28, 1997
-------------------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director February 28, 1997
-------------------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Director February 28, 1997
-------------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Vice President and
------------------------------------------- Director February 28, 1997
ROBERT F. GUNIA
/s/ Harry A. Jacobs, Jr. Director February 28, 1997
-------------------------------------------
HARRY A. JACOBS, JR.
/s/ Donald D. Lennox Director February 28, 1997
-------------------------------------------
DONALD D. LENNOX
/s/ Mendel A. Melzer Director February 28, 1997
-------------------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director February 28, 1997
-------------------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director February 28, 1997
-------------------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker President and Director February 28, 1997
-------------------------------------------
RICHARD A. REDEKER
/s/ Nancy Hays Teeters Director February 28, 1997
-------------------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weil, III Director February 28, 1997
-------------------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Principal Financial and
------------------------------------------- Accounting Officer February 28, 1997
GRACE C. TORRES
</TABLE>
C-7
<PAGE>
EXHIBIT INDEX
1. Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).
2. Amended and restated By-Laws. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 20 to the Registration Statement
filed on Form N-1A via EDGAR filed on March 1, 1994 (File No. 2-
66407).
4. Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits Nos. 1 and 2 above.
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. *
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and the Prudential Investment Corporation.*
6. (a) Selected Dealer Agreement, incorporated by reference to Exhibit
6(b) to Pre-Effective Amendment No. 1 to Registration Statement on
Form N-1 (File No. 2-66407).
(b) Distribution and Service Agreement for Class A shares.
Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(c) Distribution and Service Agreement for Class B shares.
Incorporated by reference to Exhibit 6(c) to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(d) Distribution and Service Agreement for Class C shares.
Incorporated by reference to Exhibit 6(d) to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1995 (File No. 2-66407).
(e) Amended Distribution Agreement dated January 1, 1996.
Incorporated by reference to Exhibit 6(e) to Post-Effective Amendment
No. 24 to Registration Statement on Form N-1A filed via EDGAR on
February 28, 1986 (File No. 2-66407).
8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Opinion of Sullivan & Cromwell.*
11. Consent of Independent Accountants.*
15. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 23 to
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 15(b) to Post-Effective Amendment No. 23 to
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 15(c) to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A filed via EDGAR on February 28,
1995 (File No. 2-66407).
16. (a) Schedule of Calculation of Average Annual Total Return (Class B
Shares), incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 13 to Registration Statement on Form N-1A (File No. 2-
66407).
(b) Schedule of Calculation of Average Annual Total Return (Class A
Shares), incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 17 to Registration Statement on Form N-1A (File No. 2-
66407).
(c) Schedule of Calculation of Aggregate Total Return for Class A and
Class B shares, incorporated by reference to Exhibit 16(c) to Post-
Effective Amendment No. 20 to Registration Statement on Form N-1A (File
No. 2-66407).
27. Financial Data Schedule.*
- ---------
*Filed herewith.
<PAGE>
Exhibit 99.5(a)
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
Management Agreement
--------------------
Agreement made this 2nd day of May, 1988, as amended on January 22,
1990, between Prudential-Bache National Municipals Fund, Inc., a Maryland
corporation (the "Fund"), and Prudential Mutual Fund Management, Inc., a
Delaware corporation (the "Manager").
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund desires to retain the Manager to render or contract
to obtain as hereinafter provided investment advisory services to the Fund and
the Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund
and administrator of its corporate affairs for the period and on the terms set
forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein
<PAGE>
described, for the compensation herein provided. The Manager is authorized to
enter into an agreement with The Prudential Investment Corporation ("PIC")
pursuant to which PIC shall furnish to the Fund the investment advisory services
specified therein in connection with the management of the Fund. Such agreement
in the form attached as Exhibit A is hereinafter referred to as the "Subadvisory
Agreement." The Manager will continue to have responsibility for all investment
advisory services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund,
the Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by
<PAGE>
the Fund, and what portion of the assets will be invested or held uninvested as
cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund and with
the instructions and directions of the Board of Directors of the Fund and will
conform to and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) in conformity with the policy with respect to brokerage as set
forth in the Fund's Registration Statement and Prospectus (hereinafter defined)
or as the Board of Directors may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the Manager will give primary
consideration to securing the most favorable price and efficient execution.
Consistent with this policy, the Manager may consider the financial
responsibility, research and
3
<PAGE>
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party. It is understood that Prudential Securities Incorporated may be used as
principal broker for securities transactions but that no formula has been
adopted for allocation of the Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and economic analysis
provided by brokers or futures commission merchants and that such brokers may
execute brokerage transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers or futures commission merchants on the
basis of seeking the most favorable price and efficient execution. Therefore,
the Manager is authorized to pay higher brokerage commissions for the purchase
and sale of securities and futures contracts for the Fund to brokers or futures
commission merchants who provide such research and analysis, subject to review
by the Fund's Board of Directors from time to time with respect to the extent
and continuation of this practice. It is understood that the services provided
4
<PAGE>
by such broker or futures commission merchant may be useful to the Manager in
connection with its services to other clients. On occasions when the Manager
deems the purchase or sale of a security or a futures contract to be in the best
interest of the Fund as well as other clients of the Manager or the Subadviser,
the Manager, to the extent permitted by applicable laws and regulations, may,
but shall be under no obligation to, aggregate the securities or futures
contracts to be so sold or purchased in order to obtain the most favorable price
or lower brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold, as well
as the expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Board of
Directors such periodic and special reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Fund (including those being maintained by the
Fund's Custodian).
5
<PAGE>
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary
of State of Maryland (such Articles of Incorporation, as in effect on the
date hereof and as amended from time to time, are herein called the
"Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the
6
<PAGE>
Securities Act of 1933, as amended, on Form N-1A (the "Registration
Statement"), as filed with the Securities and Exchange Commission (the
"Commission") relating to the Fund and shares of the Fund's Common Stock and
all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the Fund
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however
7
<PAGE>
that the Manager may retain a copy of such records. The Manager further agrees
to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such
records as are required to be maintained by the Manager pursuant to Paragraph 2
hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of directors who are not affiliated
persons of the Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection
with managing the ordinary course of the Fund's business other than those
assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the Subadvisory
Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated persons
of the Manager or the Fund's investment adviser,
8
<PAGE>
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii) preparing
and maintaining the general accounting records of the Fund and the providing
of any such records to the Manager useful to the Manager in connection with
the Manager's responsibility for the accounting records of the Fund pursuant
to Section 31 of the 1940 Act and the rules promulgated thereunder, (iii)
the pricing of the shares of the Fund, including the cost of any pricing
service or services which may be retained pursuant to the authorization of
the Board of Directors of the Fund, and (iv) for both mail and wire orders,
the cashiering function in connection with the issuance and redemption of
the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the maintenance
of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to
9
<PAGE>
federal, state or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and Exchange
Commission, registering the Fund as a broker or dealer and qualifying its
shares under state securities laws, including the preparation and printing
of the Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other
10
<PAGE>
extraordinary expenses not incurred in the ordinary course of the Fund's
business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as full compensation therefor a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to and
including $250
11
<PAGE>
million, .475 of 1% of the next $250 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. This fee will be computed daily and
will be paid to the Manager monthly. Any reduction in the fee payable and any
payment by the Manager to the Fund pursuant to paragraph 7 shall be made
monthly. Any such reductions or payments are subject to readjustment during the
year.
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided,
12
<PAGE>
however, that this Agreement may be terminated by the Fund at any time, without
the payment of any penalty, by the Board of Directors of the Fund or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager at any time, without the payment of any penalty, on
not more than 60 days' nor less than 30 days' written notice to the other party.
This Agreement shall terminate automatically in the event of its assignment (as
defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13
<PAGE>
13. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Fund or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to the Manager copies of any of the
above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
15. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if
14
<PAGE>
delivered or mailed by registered mail, postage prepaid, (1) to the Manager at
One Seaport Plaza, New York, N.Y. 10292, Attention: Secretary; or (2) to the
Fund at One Seaport Plaza, New York, N.Y. 10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential-Bache National Municipals
Fund, Inc." or any name including the word "Prudential" or "Bache" only for so
long as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by, managed by
or otherwise connected with the Manager, or any organization which shall have so
succeeded to such businesses. In no event shall the Fund use the name
"Prudential-Bache National Municipals Fund, Inc." or any name including the word
"Prudential" or "Bache" if the Manager's function is transferred or assigned to
a company of which The Prudential Insurance Company of America does not have
control.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL-BACHE NATIONAL
MUNICIPALS FUND, INC.
By /s/ Lawrence C. McQuade
----------------------------
Lawrence C. McQuade
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Robert F. Gunia
--------------------
Robert F. Gunia
16
<PAGE>
Exhibit 99.5(b)
Prudential-Bache National Municipals Fund, Inc.
Subadvisory Agreement
Agreement made as of this 2nd day of May, 1988 between Prudential Mutual
Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The
Prudential Investment Corporation, a New Jersey Corporation (the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated May 2,
1988(the "Management Agreement"), with Prudential-Bache National Municipals
Fund, Inc. (the "Fund"), a Maryland corporation and a diversified open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance
with the Fund's investment objectives, policies and restrictions as stated
in the Prospectus, (such Prospectus and Statement of Additional Information
as currently in effect and as amended or supplemented from time to time,
being herein called the "Prospectus"), and subject to the following
understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by the Fund, and
what portion of the assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation,
<PAGE>
By-Laws and Prospectus of the Fund and with the instructions and
directions of the Manager and of the Board of Directors of the Fund and
will conform to and comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable federal and
state laws and regulations.
2
<PAGE>
(iii) The Subadviser shall determine the securities to be purchased or
sold by the Fund and will place orders with or through such persons, brokers or
dealers (including but not limited to Prudential-Bache Securities Inc.) to carry
out the policy with respect to brokerage as set forth in the Fund's Registration
Statement and Prospectus or as the Board of Directors may direct from time to
time. In providing the Fund with investment supervision, it is recognized that
the Subadviser will give primary consideration to securing the most favorable
price and efficient execution. Within the framework of this policy, the
Subadviser may consider the financial responsibility, research and investment
information and other services provided by brokers or dealers who may effect or
be a party to any such transaction or other transactions to which the
Subadviser's other clients may be a party. It is understood that Prudential-
Bache Securities Inc. may be used as principal broker for securities
transactions but that no formula has been adopted for allocation of the Fund's
investment transaction business. It is also understood that it is desirable for
the Fund that the Subadviser have access to supplemental investment and market
research and security and economic analysis provided by brokers who may execute
brokerage transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Subadviser is authorized to place
orders for the purchase and sale of securities for the Fund with such brokers
subject to review by the Fund's Board of Directors from time to time with
respect to the extent and continuation of this practice. It is understood that
the services provided by such brokers may be useful to the Subadviser in
connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of the
Subadviser, the Subadviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be sold or
3
<PAGE>
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Subadviser in the manner the Subadviser
considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and records with respect
to the Fund's portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act
and shall render to the Fund's Board of Directors such periodic and special
reports as the Board may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning the
Fund's assets and shall provide the Manager with such information upon
request of the Manager.
(vi) The investment management services provided by the Subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall be free
to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors, officers
and employees who may be elected as directors or officers of the Fund to serve
in the capacities in which they are elected. Services to be furnished by the
Subadviser under this Agreement may be furnished through the medium of any of
such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall timely
furnish to the Manager all information relating to the Subadviser's services
hereunder needed by the Manager to keep the other books and records of the Fund
required by Rule 31a-1 under the 1940 Act. The Subadviser agrees that all
records which it maintains for the Fund are the property of the Fund and the
4
<PAGE>
Subadviser will surrender promptly to the Fund any of such records upon the
Fund's request, provided however that the Subadviser may retain a copy of such
records. The Subadviser further agrees to preserve for the periods prescribed by
Rule 31a-2 of the Commission under the 1940 Act any such records as are required
to be maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to be
provided to the Fund pursuant to the Management Agreement and shall oversee and
review the Subadviser's performance of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to the
Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for any
loss suffered by the Fund or the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
5. This Agreement shall continue in effect for a period of more than two years
from the date hereof only so long as such continuance is specifically approved
at least annually in conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at any time, without
the payment of any penalty, by the Board of Directors of the Fund or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Subadviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of the
Subadviser's directors, officers, or
5
<PAGE>
employees who may also be a director, officer or employee of the Fund to engage
in any other business or to devote his or her time and attention in part to the
management or other aspects of any business, whether of a similar or a
dissimilar nature, nor limit or restrict the Subadviser's right to engage in any
other business or to render services of any kind to any other corporation, firm,
individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to stockholders, sales literature or other material prepared for distribution to
stockholders of the Fund or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Subadviser hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery.
6
<PAGE>
8. This Agreement may be amended by mutual consent, but the consent of
the Fund must be obtained in conformity with the requirements of the 1940
Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Michael J. Downey
------------------------------------
President
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ John Bookmeyer, Jr.
------------------------------------
7
<PAGE>
Exhibit 99.8
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<C> <S> <C>
1. Employment of Custodian and Property to be Held by It.................. -1-
2. Duties to the Custodian with Respect to Property of The Fund Held By
the Custodian in the United States..................................... -2-
2.1 Holding Securities............................................... -2-
2.2 Delivery of Securities........................................... -2-
2.3 Registration of Securities....................................... -6-
2.4 Bank Accounts.................................................... -7-
2.5 Availability of Federal Funds.................................... -7-
2.6 Collection of Income............................................. -8-
2.7 Payment of Fund Monies........................................... -8-
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased....................................................... -11-
2.9 Appointment of Agents........................................... -11-
2.10 Deposit of Securities in Securities Systems..................... -11-
2.10A Fund Assets Held in the Custodian's Direct Paper System......... -13-
2.11 Segregated Account.............................................. -14-
2.12 Ownership Certificates for Tax Purposes......................... -15-
2.13 Proxies......................................................... -16-
2.14 Communications Relating to Fund Portfolio Securities............ -16-
2.15 Reports to Fund by Independent Public Accountants............... -16-
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States.......................................... -17-
3.1 Appointment of Foreign Sub-Custodians........................... -17-
3.2 Assets to be Held............................................... -17-
3.3 Foreign Securities Depositories................................. -18-
3.4 Segregation of Securities....................................... -18-
3.5 Agreements with Foreign Banking Institutions.................... -18-
3.6 Access of Independent Accountants of the Fund................... -19-
3.7 Reports by Custodian............................................ -19-
3.9 Liability of Foreign Sub-Custodians............................. -20-
3.10 Liability of Custodian.......................................... -21-
3.11 Reimbursements for Advances..................................... -21-
3.12 Monitoring Responsibilities..................................... -22-
3.13 Branches of U.S. Banks.......................................... -22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the
Fund.................................................................. -23-
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
5. Proper Instructions................................................... -24-
6. Actions Permitted without Express Authority........................... -24-
7. Evidence of Authority................................................. -25-
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income......................... -26-
9. Records............................................................... -26-
10. Opinion of Fund's Independent Accountant.............................. -27-
11. Compensation of Custodian............................................. -27-
12. Responsibility of Custodian........................................... -27-
13. Effective Period, Termination and Amendment........................... -29-
14. Successor Custodian................................................... -30-
15. Interpretative and Additional Provisions.............................. -32-
16. Massachusetts Law to Apply............................................ -32-
17. Prior Contracts....................................................... -32-
18. The Parties........................................................... -32-
19. Limitation of Liability............................................... -33-
</TABLE>
-ii-
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund
listed on Appendix A which evidences its agreement to be bound hereby by
executing a copy of this Contract (each such Fund individually hereinafter
referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/ Declaration of Trust. The Fund agrees to deliver to the
Custodian all securities and cash owned by it, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, ("Shares") of
the Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors/ Trustees of the Fund, and
<PAGE>
provided that the Custodian shall have the same responsibility or liability to
the Fund on account of any actions or omissions of any sub-custodian so employed
as any such sub-custodian has to the Custodian, provided that the Custodian
agreement with any such domestic sub-custodian shall impose on such sub-
custodian responsibilities and liabilities similar in nature and scope to those
imposed by this Agreement with respect to the functions to be performed by such
sub-custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By the
------------------------------------------------------------------------
Custodian in the United States.
- ------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate
------------------
for the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other than
(a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
----------------------
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System") only upon
-2-
<PAGE>
receipt of Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name
of the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange
for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be
--------
delivered to the Custodian;
-3-
<PAGE>
(7) Upon the sale of such securities for the account of the Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided
that in any such case, the Custodian shall have no responsibility
or liability for any loss arising from the delivery of such
securities prior to receiving payment for such securities except
as may arise from the Custodian's own negligence or willful
misconduct;
(8) For exchange or conversation pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
(10) For delivery in connection with any loans of securities made by
the Fund, but only against receipt of adequate collateral as
--- ----
agreed upon from time to time by the Custodian and the Fund,
which may be in the form of cash or
-4-
<PAGE>
obligations issued by the United States government, its agencies
or instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's account
in the book-entry system authorized by the U.S. Department of the
Treasury, the Custodian will not be held liable or responsible
for the delivery of securities owned by the Fund prior to the
receipt of such collateral;
(11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
--- ----
receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
(13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or
-5-
<PAGE>
any similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to
the holders of shares in connection with distributions in kind,
as may be described from time to time in the Fund's currently
effective prospectus and statement of additional information
("prospectus"), in satisfaction of requests by holders of Shares
for repurchase or redemption; and
(15) For any other proper business purpose, but only upon receipt of,
--------
in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities to
be delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper business
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the Fund or in
the name of any nominees of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
------
authorized in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment adviser as the
-6-
<PAGE>
Fund, or in the name or nominee name of any agent appointed pursuant to Section
2.9 or in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts to timely collect
income due the Fund on such securities and to notify the Fund on a best efforts
basis of relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for the Fund may be deposited
by it to its credit as Custodian in the Banking Department of the Custodian or
in such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust company
--------
shall be qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be approved by
vote of a majority of the Board of Directors/Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
-7-
<PAGE>
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
-----------------------------
and the Custodian, the Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Fund as of specified times agreed upon from
time to time by the Fund and the Custodian in the amount of checks received in
payment for Shares of the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due and
shall collect interest when due on securities held hereunder. Income due the
Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall
be the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the Fund is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which
----------------------
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
-8-
<PAGE>
(1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the account
of the Fund but only (a) against the delivery of such securities,
or evidence of title to such options, futures contracts or
options on futures contracts, to the Custodian (or any bank,
banking firm or trust company doing business in the United States
or abroad which is qualified under the Investment Company Act of
1940, as amended, to act as a custodian and has been designated
by the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for transfer;
(b) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Section
2.10 hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.10A; (d) in the case of repurchase agreements entered
into between the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery of
the securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the
-9-
<PAGE>
Fund in any bank, whether domestic or foreign; such transfer may
be effected prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper Instructions from
the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by the Fund as
set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the
account of the Fund: interest, taxes, management, accounting,
transfer agent and legal fees, and operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
(6) For payment of the amount of dividends received in respect of
securities sold short;
(7) For any other proper purpose, but only upon receipt of, in
--------
addition to Proper Instructions, a certified copy of a resolution
of Board of Directors/Trustees or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary,
-10-
<PAGE>
specifying the amount of such payment, setting forth the purpose
for which such payment is to be made, declaring such purpose to
be a proper purpose, and naming the person or persons to whom
such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
-------------------------------------------------------------------
Except as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of securities for the account of the Fund is made by
the Custodian in advance of receipt of the securities purchased in the absence
of specific written instructions from the Fund to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in it
---------------------
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided, however, that
--------
the appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
-------------------------------------------
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in
-11-
<PAGE>
accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the Securities
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
(2) The records of the Custodian with respect to domestic securities
of the Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred to
the Account, and (i.) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt of
advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies of
all advices from the Securities System of transfers of domestic
securities for the account of the Fund shall identify the Fund,
be maintained
-12-
<PAGE>
for the Fund by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund
in the form of a written advice or notice and shall furnish
promptly to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System for
the account of the Fund.
(4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
(5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from failure
of the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may
have as a consequence of any such
-13-
<PAGE>
loss or damage if and to the extent that the Fund has not been
made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
-------------------------------------------------------
Custodian may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
(2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which
shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
(3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to
the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Fund;
-14-
<PAGE>
(5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written
advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transaction in the
Direct Paper System for the account of the Fund;
(6) The Custodian shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request
from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash, government securities or liquid,
high-grade debt obligations in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon purchased
or sold by the Fund, (iii) for the purposes of compliance by the Fund
-15-
<PAGE>
with the procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in the case of
--------
clause (iv), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
---------------------------------------
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection with
transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
-------
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to
----------------------------------------------------
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
all written information (including, without limitation, pendency of calls and
maturities of securities held domestically and
-16-
<PAGE>
expirations of rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of the
securities being held for the Fund. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Fund all written information
received by the Custodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making the tender or
exchange offer. If the Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall notify
the Custodian at least three business days prior to the date of which the
Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
-------------------------------------------------
shall provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures contracts
and options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
-------------------------------------------------------------------------
of the United States
- --------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
-------------------------------------
instructs the Custodian to employ as sub-custodians for the Fund's securities
and other assets maintained
-17-
<PAGE>
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign sub-
custodians"). Upon receipt of "Proper Instructions", as defined in Section 5 of
this Contract, together with a certified resolution of the Fund's Board of
Directors/Trustees, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking institutions
and foreign securities depositories to act as sub-custodian. Upon receipt of
Proper Instructions, the Fund may instruct the Custodian to cease the employment
of any one or more such sub-custodians for maintaining custody of the Fund's
assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
-----------------
assets maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect the
Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
-------------------------------
upon in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books
-------------------------
as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that
-18-
<PAGE>
such institution establish a custody account for the Custodian on behalf of the
Fund and physically segregate in that account, securities and other assets of
the Fund, and, in the event that such institution deposits the Fund's securities
in a foreign securities depository, that it shall identify on its books as
belonging to the Custodian, as agent for the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
--------------------------------------------
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
---------------------------------------------
Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
-19-
<PAGE>
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
--------------------
to time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as to securities
acquired for the Fund, the identity of the entity having physical possession of
such securities.
3.8 Transactions in Foreign Custody Account
---------------------------------------
(a) Except as otherwise provided in paragraph (b) of this Section 3.8,
the provision of Sections 2.2 and 2.7 of this Contract shall apply, in their
entirety to the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefore (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
-20-
<PAGE>
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
-----------------------------------
the Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the performance of
its duties and to indemnify, and hold harmless, the Custodian and each Fund from
and against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking institution as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Fund has not been made whole for any such loss, damage,
cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts
----------------------
or omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless of
whether assets are maintained in the custody of a foreign banking institution, a
foreign securities depository or a branch of a U.S. bank as contemplated by
paragraph 3.13 hereof, the Custodian shall not be liable for any loss, damage,
cost, expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the sub-
custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in
-21-
<PAGE>
delegating custody duties to State Street London Ltd., the Custodian shall not
be relieved of any responsibility to the Fund for any loss due to such
delegation, except such loss as may result from (a) political risk (including,
but not limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or (b) other
losses (excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or other losses
under circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
--------------------------
advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as amy arise from its or its nominee's own
negligent action, negligent failure to act or wilful misconduct, any property at
any time held for the account of the Fund shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be entitled
to utilize available cash and to dispose of the Fund assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually
---------------------------
to the Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in kind
and scope to that furnished to the Fund in connection with the initial approval
of this Contract. In addition, the Custodian will promptly inform the Fund in
the event that the Custodian learns of a material adverse change in the
financial
-22-
<PAGE>
condition of a foreign sub-custodian or any material loss of the assets of the
Fund or in the case of any foreign sub-custodian not the subject of an exemptive
order from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 Branches of U.S. Banks
----------------------
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are maintained in
a foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification
set forth in Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained
in an interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund.
-----------------------------------------------------------------------
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or repurchase of their Shares.
In
-23-
<PAGE>
connection with the redemption or repurchase of Shares of the Fund, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of the
Fund, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Fund and the
Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
-------------------
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. It is understood and agreed that the Board of
-24-
<PAGE>
Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund
Management, Inc., as Manager of the Fund, and (ii) The Prudential Investment
Corporation (or Prudential-Bache Securities Inc.), as Subadviser to the Fund, to
deliver proper instructions with respect to all matters for which proper
instructions are required by this Article 5. The Custodian may rely upon the
certificate of an officer of the Manager or Subadviser, as the case may be, with
respect to the person or persons authorized on behalf of the Manager and
Subadviser, respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices provided that
the Fund and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority.
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
- --------
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks, drafts
and other negotiable instruments; and
-25-
<PAGE>
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as otherwise
directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/Trustees pursuant to the Articles of
Incorporation/Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income.
- ------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors/Trustees of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the
-26-
<PAGE>
Fund and the Transfer Agent daily of the total amounts of such net income and,
if instructed in writing by an office of the Fund to do so, shall advise the
Transfer Agent periodically of the division of such net income among its various
components. The calculations of the net asset value per share and the daily
income of the Fund shall be made at the time or times described from time to
time in the Fund's currently effective prospectus.
9. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end Fund) and Form N-SAR or other periodic reports to
-27-
<PAGE>
the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Fund)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice. Notwithstanding the foregoing, the
responsibility of the Custodian with respect to redemptions effected by check
shall be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof
-28-
<PAGE>
with respect to sub-custodians located in the United States and, regardless of
whether assets are maintained in the custody of a foreign banking institution, a
foreign securities depository or a branch of a U.S. bank as contemplated by
paragraph 3.11 hereof, the Custodian shall not be liable for any loss, damage,
cost, expense, liability or claim resulting from, or caused by, the direction of
or authorization by the Fund to maintain custody or any securities or cash of
the Fund in a foreign country including, but not limited to, losses resulting
from nationalization, expropriation, currency restrictions, or acts of war or
terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the
-29-
<PAGE>
Fund notice of its intention to dispose of assets identifying such assets and
the Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal
value other than those identified in such notice.
13. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, however that the Custodian
--------
shall not act under Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees of the Fund has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors/Trustees has reviewed the use
by the Fund of such Securities System, as required in each case by Rule 17f-4
under the Investment Company Act of 1940, as amended and that the Custodian
shall not act under Section 2.10A hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has approved the initial use of the Direct Paper System and
the receipt of an annual certificate of the Secretary or an Assistant Secretary
that the Board of Directors/Trustees has reviewed the use by the Fund of the
Direct Paper System; provided further, however, that the Fund shall not amend or
-------- -------
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Articles of
-30-
<PAGE>
Incorporation/Declaration of Trust, and further, provided, that the Fund may at
any time by action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before
-31-
<PAGE>
the date when such termination shall become effective, then the Custodian shall
have the right to deliver to a bank or trust company, which is a "bank" as
defined in the Investment Company Act of 1940, doing business in Boston,
Massachusetts, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract and to transfer to an account of such
successor custodian all of the Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
15. Interpretative and Additional Provisions
----------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
-32-
<PAGE>
annexed hereto, provided that no such interpretative or additional provisions
--------
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/ Declaration of Trust of the Fund. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. The Parties
-----------
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business Trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
-----------------------
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of
<PAGE>
the Fund for the enforcement of any claims against the Fund as neither the
Directors/Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
By /s/ Al O'neal
- ------------------------- ------------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ---------------- -------------------
Secretary Vice President
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of each of the parties
indicated on Appendix A for use as sub-custodians for the Fund's securities and
other assets:
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------------
<S> <C> <C>
Argentina Citibank, N.A. Caja de Valores,
CDV
Australia Westpac Banking Austraclear
Corporation Limited
Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen
Belgium Generale Bank Caisse
Interprofessionnelle
de Depots et de
Virements de Titres
S.A. (C.I.K.)
Brazil Citibank, N.A. Bolsa de Valores de
Sao Paolo (Bovespa);
Banco Central do
Brasil, Systema
Especial de Liquidacao
E Custodia (SELIC)
Canada Canada Trustco The Canadian
Mortgage Company Depository for
Securities Limited
Chile Citibank, N.A. None
China The Hong Kong and Shanghai Securities
Shanghai Banking Central Clearing and
Corporation Limited and Registration
Corporation
Shenzhen Securities
Registrars Co.,
Limited
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------------
<S> <C> <C>
Columbia Cititrust Columbia, None
S.A.
Sociedad Fiduciaria
The Czech Republic Ceckoslovenska Obchodni Stredisko Cennych
Banka A.S. Papiru (SCP)
Denmark Den Danske Bank Vaerdipapircentralen
The Danish Securities
Center (VP)
Finland Merita Bank Limited Central Share Register
of Finland
France Banque Paribas Societe
Interprofessionnelle
pour la Compensation
des Valeurs Mobilieres
(SICOVAM)
Germany BHF-Bank The Deutscher
Aktiengellschaft Kassenverein AG
Greece National Bank of The Central Securities
Greece S.A. Depository
(Apothetirio Titlon
A.E.)
Hong Kong Standard Chartered The Central Clearing
Bank and Settlement System
(CCASS) Securities
Depository
Hungary Citibank Budapest Rt. The Central Depository
and Clearing House
India The Hong Kong and None
Shanghai Banking
Corporation Limited
Indonesia Standard Chartered None
Bank
Ireland Bank of Ireland The Central Bank of
Ireland, The Gilt
Settlement Office
(GSO)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------------
<S> <C> <C>
Israel Bank Hapoalin The Clearing House
B.M. of the Tel Aviv
Stock Exchange
Italy Morgan Guaranty Monte Titoli, S.P.A.
Trust Company Banca d' Italia
Japan The Daiwa Bank, Ltd Japan Securities
Depository Center
Sumitomo Trust & (JASDEC); Bank of
Banking Co., Ltd. Japan Net System
Korea SEOULBANK Korea Securities
Depository
Luxembourg -- Cedel
Malaysia Standard Chartered Malaysian Central
Bank Malaysia Berhad Depository Sdn. Bhd.
Mexico Citibank, N.A. S.D. INDEVAL, S.A.
De C.V.(Instituto para
el Deposito de
Valores); Banco de
Mexico
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
New Zealand ANZ Banking Group Nederlands Centraal
(New Zealand) Limited Instituut voor Giraal
Effectenverkeer B.V.
Norway Christiania Bank Verdipapirsentralen
og Kreditkasse The Norwegian Registry
of Securities
Pakistan Deutch Bank AG None
Peru Citibank, N.A. Caja de Valores
Philippines Standard Chartered None
Bank
Poland Citibank Poland, S.A. The National
Depository of
Securities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------------
<S> <C> <C>
Portugal Banco Comercial Central de Valores
Portugues (Lisbon) Mobiliarios (Central)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Cekoslovenska Obchodna Stredisko cennych
Bank A.S. papierov (SCP);
National Bank of
Slovakia
South Africa Standard Bank of None
South Africa Ltd.
Spain Banco Santandar, S.A. Servicio de
Compensacion y
Liquidacion de Valores
(SCLV); Banco de
Espana, Anotaciones
en Cuenta
Sweden Skandinaviska Vardepapperscentralen,
Enskilda Banken VPC, AB, The Swedish
Securities Depository
Switzerland Union Bank of Schweizerische
Switzerland Effekten-Giro AG
(SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository
Company, Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities
Central Depository
Company, Ltd.
Turkey Citibank, N.A. Istanbul Stock
Exchange Settlement
and Custody Co., Inc.
United Kingdom State Street Bank The Bank of England,
and Trust Company The Central Gilts
London Branch, and Office (CGO); The
State Street London Central London
Limited; subsidiary Moneymarkets Office
of State Street Bank (CMO)
& Trust Company
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------------
<S> <C> <C>
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
Transnational The Euroclear System
Cedel
</TABLE>
Certified:
- -------------------------
Fund's Authorized Officer
Date:-
-------------------
<PAGE>
Exhibit 99.9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE NATIONAL MUNICIPALS FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Article 1 Terms of Appointment; Duties of the Agent...... 1
Article 2 Fees and Expenses.............................. 4
Article 3 Representations and Warranties of the Agent.... 5
Article 4 Representations of Warranties of the Fund...... 5
Article 5 Duty of Care and Indemnification............... 6
Article 6 Documents and Covenants of the Fund and the
Agent.......................................... 9
Article 7 Termination of Agreement.......................10
Article 8 Assignment.....................................11
Article 9 Affiliations...................................11
Article 10 Amendment......................................12
Article 11 Applicable Law.................................12
Article 12 Miscellaneous..................................12
Article 13 Merger of Agreement............................13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 1st day of January, 1988 by and between
PRUDENTIAL-BACHE NATIONAL MUNICIPALS, Inc., a Maryland corporation, having its
principal office and place of business at One Seaport Plaza, New York, New York
10292 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey
corporation, having its principal office and place of business at Raritan Plaza
One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints PMFS to act as, and PMFS agrees to act as,
the transfer agent for the authorized and issued shares of the common stock of
each series of the Fund, $.01 par value (Shares), dividend disbursing agent and
<PAGE>
shareholder servicing agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of the Fund or any series thereof
(Shareholders) and set out in the currently effective prospectus and statement
of additional information (prospectus) of the Fund, including without limitation
any periodic investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Articles of Incorporation of the Fund
(the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies
<PAGE>
as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a record of
the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any proposed issue of
Shares by the Fund would result in an overissue. In case any issue of Shares
would result in an overissue, PMFS shall refuse to issue such Shares and shall
not countersign and issue any certificates requested for such Shares. When
recording the issuance of Shares, PMFS shall have no obligation to take
cognizance of any Blue Sky laws relating to the issue or sale of
<PAGE>
such Shares, which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in
<PAGE>
writing those transactions and assets to be treated as exempt from Blue Sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of PMFS for the Fund's registration
status under the Blue Sky or securities laws of any State or other jurisdiction
is solely limited to the initial establishment of transactions subject to Blue
Sky compliance by the Fund and the reporting of such transactions to the Fund as
provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
-----------------
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
<PAGE>
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund
agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS
for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
a reasonable period of time following the mailing of the respective billing
notice. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to PMFS by the Fund upon
request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
--------------------------------------
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission (SEC) as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and By-
Laws to enter into and perform this Agreement.
<PAGE>
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act of 1933 (the
1933 Act) is currently effective and will remain effective, and appropriate
state securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
<PAGE>
Article 5 Duty of Care and Indemnification
--------------------------------
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any
<PAGE>
requirement under the federal securities laws or regulations or the securities
or Blue Sky laws of any State or other jurisdiction that such Shares be
registered in such State or other jurisdiction or in violation of any stop order
or other determination or ruling by any federal agency or any State or other
jurisdiction with respect to the offer or sale of such Shares in such State or
other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by PMFS as a result of PMFS' lack of good faith, negligence or
willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the
<PAGE>
proper person or persons, or upon any instruction, information, data, records or
documents provided to PMFS or its agents or subcontractors by machine readable
input, telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. PMFS, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signature of the officers of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or co-
registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for
<PAGE>
which either party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such assertion, and
shall keep the other party advised with respect to all developments concerning
such claim. The party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense of such claim.
The party seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
--------------------------------------------
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary of the
Fund as to such approval;
<PAGE>
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to
be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records,
<PAGE>
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential and shall not be voluntarily disclosed to
any other person except as may be required by law or with the prior consent of
PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and other materials will be
borne by the Fund. Additionally, PMFS reserves the right to charge for any
other reasonable fees and expenses associated with such termination.
Article 8 Assignment
----------
8.01 Except as provided in Section 8.03 below, neither this Agreement
nor any rights or obligations hereunder may be
<PAGE>
assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Securities or Prudential subsidiary or affiliate duly
registered as a broker-dealer and/or a transfer agent pursuant to the 1934 Act
or (vi) any other Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the Fund for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 Affiliations
------------
9.01 PMFS may now or hereafter, without the consent of or notice to
the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company
<PAGE>
registered with the SEC under the 1940 Act, including without limitation any
investment company whose adviser, administrator, sponsor or principal
underwriter is or may become affiliated with Prudential Securities and/or
Prudential or any of its or their direct or indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
<PAGE>
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Applicable Law
--------------
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
-------------
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of money
on the account of any Shareholder or new investor
<PAGE>
is returned unpaid for any reason, PMFS will (a) give prompt notification to the
Fund's distributor (Distributor) of such non-payment; and (b) take such other
action, including imposition of a reasonable processing or handling fee, as PMFS
may, in its sole discretion, deem appropriate or as the Fund and the Distributor
may instruct PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in writing.
To the Fund:
Prudential-Bache National Municipals Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
-------------------
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
PRUDENTIAL-BACHE NATIONAL
MUNICIPALS FUND, INC.
BY: /s/ Robert F. Gunia
------------------------
ATTEST:
/s/ S. Jane Rose
-----------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Frederick Fiandaca
-----------------------
ATTEST:
/s/ Lynda M. Puglesi
- ------------------------
19
<PAGE>
Exhibit 10
SULLIVAN & CROMWELL
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
March 6, 1997
Prudential National Municipals Fund, Inc.,
Gateway Center Three,
100 Mulberry Street,
Newark, New Jersey 07102-4077.
Dear Sirs:
You have requested our opinion in connection with your filing of Post-
Effective Amendment No. 25 to the Registration Statement on Form N-1A (the
"Post-Effective Amendment") under the Securities Act of 1933 (the "Act") and
your registration in connection therewith of 4,685,488 shares of your Common
Stock, $.01 par value (the "Shares") pursuant to Rule 24e-2 under the Investment
Company Act of 1940.
As your counsel, we are familiar with your organization and corporate
status and the validity of your Common Stock.
We advise you that, in our opinion, when the Post-Effective Amendment
relating to the Shares has become effective under the Act, the Shares, when duly
issued and sold, for not less than the par value thereof and in
<PAGE>
Prudential National Municipals Fund, Inc. Exhibit 10
conformity with your charter, will be duly authorized and validly issued, fully
paid and nonassessable.
The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Laws of the State of Maryland, and we are
expressing no opinion as to the effect by the laws of any other jurisdiction.
We have relied as to certain matters on information obtained from
public officials, your officers and other sources believed by us to be
responsible.
We consent to the filing of this opinion with the Securities and
Exchange Commission in connection with the notice referred to above. In giving
such consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ Sullivan & Cromwell
<PAGE>
EX 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 25 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 24, 1997, relating to the financial statements and financial highlights
of Prudential National Municipal Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian and Transfer and
Dividend Disbursing Agent, and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000314612
<NAME> PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL NATIONAL MUNICIPALS FUND, I (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 633,737,453
<INVESTMENTS-AT-VALUE> 665,518,784
<RECEIVABLES> 12,059,719
<ASSETS-OTHER> 18,524
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 677,597,027
<PAYABLE-FOR-SECURITIES> 4,055,215
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,846,158
<TOTAL-LIABILITIES> 5,901,373
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 642,428,001
<SHARES-COMMON-STOCK> 43,138,584
<SHARES-COMMON-PRIOR> 47,618,036
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,513,678)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,781,331
<NET-ASSETS> 671,695,654
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 42,028,983
<OTHER-INCOME> 0
<EXPENSES-NET> 5,512,413
<NET-INVESTMENT-INCOME> 36,516,570
<REALIZED-GAINS-CURRENT> 6,573,149
<APPREC-INCREASE-CURRENT> (26,789,525)
<NET-CHANGE-FROM-OPS> 16,300,194
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (36,516,570)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (172,764)
<NUMBER-OF-SHARES-SOLD> 132,494,761
<NUMBER-OF-SHARES-REDEEMED> (224,127,599)
<SHARES-REINVESTED> 22,304,782
<NET-CHANGE-IN-ASSETS> (89,717,196)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8,914,063)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,347,154
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,161,340
<AVERAGE-NET-ASSETS> 508,159,000
<PER-SHARE-NAV-BEGIN> 15.98
<PER-SHARE-NII> 0.4
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.82
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.56
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000314612
<NAME> PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 633,737,453
<INVESTMENTS-AT-VALUE> 665,518,784
<RECEIVABLES> 12,059,719
<ASSETS-OTHER> 18,524
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 677,597,027
<PAYABLE-FOR-SECURITIES> 4,055,215
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,846,158
<TOTAL-LIABILITIES> 5,901,373
<SENIOR-EQUITY> 0
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<NAME> PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (CLAS
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