<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
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CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
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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 22
Financial Statements..................................... B-26 --
Report of Independent Accountants........................ B-42 --
Appendix I--Description of Tax-Exempt Security Ratings... I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Historical Performance Data................ III-1 --
Appendix IV--Information Relating to the Prudential...... IV-1 --
</TABLE>
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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
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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
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<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
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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.
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(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.
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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 (since May 1996), Prudential Investments;
Gunia (50) Executive Vice President and Treasurer (since December
1996); Prudential Mutual Fund Management LLC (PMF); Se-
nior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); for-
merly Chief Administrative Officer (July 1990-September
1996), Director (January 1989-September 1996), Execu-
tive Vice President, Treasurer and Chief Financial Of-
ficer (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
(36) Prudential Investments (November 1995-September 1996),
751 Broad Senior Vice President and Chief Financial Officer of
Street Prudential Preferred Financial Services (April 1993-No-
Newark, NJ vember 1995), Managing Director of Prudential Invest-
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>
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* "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.
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<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 (since February 1997) and Chief
Financial Officer (since May 1996) of PMF; formerly
Managing Director of Prudential Investments and Vice
President, The Prudential Investment Corporation
(February 1995-May 1996), Senior Vice President
(January 1989-January 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 (39) Treasurer and Principal First Vice President (since December 1996) of PMF; for-
Financial and merly First Vice President (January 1990-September
Accounting Officer 1996) of Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director of Prudential Investments and the Private
Asset Group of Prudential (since March 1996); formerly
First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 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; formerly
Vice President and Associate General Counsel (January
1993-September 1996) of Prudential Mutual Fund Manage-
ment, Inc.; Vice President and Associate General Coun-
sel 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.
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).
In addition, an eligible group of related Fund investors may include (i) a
client of a Prudential Securities financial adviser who gives such financial
adviser discretion to purchase the Prudential Mutual Funds for his or her
account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or
(ii) a client of an unaffiliated registered investment adviser which is a
client of a Prudential Securities financial adviser, if such unaffiliated
adviser has discretion to purchase the Prudential Mutual Funds for the
accounts of his or her customers but only if the client of such unaffiliated
adviser participates in a market timing program conducted by such unaffiliated
adviser; provided such accounts in the aggregate have assets of at least $15
million invested in the Prudential Mutual Funds.
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
B-16
<PAGE>
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 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. 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.
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.
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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.
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<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.
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/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.
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<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.
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<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.
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/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.
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