<PAGE>
As filed with the Securities and Exchange Commission on September , 1998
Registration No. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
(Check appropriate box or boxes)
--------------
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
NO FILING FEE IS REQUIRED BECAUSE OF RELIANCE ON SECTION 24(f) OF THE
INVESTMENT COMPANY ACT OF 1940. PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF
1933, THE PROSPECTUS AND PROXY STATEMENT RELATES TO SHARES PREVIOUSLY REGISTERED
ON FORM N-1A (FILE NO. 2-66407).
<TABLE>
<S> <C>
TITLE OF SECURITIES BEING REGISTERED................ SHARES OF COMMON STOCK, PAR VALUE $.01 PER
SHARE
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a)UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-14 ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus.............................. Table of Contents
Item 3. Fee Table, Synopsis Information and Risk
Factors................................. Synopsis; Principal Risk Factors
Item 4. Information about the Transaction....... Synopsis; The Proposed Transaction
Item 5. Information about the Registrant........ Information about National Municipals
Fund; Appendix A
Item 6. Information about the Company Being
Acquired................................ Information about the Series
Item 7. Voting Information...................... Voting Information
Item 8. Interest of Certain Persons and
Experts................................. Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
PART B
STATEMENT OF ADDITIONAL
INFORMATION CAPTION
----------------------------------------
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Cover Page
Item 12. Additional Information about the
Registrant.............................. Statement of Additional Information of
Prudential National Municipals Fund,
Inc. dated March 4, 1998.
Item 13. Additional Information about the Company
Being Acquired.......................... Not Applicable
Item 14. Financial Statements.................... Statement of Additional Information of
Prudential National Municipals Fund,
Inc. dated March 4, 1998; Annual and
Semi-Annual Reports to shareholders of
National Municipals Fund for the fiscal
year ended December 31, 1997 and the six
months ended June 30, 1998,
respectively; Annual Reports to
Shareholders of the Maryland Series and
Michigan Series for the fiscal year
ended August 31, 1998; Annual Report to
Shareholders of the Intermediate Series
of Prudential Municipal Bond Fund for
the fiscal year ended April 30, 1998.
PART C
Information required to be included in Part C is set forth under the appropriate item,
so numbered, in Part C of this Registration Statement.
</TABLE>
<PAGE>
[LOGO]
PRUDENTIAL MUNICIPAL SERIES FUND/MARYLAND AND MICHIGAN SERIES
PRUDENTIAL MUNICIPAL BOND FUND/INTERMEDIATE SERIES
October , 1998
Dear Shareholder:
You may be aware that the Trustees of Prudential Municipal Series Fund/Maryland
Series and Michigan Series and the Trustees of Prudential Municipal Bond
Fund/Intermediate Series have recently approved a proposal to exchange the
assets and liabilities of your Series for shares of Prudential National
Municipals Fund. The enclosed proxy materials describe this proposal in detail.
If the proposal is approved by the shareholders and implemented, you will
automatically receive shares of Prudential National Municipals Fund in exchange
for your share of each Series.
THE TRUSTEES AND I STRONGLY RECOMMEND THAT YOU VOTE FOR THE PROPOSAL. WE BELIEVE
THAT THIS TRANSACTION SERVES YOUR INTERESTS IN THE FOLLOWING WAYS:
SIMILAR STRATEGIES--GREATER FLEXIBILITY
The Funds' investment objectives and strategies, while not identical, are
similar. Each invests primarily in investment grade, tax-exempt municipal
bonds. While Maryland and Michigan Series seek to provide income exempt
from federal and Maryland and Michigan state income taxes, respectively,
Prudential National Municipals Fund seeks income exempt from only federal
income taxes. Increasingly, single state series have had difficulty finding
attractive issues due to a shrinking municipal bond supply--making
portfolio diversification a challenge. In contrast, Prudential National
Municipals Fund is nationally diversified, enabling it to invest in a wider
range of municipal bond investment opportunities.
EXPENSE LEVELS
The Series have relatively few assets and have not been able to attract new
assets. They operated with relatively high expense ratios before voluntary
management fee waivers, which were discontinued by the Manager as of
September 1, 1997.
POTENTIAL FOR HIGHER INCOME GENERALLY EXEMPT INCOME TAXES
The municipal obligations held by National Municipals Fund have
historically had a higher gross yield than the obligations in the Series'
portfolios and National Municipals Fund has lower expense ratios than the
Series due to its appreciably larger size.
PRUDENTIAL NATIONAL MUNICIPALS FUND'S investment objective is to seek a high
level of current income exempt from federal income taxes by investing in a
broadly diversified portfolio of municipal bonds issued from across the country.
Portfolio manager Peter Allegrini has over 19 years of investment experience.
PLEASE READ THE ENCLOSED MATERIALS CAREFULLY FOR MORE COMPLETE INFORMATION. Your
vote is important, no matter how many shares you own. Voting your shares early
may permit your Series to avoid costly follow-up mail and telephone
solicitation. After you have reviewed the enclosed materials, please complete,
date and sign your proxy card and mail it in the enclosed postage-paid return
envelope today.
SAVE TIME AND POSTAGE COSTS. Help us save time and postage costs (savings that
we can pass on to you) by voting through the internet or via a touch tone phone.
Each method is generally available 24 hours per day. If you are voting via these
methods, you do not need to return your proxy card.
TO VOTE BY INTERNET, FOLLOW THESE INSTRUCTIONS:
Read your proxy statement and have your proxy card available.
Go to website www.proxyvote.com.
Enter your 12 digit control number found on your proxy card.
Follow the simple instructions found at the website.
TO VOTE BY TELEPHONE, FOLLOW THESE INSTRUCTIONS:
Read your proxy statement and have your proxy card available.
Call the toll free number shown on your proxy card.
Enter your 12 digit control number found on your proxy card.
Follow the simple recorded instructions.
<PAGE>
SHAREHOLDERS ON SYSTEMATIC ACCUMULATION PLANS SHOULD CONTACT THEIR FINANCIAL
ADVISOR OR CALL PRUDENTIAL MUTUAL FUNDS CUSTOMER SERVICE DIVISION
(1-800-225-1852) TO CHANGE THEIR OPTIONS. IF NO CHANGE IS MADE BY NOV 20, 1998,
FUTURE PURCHASES WILL BE MADE IN SHARES OF PRUDENTIAL NATIONAL MUNICIPALS FUND.
SHAREHOLDERS WITH CERTIFICATES OUTSTANDING SHOULD CONTACT THEIR FINANCIAL
ADVISOR OR CALL PRUDENTIAL MUTUAL FUNDS CUSTOMER SERVICE DIVISION
(1-800-225-1852) TO DEPOSIT THEIR CERTIFICATES.
We value your investment and thank you for the confidence you have placed in
Prudential Mutual Funds.
Sincerely,
Brian M. Storms
PRESIDENT, PRUDENTIAL MUTUAL FUNDS AND ANNUITIES
Prudential Municipal Series Fund and Prudential Municipal Bond Fund, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 09102-4077
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND--MARYLAND AND MICHIGAN SERIES
PRUDENTIAL MUNICIPAL BOND FUND--INTERMEDIATE SERIES
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
--------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------
To our Shareholders:
Notice is hereby given that a Special Meeting of the Shareholders of each of
the Maryland and Michigan Series (collectively, the State Series) of Prudential
Municipal Series Fund (Series Fund) and the Shareholders of the Intermediate
Series (Intermediate Series, and collectively, with the State Series, the Series
and each a Series) of Prudential Municipal Bond Fund (Municipal Bond Fund) will
be held at 9:00 A.M. Eastern time, on December 3, 1998, at The Prudential
Insurance Company of America, Plaza Building, 751 Broad Street, Newark, New
Jersey 07102, for the following purposes:
1. With respect to each of the Maryland and Michigan Series, separately, to
approve an Agreement and Plan of Reorganization whereby all of the assets of
each of the Maryland and Michigan Series will be transferred to Prudential
National Municipals Fund, Inc. (National Municipals Fund) in exchange for shares
of the National Municipals Fund and National Municipals Fund's assumption of all
of the liabilities, if any, of each of the Maryland and Michigan Series.
2. With respect to the Intermediate Series, to approve an Agreement and
Plan of Reorganization whereby all of the assets of the Intermediate Series will
be transferred to National Municipals Fund in exchange for shares of the
National Municipals Fund and National Municipals Fund's assumption of all of the
liabilities, if any, of Intermediate Series.
3. To consider and act upon any other business as may properly come before
the Meeting or any adjournment thereof.
Only shares of beneficial interest of the Series of record at the close of
business on October 15, 1998, are entitled to notice of and to vote at this
Meeting or any adjournment thereof.
S. JANE ROSE
SECRETARY
Dated: October , 1998
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND--MARYLAND AND MICHIGAN SERIES
AND
PRUDENTIAL MUNICIPAL BOND FUND--INTERMEDIATE SERIES.
PROXY STATEMENT
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 255-1852
----------------
Prudential Municipal Series Fund (Series Fund) is an open-end, management
investment company comprised of thirteen separate series, two of which are the
Maryland Series and the Michigan Series (collectively, the State Series).
Prudential Municipal Bond Fund (Municipal Bond Fund) is an open-end diversified
management investment company comprised of three Series, one of which is the
Intermediate Series (Intermediate Series and, collectively with the State
Series, the Series and each a Series), Prudential National Municipals Fund, Inc.
(National Municipals Fund) is an open-end, diversified, management investment
company. Each of Series Fund, Municipal Bond Fund and National Municipals Fund
(collectively, the Funds) are managed by Prudential Investments Fund Management
LLC, and have the same address.
The Maryland and Michigan Series each is a non-diversified series, the
investment objective of each of which is to provide the maximum amount of income
that is exempt from Maryland or Michigan state taxes, respectively, and federal
income taxes consistent with the preservation of capital and, in conjunction
therewith, the State Series may each invest in debt securities with the
potential for capital gain. The investment objective of Intermediate Series is
to provide a high level of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital. The investment
objective of National Municipals Fund is to seek a high level of current income
exempt from federal income taxes.
This Prospectus and Proxy Statement is being furnished to shareholders of
each Series in connection with an Agreement and Plan of Reorganization with
respect to the State Series and an Agreement and Plan of Reorganization with
respect to Intermediate Series (the State Series Plan, the Intermediate Series
Plan and, collectively, the Plans), whereby National Municipals Fund will
acquire all of the assets of each Series and assume the liabilities, if any, of
each Series.
If the Plans are each approved by the respective Series' shareholders, the
respective Series will be terminated and shareholders of each State Series Class
A, Class B and Class C shares will receive Class A shares of National Municipals
Fund; shareholders of Intermediate Series Class A, Class B and Class C shares
will receive Class A, Class B, and Class C shares, respectively, of National
Municipals Fund; and shareholders of Intermediate Series Class Z shares will
receive Class A shares of National Municipal Fund. Shareholders of National
Municipals Fund are not being asked to vote on the Plans. The Shareholders of
each Series vote separately on the respective Plan and the reorganization of any
Series into National Municipals Fund is not contingent on that Plan being
approved by any other Series.
This Prospectus and Proxy Statement sets forth concisely information about
National Municipals Fund that prospective investors should know before
investing. This Prospectus and Proxy Statement is accompanied by the Prospectus
of National Municipals Fund, dated March 4, 1998, as supplemented on July 1,
1998 and September 1, 1998, and the Annual and Semi-Annual Reports to
Shareholders of National Municipals Fund for the fiscal year ended December 31,
1997, and the six-month period ended June 30, 1998, respectively, which
Prospectus and Supplement and Annual and Semi-Annual Reports are incorporated by
reference herein. The Prospectus of each State Series, each dated October ,
1998; the Annual Report to Shareholders of each State Series for the fiscal year
ended August 31, 1998, which Prospectuses and Annual and Semi-Annual Reports are
incorporated by reference herein; the Prospectus of Intermediate Series dated
July 1, 1998, as supplemented August 27, 1998 and September 1, 1998, the Annual
Report to Shareholders of Intermediate Series for the fiscal year ended April
30, 1998, which Prospectus, Supplements and Annual Report are incorporated by
reference herein; and the Statement of Additional Information of National
Municipals Fund, dated March 4, 1998, have been filed with the Securities and
Exchange Commission (Commission), and are available without charge upon written
request to Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New
Jersey 08837 or by calling the toll-free number shown above. Additional
information contained in a Statement of Information dated October , 1998,
forming a part of National Municipals Fund's Registration Statement on Form N-14
has been filed with the Commission, is incorporated herein by reference and is
available without charge upon request to the address or telephone number shown
above.
This Prospectus and Proxy Statement will first be mailed to shareholders on
or about October [ ], 1998.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is October [ ], 1998
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRUDENTIAL MUNICIPAL SERIES FUND--MARYLAND AND MICHIGAN SERIES
PRUDENTIAL MUNICIPAL BOND FUND--INTERMEDIATE SERIES
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
--------------
PROSPECTUS AND PROXY STATEMENT DATED OCTOBER , 1998
--------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreements and Plans of
Reorganization (with respect to each of the Maryland and Michigan Series, the
State Series Plan; with respect to the Intermediate Series, the Intermediate
Series Plan, and collectively, the Plans) and is qualified by reference to the
more complete information contained herein as well as in the Prospectuses of the
Maryland Series and Michigan Series (collectively the State Series) of
Prudential Municipal Series Fund (Series Fund) and the Prospectus of
Intermediate Series (Intermediate Series, collectively with the State Series,
the Series) of the Prudential Municipal Bond Fund (Municipal Bond Fund) and the
enclosed Prospectus of Prudential National Municipals Fund, Inc. (National
Municipals Fund, and together with the Series Fund and Municipal Bond Fund, the
Funds). Shareholders should read the entire Prospectus and Proxy Statement
carefully.
GENERAL
This Prospectus and Proxy Statement is furnished by the Trustees of the
Series Fund and Municipal Bond Fund in connection with the solicitation of
Proxies for use at a Special Meeting of Shareholders of each of the Series of
such Funds (the Meeting) to be held at 9:00 A.M. on December 3, 1998 at the
Prudential Insurance Company of America, Plaza Building, 751 Broad Street,
Newark, New Jersey 07102. The purpose of the Meeting is to approve each Plan
whereby all of the assets of the respective Series will be acquired by, and the
liabilities of each Series, if any, will be assumed by National Municipals Fund,
in exchange for shares of common stock of National Municipals Fund, and such
other business as may properly come before the Meeting or any adjournment
thereof. The Plans are attached to this Prospectus and Proxy Statement as
Appendix B.
Approval of the Plans with respect to a particular Series requires the
affirmative vote of a majority of the shares of that Series that are outstanding
and entitled to vote. Shareholders of each Series vote together and not by
separate class within each Series. Approval of the Plans by the shareholders of
National Municipals Fund is not required and the Plans are not being submitted
for their approval. The Shareholders of each Series vote separately on the
respective Plan, and the reorganization of any series (each a Reorganization)
into National Municipals Fund is not contingent on that Plan being approved by
any other Series.
THE PROPOSED REORGANIZATIONS
The Directors of National Municipals Fund and the Trustees of both Series
Fund and Municipal Bond Fund have approved each respective Plan. Each Plan
provides for the transfer of all the assets of the respective Series in exchange
for shares of common stock of National Municipals Fund and the assumption
2
<PAGE>
by National Municipals Fund of the liabilities, if any, of such Series.
Following approval by the shareholders of the Maryland or Michigan Series, Class
A shares of National Municipals Fund will be distributed to Class A, Class B and
Class C shareholders of that Series and the Series will be terminated. Following
approval by Intermediate Series' shareholders, Class A, Class B and Class C
shares of National Municipals Fund will be distributed to Class A, Class B and
Class C shareholders, respectively, of Intermediate Series; and Class A shares
of National Municipals Fund will be distributed to Class Z shareholders of
Intermediate Series; and Intermediate Series will be terminated. Each
Reorganization will become effective as soon as practicable after the Meeting.
Each Series' shareholders will receive the number of full and fractional shares
of National Municipals Fund of the applicable Class equal in value (rounded to
the third decimal place) to such shareholder's corresponding shares of the
Series as of the closing date.
REASONS FOR THE REORGANIZATIONS
There are a number of similarities between each Series and National
Municipals Fund that led to consideration of the Plans. The following are among
the reasons for each Reorganization proposed by Prudential Investments Fund
Management LLC (PIFM), the Manager of each Fund:
THE SERIES HAVE BEEN UNABLE TO ATTRACT SIGNIFICANT ASSETS. Assets in each
of the Series have been steadily declining during the past several years. As of
June 30, 1998, Maryland and Michigan Series' assets were approximately
$30,950,000 and $54,413,000, respectively, with 1,357 and 2,368 shareholders,
respectively. As of June 30, 1998, the Intermediate Series assets were
approximately $38,624,000 with 1,711 shareholders. As a result, the Series have
been operated with relatively high expense ratios. Because of their size, the
Series' do not enjoy the economies of scale of National Municipals Fund. The
Manager believes the Series' situations are not likely to improve. The
Distributor of Series Fund and Municipal Bond Fund limited distribution fees
with respect to the Class A and Class C shares of the Series to no more than .10
of 1% of the average daily net asset value of the Class A shares and to no more
than .75 of 1% of the average daily net assets of the Class C shares,
respectively, for each respective Series. Although such distribution fee
limitations or waivers have been in place for some time for the Series, such
limitations or waivers are voluntary and could therefore be eliminated at any
time.
NATIONAL MUNICIPALS FUND AND THE SERIES HAVE SIMILAR INVESTMENT
POLICIES. National Municipals Fund and each Series invest primarily in
investment grade debt securities of municipal debt obligations, the investment
income from which is exempt from federal income taxes. However, shareholders of
the Maryland and Michigan Series should recognize that if the Reorganization
occurs, income from their investment in National Municipals Fund will likely be
subject to Maryland and Michigan state income taxes, as applicable. Shareholders
of each Series are advised to consult their own tax advisers regarding specific
questions as to federal, state, or local taxes. See "--Investment Objectives and
Policies" below. An additional difference is that each of the Series seeks a
high level of income consistent with capital preservation while National
Municipals Fund does not similarly seek capital preservation.
NATIONAL MUNICIPALS FUND OFFERS GREATER DIVERSIFICATION OF ASSETS AND
REDUCES POTENTIAL CONCERNS RELATING TO INADEQUATE SUPPLY OF MUNICIPAL BONDS FROM
SPECIFIC STATES. Because the Maryland and Michigan Series must each invest at
least 80% of its total assets in municipal obligations of issuers located in
Maryland or Michigan, respectively, and other obligations of qualifying issuers,
each of their portfolios are more susceptible to factors adversely affecting
issuers of such obligations than is a national municipal bond fund such as
National Municipals Fund. In addition, the State Series from time to time may
have difficulty obtaining suitable investments due to inadequate supply. A
national municipal fund such as National Municipals Fund is not similarly
constrained as to potential purchasers.
3
<PAGE>
AFTER IMPLEMENTATION OF EACH PLAN, THE FORMER SHAREHOLDERS OF EACH SERIES
AND THE SHAREHOLDERS OF NATIONAL MUNICIPALS FUND MAY BENEFIT FROM REDUCED
EXPENSES RESULTING FROM GREATER ECONOMIES OF SCALE. The Trustees of Series
Fund, the Trustees of the Municipal Bond Fund and the Directors of National
Municipals Fund believe that each Reorganization may achieve certain economies
of scale that each Series alone cannot realize because of its small size, and
that National Municipals Fund would realize the benefits of a larger asset base.
The combination of the Series and National Municipals Fund would eliminate
certain duplicate expenses, such as those incurred in connection with separate
audits and the preparation of separate financial statements for the Series and
National Municipals Fund, and reduce other expenses, because their expenses
would be spread across a larger asset base.
The ratios of total expenses to average net assets for Class A, Class B and
Class C shares of National Municipals Fund and Class A, Class B, and Class C
shares of each Series and, with respect to Intermediate Series, Class Z shares
were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
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<S> <C> <C> <C> <C>
NATIONAL MUNICIPALS FUND:
Six Months Ended June 30, 1998(1)............................... 0.73% 1.13% 1.38% --
Fiscal Year Ended December 31, 1997(2).......................... 0.70% 1.10% 1.35% --
Fiscal Year Ended December 31, 1997(3).......................... 0.73% 1.13% 1.38% --
MARYLAND SERIES:
Six Months Ended February 28, 1998(1)........................... 1.19% 1.59% 1.84% --
Fiscal Year Ended August 31, 1998............................... 1.12% 1.52% 1.77% --
MICHIGAN SERIES:
Six Months Ended February 28, 1998(1)........................... 0.94% 1.34% 1.59% --
Fiscal Year Ended August 31, 1998............................... 0.91% 1.31% 1.56% --
INTERMEDIATE SERIES:
Fiscal Year Ended April 30, 1998(2)............................. 1.31% 1.71% 1.96% 1.21%
Fiscal Year Ended April 30, 1998(3)............................. 1.33% 1.73% 1.98% 1.23%
</TABLE>
- ---------------
(1) Figures are annualized and unaudited.
(2) Net of management fee waiver and/or expense subsidy. As of September 1,
1997, the Manager eliminated its management fee waiver (.05 of 1%) with
respect to both National Municipal Fund and the Series.
(3) Before consideration of management fee waiver and/or expense subsidy.
AFTER IMPLEMENTATION OF THE PLANS, CERTAIN SHAREHOLDERS OF THE STATE SERIES
SHOULD BENEFIT FROM REDUCED DISTRIBUTION FEES AND SALES LOADS. If the State
Series Plan is implemented, each Class A, Class B and Class C shareholder of the
State Series will receive the number of full and fractional Class A shares of
National Municipals Fund equal to the net asset value (rounded to the third
decimal place) of such shareholder's shares as of the closing date. Class A,
Class B and Class C shares of the State Series and Intermediate Series currently
are subject to maximum distribution fees of .10 of 1%, .50 of 1% and .75 of 1%,
respectively (after reduction). Class A shares of National Municipals Fund
currently are subject to a maximum distribution fee of .10 of 1% (after
reduction). Accordingly, Class B and Class C shareholders of the State Series
should benefit from reduced distribution fees since they will receive Class A
shares in the Reorganization. Furthermore, Class B and Class C shares of the
Series currently are subject to maximum deferred sales loads of up to 5% and 1%,
respectively. If the State Series Plan is implemented, such shareholders will
receive Class A shares of National Municipals Fund, which are not subject to a
deferred sales load. Therefore, Class B and Class C shareholders of the State
Series should benefit from the elimination of otherwise applicable sales loads
if the State Series Plan is approved.
4
<PAGE>
If the State Series Plan is implemented, Class A shareholders of the State
Series will be subject to the same distribution fee charged by National
Municipals Fund as is currently charged by the State Series (each after
reduction). Like Class A shares of the State Series, the Class A shares of
National Municipals Fund to be received in the Reorganizations by Class A
shareholders of the State Series will not be subject to any deferred sales load.
Therefore, Class A shareholders of the State Series will not be subject to any
additional distribution fees or sales loads following the Reorganizations.
If the Intermediate Series Plan is implemented, each Class A and Class Z
shareholder of Intermediate Series will receive the number of full and
fractional Class A shares of National Municipals Fund equal to the net asset
value (rounded to the third decimal place) of such shareholder's shares as of
the closing date. Each Class B and Class C shareholder of Intermediate Series
will receive the number of full and fractional Class B and Class C shares,
respectively, of National Municipals Fund equal to the net asset value (rounded
to the third decimal place) of such shareholder's shares as of the closing date.
Class A, Class B and Class C shares of Intermediate Series currently are subject
to maximum distribution fees (after reduction) of .10 of 1%, .50 of 1% and .75
of 1%, respectively, which are the same maximum distribution fees (after
reduction) with respect to Class A, Class B and Class C shares of National
Municipals Fund. Furthermore, Class A shares of Intermediate Series and National
Municipals Fund are not subject to any deferred sales load and Class B and Class
C shares of Intermediate Series are subject to the same deferred sales loads
with respect to Class B and Class C shares of National Municipals Fund,
respectively. Therefore, Class A, Class B and Class C shareholders of
Intermediate Series will not be subject to any additional distribution fees or
sales loads following the Reorganization. Although Class Z shareholders of
Intermediate Series will be subject to a maximum distribution fee (after
reduction) of .10 of 1% with respect to the Class A shares of National
Municipals Fund to be received in the Reorganization, it is anticipated that the
Total Fund Operating Expenses (after reduction) with respect to Class A shares
of National Municipals Fund following the Reorganization will be lower than
Total Fund Operating Expenses with respect to Class Z shares of Intermediate
Series prior to the Reorganization. See "Fees and Expenses--Pro Forma Expense
Ratios--Annual Fund Operating Expenses (as a percentage of average net assets)."
NATIONAL MUNICIPALS FUNDS HAS ACHIEVED A YIELD COMPARABLE TO THE
SERIES. The municipal obligations held by National Municipals Fund have
historically had a higher gross yield than the obligations in the other Series'
portfolios, and National Municipals Fund has lower expense ratios than each
Series due to its appreciably larger size. The following table presents the 30
day yield for each Series and National Municipals Fund (on a pre- and
after-state income tax basis) for the period ended June 30, 1998:
<TABLE>
<CAPTION>
ADJUSTED
NATIONAL NATIONAL
MARYLAND MICHIGAN INTERMEDIATE MUNICIPALS MUNICIPALS
SERIES SERIES SERIES FUND FUND
30 DAY 30 DAY 30 DAY 30 DAY 30 DAY
CLASS SEC YIELD* SEC YIELD* SEC YIELD* SEC YIELD* SEC YIELD*
----- -------------- -------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
A 3.67% 3.75% 3.51% 4.16% 3.95%**/3.98%***
B 3.39% 3.46% 3.23% 3.89% N/A
C 3.14% 3.23% 2.97% 3.64% N/A
Z N/A N/A 3.73% N/A N/A
</TABLE>
- ------------
Past performance is not a guarantee of future results.
* After distribution subsidy.
** After application of Maryland state tax rate of 4.95%.
*** After application of Michigan state tax rate of 4.40%.
5
<PAGE>
NATIONAL MUNICIPALS FUND HAS ACHIEVED AVERAGE ANNUAL TOTAL RETURNS
COMPARABLE TO THE SERIES. The following table reflects each Fund's respective
average annual total returns (unaudited) before and after application of the
management fee waivers and/or subsidy and after distribution fee reduction as of
June 30, 1998.
<TABLE>
<CAPTION>
AFTER MANAGEMENT FEE WAIVER BEFORE MANAGEMENT FEE WAIVER
AND/OR EXPENSE SUBSIDY+ AND/OR EXPENSE SUBSIDY+
------------------------------------- -------------------------------------
CLASS A CLASS B CLASS C CLASS Z CLASS A CLASS B CLASS C CLASS Z
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NATIONAL MUNICIPALS FUND:
One Year............... 5.52% 3.34% 7.07% N/A 5.52% 3.34% 7.07% N/A
Five Years............. 5.07% 5.14% N/A N/A 5.10% 5.17% N/A N/A
Ten Years.............. N/A 7.30% N/A N/A N/A 7.32% N/A N/A
Since Inception*....... 7.32% 8.64% 6.54% N/A 7.33% 8.64% 6.57% N/A
MARYLAND SERIES:
One Year............... 5.11% 3.03% 6.76% N/A 5.11% 3.03% 6.76% N/A
Five Years............. 4.64% 4.71% N/A N/A 4.68% 4.75% N/A N/A
Ten Years.............. N/A 6.75% N/A N/A N/A 6.78% N/A N/A
Since Inception*....... 6.58% 6.89% 6.08% N/A 6.60% 7.07% 6.13% N/A
MICHIGAN SERIES:
One Year............... 5.42% 3.25% 6.98% N/A 5.42% 3.25% 6.98% N/A
Five Years............. 5.05% 5.09% N/A N/A 5.09% 5.12% N/A N/A
Ten Years.............. N/A 7.32% N/A N/A N/A 7.33% N/A N/A
Since Inception*....... 7.05% 8.13% 6.26% N/A 7.07% 8.24% 6.31% N/A
INTERMEDIATE SERIES:
One Year............... 3.41% 1.18% 4.92% 6.71% 3.41% 1.18% 4.92% 6.71%
Five Years............. 4.13% 4.18% N/A N/A 4.17% 4.22% N/A N/A
Ten Years.............. N/A 6.13% N/A N/A N/A 6.49% N/A N/A
Since Inception*....... 6.07% 6.19% 4.78% 6.36% 6.22% 6.61% 4.83% 6.31%
</TABLE>
- ------------
+ As of September 1, 1997, PIFM discontinued its management fee waiver for the
Series and National Municipals Fund.
* Inception dates: Class A, January 22, 1990, Class B, May 18, 1984, Class C,
August 1, 1994, and Class Z (Intermediate Series only), September 16, 1996.
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.
6
<PAGE>
For the reasons set forth below under "The Proposed Transaction--Reasons for
the Reorganizations Considered by the Trustees/Directors," the Directors of
National Municipals Fund, and the Trustees of Series Fund and Municipal Bond
Fund, including those Directors or Trustees who are not "interested persons"
(Independent Directors or Trustees), as that term is defined in the Investment
Company Act of 1940, as amended (Investment Company Act), have concluded that
each Reorganization would be in the best interests of the shareholders of
National Municipals Fund and the respective Series and that the interests of
shareholders of National Municipals Fund and the respective Series will not be
diluted as a result of the proposed transaction. Accordingly, the Board of
Directors of National Municipals Fund and the Trustees of Series Fund and
Municipal Bond Fund each recommend approval of the respective Plans.
STRUCTURE OF THE SERIES AND NATIONAL MUNICIPALS FUND
Each Series is authorized to issue an unlimited number of shares of
beneficial interest, $.01 par value per share, whereas National Municipals Fund
is authorized to issue 750 million shares of common stock, $.01 par value per
share. The State Series and National Municipals Fund have each divided their
shares into three classes, designated Class A, Class B and Class C, each of
which is currently being offered by the respective funds. Intermediate Series
has divided its shares into four classes, designated Class A, Class B, Class C
and Class Z, each of which is currently being offered by Municipal Bond Fund.
Each class of shares represents an interest in the same assets of the Maryland,
Michigan or Intermediate Series or National Municipals Fund, as the case may be,
and is identical in all respects except that (i) each class is subject to
different sales charges and/or service fees (except for Class Z shares of
Intermediate Series, which are not subject to any sales charges or distribution
and/or service fees), (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) with respect to Intermediate Series, Class Z shares
are offered to a limited group of investors. The distribution systems for Class
A, Class B and Class C shares of each Fund are identical. Share certificates
will be issued by National Municipals Fund upon written request to Prudential
Mutual Fund Services LLC, the Fund's Transfer Agent. See "Shareholder Guide" in
the National Municipals Fund's Prospectus. National Municipals Fund has received
an order from the Commission permitting the issuance and sale of multiple
classes of shares. Pursuant to National Municipals Fund's Articles of
Incorporation, Series Fund's Declaration of Trust and Municipal Bond Fund's
Declaration of Trust, each Fund's Board of Directors/Trustees may authorize the
creation of additional series of shares, and classes within such series, with
such preferences, privileges, limitations and voting and dividend rights as that
Fund's Board of Directors/Trustees may determine.
The Board of Directors/Trustees of each Fund may increase or decrease the
number of authorized shares of its respective Fund without approval by the
shareholders. Shares of National Municipals Fund or a Series, when issued, are
fully paid, nonassessable, fully transferable and redeemable at the option of
the holder. Shares are also redeemable at the option of each Fund under certain
circumstances. Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In the
event of liquidation, each share of National Municipals Fund or a Series is
entitled to its portion of all of National Municipals Fund's or the Series,
assets after all debt and expenses of that Fund have been paid. Since Class B
and Class C shares generally bear higher distribution expenses than Class A
shares, the liquidation proceeds to shareholders of those classes are likely to
be lower than to Class A shareholders. None of the Funds' shares have cumulative
voting rights for the election of Directors/Trustees.
7
<PAGE>
If a stock certificate is desired by a shareholder of National Municipals
Fund or a Series, it must be requested in writing for each purchase of shares.
Certificates are issued only for full shares. Shareholders who hold their shares
through Prudential Securities Incorporated (Prudential Securities) will not
receive stock certificates.
It is the present intent of the Directors of National Municipals Fund and
the Trustees of Series Fund and Municipal Bond Fund not to hold annual meetings
of shareholders unless the election of Directors/Trustees is required under the
Investment Company Act, nor to hold special meetings of shareholders unless
required by the Investment Company Act or state law.
INVESTMENT OBJECTIVES AND POLICIES
National Municipals Fund's investment objective is to seek a high level of
current income exempt from federal income taxes. There can be no assurance that
such investment objective will be achieved. National Municipals Fund seeks to
achieve its objective by investing primarily in long-term medium quality bonds
of municipalities possessing adequate but not outstanding capacities to service
their debt. While the investment adviser will not be limited by the ratings
assigned by the rating services, National Municipals Fund will be principally
invested in municipal bonds rated A and Baa by Moody's Investors Group (Moody's)
and A and BBB by Standard & Poor's Ratings Group (S&P). Unlike the Series,
preservation of capital is not an objective for National Municipals Fund. Under
normal circumstances, National Municipals Fund intends to invest substantially
all, and in any event at least 80%, of its total assets in municipal bonds and
municipal notes (E.G., tax revenue and bond anticipation notes). National
Municipals Fund may invest in variable rate securities and inverse floating rate
obligations and may engage in various hedging and return enhancing strategies,
including the purchase and sale of derivatives. These strategies include the
purchase of put options and the purchase and sale of financial futures contracts
and options thereon. See "Principal Risk Factors--Hedging and Return Enhancement
Strategies." National Municipals Fund may invest up to 15% of its net assets in
illiquid securities and may borrow an amount equal to no more than 33 1/3% of
the value of its total assets from banks for temporary, extraordinary or
emergency purposes or for the clearance of transactions.
The investment objective of each of Maryland and Michigan Series is to
provide the maximum amount of income that is exempt from, respectively, Maryland
and Michigan state tax and federal income taxes as is consistent with the
preservation of capital and, in conjunction therewith, the Maryland and Michigan
Series may each invest in debt securities with the potential for capital gain.
There can be no assurance that such investment objectives will be achieved. To
achieve these objectives, the Maryland and Michigan Series each seeks to invest
at least 70% of its total assets in debt obligations rated Baa or above by
Moody's or BBB or above by S&P and may invest up to 30% of its total assets in
debt obligations rated below Baa by Moody's or BBB by S&P. The Maryland and
Michigan Series each invests primarily in municipal and local government
obligations of Maryland and Michigan, respectively, and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay income exempt, in the opinion of counsel, from the state
taxes of Michigan and Maryland, respectively, and federal income taxes.
Therefore, Maryland and Michigan Series investors who are residents of Maryland
or Michigan, respectively, receive income that is generally exempt from income
taxation by their state of residence.
Intermediate Series' investment objective is to provide the maximum amount
of income that is eligible for exclusion from federal income taxes consistent
with the preservation of capital. There can be no
8
<PAGE>
assurance that the investment objective will be achieved. Intermediate Series
invests all of its assets in securities rated at least BBB by S&P or Baa by
Moody's and invests at least 60% of its portfolio in securities rated A or
better by Moody's or S&P.
Each Series may invest in floating rate and variable rate securities,
including participation interests therein and inverse floating rate obligations.
Each Series may purchase and sell options and futures contracts, however, the
Maryland and Michigan Series may only do so for hedging purposes. See "Principal
Risk Factors--Hedging and Return Enhancement Strategies" below. Each Series may
invest up to 15% of its net assets in illiquid securities and may borrow an
amount equal to no more than 33 1/3% of the value of its total assets from banks
for temporary, extraordinary or emergency purposes or for the clearance of
transactions.
The State Series will invest in long-term obligations and the
dollar-weighted average maturity of the State Series' portfolio will generally
range from ten to twenty years. The State Series may also invest in certain
short-term tax exempt notes such as Tax Anticipation Notes, Revenue Anticipation
Notes, Bond Anticipation Notes, Construction Loan Notes and variable and
floating rate demand notes. Intermediate Series invests in municipal obligations
with maturities of between 5 and 15 years and simultaneously hedges the price
volatility of such contracts through the sale of futures contracts. Rather than
hedging the municipal obligation entirely, Intermediate Series will sell futures
contracts in sufficient amounts so that the dollar-weighted average maturity of
Intermediate Series' portfolio will be more than three and less than ten years.
In this manner, the investment adviser creates a synthetic obligation through
the construction of a partially hedged longer-term obligation position. See
"Principal Risk Factors--Long Term Bonds."
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the Manager of each Fund and an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential), is compensated, pursuant to a management agreement with National
Municipals Fund, at an annual rate of .50 of 1% of the first $250 million of the
average daily net assets of National Municipals Fund, .475 of 1% of the next
$250 million of the average daily net assets of National Municipals Fund, .45 of
1% of the next $500 million of National Municipals Fund's average daily net
assets, .425 of 1% of the next $250 million of National Municipals Fund's
average daily net assets, .40 of 1% of the next $250 million of National
Municipals Fund's average daily net assets and .375 of 1% of the average daily
net assets of National Municipals Fund in excess of $1.5 billion. Pursuant to a
management agreement with Series Fund, PIFM is compensated at an annual rate of
.50 of 1% of the average daily net assets of each of Maryland and Michigan
Series. Pursuant to a management agreement with Municipal Bond Fund, PIFM is
compensated at an annual rate of .50 of 1% of the average daily net assets of
Intermediate Series up to $1 billion and .45 of 1% of the average daily net
assets of Intermediate Series in excess of $1 billion.
For the fiscal year ended December 31, 1997, National Municipals Fund paid
PIFM management fees of .48% of National Municipals Fund's average daily net
assets. For the fiscal year ended August 31, 1998, Maryland and Michigan Series
paid PIFM management fees at an annual rate of .50 of 1% of its average daily
net assets. For the fiscal year ended April 30, 1998, Municipal Bond Fund paid
PIFM management fees of .48% of average daily net assets on behalf of
Intermediate Series. PIFM discontinued its management fee waiver of .05 of 1%
with respect to National Municipals Fund and each Series as of September 1,
1997.
Under subadvisory agreements between PIFM and The Prudential Investment
Corporation, doing business as Prudential Investments (PI or the Subadviser),
the Subadviser provides investment advisory services for the management of the
respective Funds. Each subadvisory agreement provides that PIFM will
9
<PAGE>
reimburse PI for its reasonable costs and expenses in providing investment
advisory services. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreements for both Funds and
supervises the Subadviser's performance of its services on behalf of each Fund.
DISTRIBUTION FEES. Prudential Investment Management Series LLC (the
Distributor), a wholly-owned subsidiary of Prudential and an affiliate of
Prudential Securities and Pruco Securities Corporation, serves as the
distributor of the Class A, Class B and Class C shares of each Fund and for
Class Z shares of Intermediate Series for Municipal Bond Fund.
Under separate Distribution and Service Plans adopted by each Fund (the
Class A Plan, Class B Plan and Class C Plan, collectively, the Distribution
Plans) pursuant to Rule 12b-1 under the Investment Company Act, and approved by
the shareholders of the applicable class of National Municipals Fund and each
Series and under separate distribution agreements (the Distribution Agreements),
the Distributor incurs the expenses of distributing the Class A, Class B and
Class C shares of National Municipals Fund and each Series, respectively. The
Distributor incurs the expenses of distributing the Fund's Class Z shares under
the Distribution Agreement with Municipal Series Fund, none of which are
reimbursed by or paid for by Municipal Bond Fund. These expenses include (i)
commissions and account servicing fees, (ii) advertising expenses, (iii) the
cost of printing and mailing prospectuses, and (iv) indirect and overhead costs
associated with the sale of each of National Municipals Fund's and the Series'
shares.
Under the Funds' Class A, Class B and Class C Plans, each Fund pays the
Distributor for distribution expenses at an annual rate of up to .30 of 1%, .50
of 1% and up to 1% of the average daily net assets of the Class A, Class B and
Class C shares, respectively. Each Fund's Class B Plan provides for the payment
of an asset-based sales charge of up to .50 of 1% of the average daily net
assets of National Municipals Fund's and each Series' Class B shares and a
service fee of up to .25 of 1% of the average daily net assets of National
Municipals Fund's and each Series' Class B shares; provided that the total
distribution-related fee does not exceed .50 of 1%. National Municipals Fund's
and each Series' Class C Plan provides for the payment to the Distributor of an
asset-based sales charge of up to .75 of 1% of the average daily net assets of
the Class C shares and a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares.
The Distributor has voluntarily limited its distribution-related fees
payable under National Municipals Fund's and each Series', Class A and Class C
Plans to .10 of 1% and .75 of 1% of the average daily net assets, respectively,
of the Class A and Class C shares.
For the most recently completed fiscal year ends, each Fund paid the
Distributor .10%, .50% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively.
Under each Plan, each Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, that Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit. The Class A Plan, Class B Plan and Class C Plan of National
Municipals Fund are substantially identical to the Class A Plan, Class B Plan
and Class C Plan, respectively, of Series Fund (State Series) and Municipal Bond
Fund (Intermediate Series).
OTHER EXPENSES. National Municipals Fund and each Series also pay certain
other expenses in connection with their operation, including accounting, legal,
audit and registration expenses. Although the basis for calculating these fees
and expenses is the same for National Municipals Fund and each Series, the per
share effect on shareholder returns is affected by their relative size.
Combining the National Municipals
10
<PAGE>
Fund with each Series will reduce certain expenses. For example, only one annual
audit of the combined Fund will be required rather than separate audits of
National Municipals Fund and each Series as is currently required.
SHAREHOLDER TRANSACTION EXPENSES. The following table provides the fees
that an investor would be subject to in connection with a purchase or redemption
of Class A, Class B and Class C Shares of National Municipals Fund the Series
and Class Z shares of Intermediate Series. However, if the Plans are
implemented, Class A, Class B and Class C shareholders of the State Series and
Class A and Class Z shareholders of Intermediate Series will receive Class A
shares of National Municipals Fund, regardless of the class of shares of the
Series held prior to the Reorganizations.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION
EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- --------------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... 3% None None None
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption
proceeds, whichever is
lower)........................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within one year
to 1% in the fifth and of purchase
sixth years and 0% the
seventh year*
Maximum Sales Load Imposed on
Reinvested Dividends.......... None None None None
Redemption Fees................ None None None None
Exchange Fees.................. None None None None
</TABLE>
- ------------
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of National Municipals Fund and each Series may not
exceed 6.25% of total gross sales, subject to certain exclusions. This 6.25%
limitation is imposed on each class of each Fund/ Series rather than on a per
shareholder basis. Therefore, long-term shareholders of each Fund/Series may
pay more in total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares.
* Class B shares automatically convert to Class A shares approximately seven
years after purchase.
EXPENSE RATIOS. For its fiscal year ended December 31, 1997, total expenses
stated as a percentage of average net assets of National Municipals Fund were
0.70%, 1.10% and 1.35% for Class A, Class B and Class C shares. After the
management fee waiver, such ratio would have been 0.73%, 1.13% and 1.38% for
Class A, Class B and Class C shares, respectively. For the six-month period
ended June 30, 1998, total expenses (annualized and unaudited), stated as a
percentage of average net assets of National Municipals Fund were 0.73%, 1.13%
and 1.38% for Class A, Class B, and Class C shares, respectively. For the fiscal
year ended August 31, 1998, total expenses stated as a percentage of average net
assets of each of the State Series were %, % and % for Maryland Series
and %, % and % for Michigan Series for Class A, Class B and Class C
shares, respectively. For the fiscal year ended April 30, 1998, total expenses
stated as a percentage of average net assets of Intermediate Series were 1.31%,
1.71%, 1.96% and 1.21% for Class A, Class B, Class C and Class Z shares,
respectively. After the management fee waiver and expense subsidy, such ratios
would have been 1.33%, 1.73%, 1.98% and 1.23% for the Class A, Class B, Class C
and Class Z shares, respectively.
11
<PAGE>
PRO FORMA EXPENSE RATIOS. Following the reorganization, the actual expense
ratios of the combined fund are expected to be lower than those of the State
Series for the State Series' fiscal year ended August 31, 1998 and than those of
Intermediate Series for Intermediate Series' fiscal year ended April 30, 1998.
Set forth below is a comparison of National Municipals Fund's and each Series'
operating expenses for, in the case of National Municipals Fund, the fiscal year
ended December 31, 1997, in the case of State Series, the fiscal year ended
August 31, 1998 and, in the case of Intermediate Series, the fiscal year ended
April 30, 1998, each before management fee waiver and before consideration of
expense subsidy. The ratios for National Municipals Fund, Maryland and Michigan
Series, and Intermediate Series are also shown on a pro forma (estimated)
combined basis, after giving effect to the Reorganizations.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B CLASS C CLASS Z
(AS A PERCENTAGE OF AVERAGE NET ASSETS) SHARES SHARES SHARES SHARES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Management Fees:
Maryland Series.......................................................... 0.50% 0.50% 0.50% --
Michigan Series.......................................................... 0.50% 0.50% 0.50% --
Intermediate Series...................................................... 0.50% 0.50% 0.50% 0.50%
National Municipals Fund................................................. 0.48% 0.48% 0.48% --
NATIONAL MUNICIPALS FUND (PRO FORMA COMBINED)............................ 0.47% 0.47% 0.47% --
12b-1 Fees (After Reduction):+
Maryland Series.......................................................... 0.10% 0.50% 0.75% --
Michigan Series.......................................................... 0.10% 0.50% 0.75% --
Intermediate Series...................................................... 0.10% 0.50% 0.75% None
National Municipals Fund................................................. 0.10% 0.50% 0.75% --
NATIONAL MUNICIPALS FUND (PRO FORMA COMBINED)............................ 0.10% 0.50% 0.75% --
Other Expenses:
Maryland Series.......................................................... 0.57% 0.57% 0.57% --
Michigan Series.......................................................... 0.36% 0.36% 0.36% --
Intermediate Series...................................................... 0.73% 0.73% 0.73% 0.73%
National Municipals Fund................................................. 0.15% 0.15% 0.15% --
NATIONAL MUNICIPALS FUND (PRO FORMA COMBINED)............................ 0.15% 0.15% 0.15% --
Total Fund Operating Expenses (After Reduction):+
Maryland Series.......................................................... 1.17% 1.57% 1.82% --
Michigan Series.......................................................... 0.96% 1.36% 1.61% --
Intermediate Series...................................................... 1.33% 1.73% 1.98% 1.23%
National Municipals Fund................................................. 0.73% 1.13% 1.38% --
NATIONAL MUNICIPALS FUND (PRO FORMA COMBINED)............................ 0.72% 1.12% 1.37% --
</TABLE>
- ---------------
+ Although the Class A and Class C Distribution and Service Plans provide that
each Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has limited its distribution fees with respect
to the Class A and Class C shares of each Fund to no more than .10 of 1% and
.75 of 1% of the average daily net asset value of the Class A shares and
Class C shares, respectively. Total Fund Operating Expenses of the Class A
and Class C shares without such limitations would be 1.37% and 2.07%,
respectively, for Maryland Series, 1.16% and 1.86%, respectively, for
Michigan Series, 1.53% and 2.23%, respectively, for Intermediate Series,
0.93% and 1.63%, respectively, for National Municipals Fund, and 0.92% and
1.62%, for National Municipals Fund (pro forma combined), as of each Fund's
most recent fiscal year end.
12
<PAGE>
The example set forth below shows the expenses that an investor in the
combined fund (assuming approval by shareholders of each Series) would pay on a
$1,000 investment, based upon the pro forma ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period
National Municipals Fund
Class A...................................................... $37 $52 $69 $117
Class B...................................................... $61 $66 $72 $120
Class C...................................................... $24 $43 $74 $163
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
PURCHASES AND REDEMPTIONS
Purchases of shares of each Series and National Municipals Fund are made
through the Distributor, through dealers, including Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the respective Fund, through
its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share next determined after receipt of a
purchase order by the Transfer Agent or plus a sales charge which may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares).
The minimum initial investment for Class A and Class B shares of each Fund
is $1,000 per class and $5,000 for Class C shares and the minimum subsequent
investment is $100 for all classes. Class A shares of each Fund are sold with an
initial sales charge of up to 3.00% of the offering price. Class B shares of
each Fund are sold without an initial sales charge but are subject to a
contingent deferred sales charge (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses) approximately seven years after
purchase. Class C shares of each Fund are sold without an initial sales charge
and, for one year after purchase, are subject to a 1% contingent deferred sales
charge on redemptions. Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares but do not convert to
another class. Class Z shares of Intermediate Series are sold without either an
initial sales charge or contingent deferred sales charge to a limited group of
investors. Class Z Shares are not subject to any ongoing service or distribution
expenses.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after the Distributor or the Transfer Agent receives the sell order.
As indicated above, the proceeds of redemptions of Class B and Class C shares
may be subject to a contingent deferred sales charge. Class A, Class B and Class
C shareholders of the State Series and Class A and Class Z shareholders of
Intermediate Series will receive the number of full and fractional Class A
shares of National Municipals Fund equal to the net asset value (rounded to the
third decimal place) to such shareholders' Class A, Class B, Class C and Class Z
shares as of the closing date. The Class B and Class C shareholders of
Intermediate Series will receive the number of full and fractional Class B and
Class C shares of National Municipals Fund equal to the net asset value (rounded
to the third decimal place) to such shareholders' shares as of the closing date.
NO CONTINGENT DEFERRED SALES
13
<PAGE>
CHARGES WILL BE IMPOSED IN CONNECTION WITH THE REORGANIZATION. FOLLOWING THE
REORGANIZATION, SHAREHOLDERS HOLDING CLASS A SHARES OF NATIONAL MUNICIPALS FUND
LIKEWISE WILL NOT BE SUBJECT TO ANY CONTINGENT DEFERRED SALES CHARGES.
EXCHANGE PRIVILEGES
The exchange privileges available to Class A, Class B and Class C
shareholders of National Municipals Fund are identical to the exchange
privileges of Class A, Class B and Class C shareholders, respectively, of each
Series. National Municipals Fund does not offer Class Z shares. Shareholders of
both National Municipals Fund and each Series have an exchange privilege with
certain other Prudential Mutual Funds, including one or more specified money
market funds, subject to the minimum investment requirements of such funds.
Class A, Class B and Class C shares of each Fund may be exchanged for Class A,
Class B and Class C shares, respectively, of another fund on the basis of
relative net asset value. No sales charge will be imposed at the time of the
exchange. Any applicable contingent deferred sales charge payable upon the
redemption of shares exchanged will be calculated from the first day of the
month after the initial purchase excluding the time shares were held in a money
market fund. Class B and Class C shares of either Fund may not be exchanged into
money market funds other than Prudential Special Money Market Fund. For purposes
of calculating the holding period applicable to the Class B conversion feature,
the time period during which Class B shares were held in a money market fund
will be excluded. An exchange will be treated as a redemption and purchase for
tax purposes.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to declare daily and to pay dividends of net investment
income, if any, monthly and make distributions at least annually of any net
capital gains. Shareholders of National Municipals Fund and each Series receive
dividends and other distributions in additional shares of National Municipals
Fund and each Series, respectively, unless they elect to receive them in cash.
Each Series shareholder's election with respect to reinvestment of dividends and
distributions in each Series will be automatically applied with respect to the
National Municipals Fund shares he or she receives pursuant to the applicable
Plan.
FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATION
The Funds shall have received on the closing date opinions of Swidler Berlin
Shereff Friedman, LLP to the effect that each of the proposed Reorganizations
will constitute a tax-free reorganization within the meaning of Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code). Accordingly, no gain or loss will be recognized to National
Municipals Fund or any Series upon the transfer of assets solely in return for
shares of National Municipals Fund and National Municipals Fund's assumption of
liabilities, if any, or to shareholders of any Series upon their receipt of
shares of National Municipals Fund in return for their shares of the Series. The
tax basis for the shares of National Municipals Fund received by each Series'
shareholders will be the same as their tax basis for the shares of each
respective Series to be constructively surrendered in exchange therefor. In
addition, the holding period of the shares of National Municipals Fund to be
received pursuant to each Reorganization will include the period during which
the shares of each respective Series to be constructively surrendered in
exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange. See "The Proposed
Transaction--Tax Considerations."
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PRINCIPAL RISK FACTORS
As the investment policies of Natural Municipals Fund and the Series are
similar, the risks associated with such investments also are similar. Below is a
summary of such risks. For a more complete discussion of the risks attendant to
an investment in National Municipals Fund, please see the National Municipals
Fund Prospectus, which accompanies this Prospectus and Proxy Statement.
RATINGS
While National Municipals Fund's investment adviser will not be limited by
the ratings assigned by the ratings services, the municipal bonds in which
National Municipals Fund's portfolio will be principally invested will be rated
A or Baa by Moody's and A or BBB by S&P, or, if not rated, will be, in the
judgment of the investment adviser, of substantially comparable quality. Bonds
rated Baa by Moody's lack outstanding investment characteristics and, in fact,
have speculative characteristics as well. In addition, National Municipals Fund
may acquire municipal bonds which have been rated below medium quality (below
BBB/ Baa) by the ratings services if, in the judgment of National Municipals
Fund's investment adviser, the bonds have the characteristics of medium quality
obligations.
Each of Maryland and Michigan Series invests at least 70% of its total
assets in securities which are rated BBB or above by S&P and Baa or above by
Moody's or comparably rated by another NRSRO and up to 30% of its total assets
in securities rated below BBB by S&P or below Baa by Moody's or comparably rated
by another NRSRO or, if unrated, will possess creditworthiness, in the opinion
of the investment adviser, comparable to such investment grade rated securities.
Such lower-rated high yield securities are commonly referred to as junk bonds.
Intermediate Series, under normal circumstances, invests all of its assets in
securities rated at least BBB by S&P or Baa by Moody's and invests at least 60%
of its portfolio in securities rated A or better by Moody's or S&P.
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Municipal bonds of medium or lower-rated quality
(I.E., high yield or junk bonds) are subject to fluctuation in value as a result
of changing economic circumstances, as well as changes in interest rates. Thus,
while medium or lower-rated obligations generally provide a higher yield than
high quality municipal bonds of similar maturities, such obligations are subject
to a greater degree of market fluctuation with less certainty of the issuer's
continuing ability to meet the payments of principal and interest when due, and
may have speculative characteristics not present in bonds of higher quality.
Lower-rated or unrated debt obligations also present the risk that, if an issuer
calls the obligation in for redemption, it may have to be replaced with a
lower-yielding security, resulting in a decreased return for investors. If a
State Series experiences unexpected net redemptions, it may be forced to sell
its higher quality securities, resulting in a decline in the overall credit
quality of the Series' portfolio and increasing the exposure of the Series to
the risks of high yield securities.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
National Municipals Fund may also engage in various portfolio strategies,
including the purchase and sale of derivatives, to reduce certain risks of its
investments for bona fide hedging, risk management and return enhancement
purposes. These strategies include the purchase of put or tender options on
municipal bonds and notes and the purchase and sale of financial futures
contracts and options thereon and municipal
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bond index futures contracts. National Municipals Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations, and there can be no assurance that any of these strategies will
succeed.
Participation in the options and futures markets involves investment risks
and transaction costs to which National Municipals Fund would not be subject
absent the use of these strategies. National Municipals Fund's successful use of
financial futures contracts and options on futures contracts depends upon the
ability of its investment adviser to accurately predict movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if National Municipals Fund has hedged against the possibility of
an increase in interest rates which would adversely affect the price of
securities in its portfolio and prices of such securities increase instead,
National Municipals Fund will lose part or all of the benefit of the increased
value of its securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if National Municipals Fund has
insufficient cash to meet daily variation margin requirements, it may have to
sell securities to meet such requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
National Municipals Fund may have to sell securities at a time when it is
disadvantageous to do so. Where futures are purchased to hedge against a
possible increase in the price of securities before National Municipals Fund is
able to invest its cash in an orderly fashion, it is possible that the market
may decline instead. If National Municipals Fund then concludes not to invest in
securities at that time because of concern as to possible future market decline
or for other reasons, the Fund will realize a loss on the futures contract that
is not offset by a reduction in the price of the securities purchased.
Each Series may also engage in various portfolio strategies, including the
purchase and sale of certain derivatives although the State Series may not do so
for return enhancement purposes. These strategies include the purchase of put
options and the purchase and sale of futures contracts and options thereon. Each
Series' participation in the options and futures markets subjects the Series to
similar types of hedging risks and, in the case of Intermediate Series, return
enhancement risks, as described above for National Municipals Fund. Subsequent
to the Reorganizations, shareholders of the State Series will be subject to the
additional risks associated with the use of derivatives for return enhancement.
LONG TERM BONDS
National Municipals Fund primarily invests in long-term municipal bonds,
including obligations with longer maturities (E.G., 20 years or more). The State
Series invest in long-term obligations, and the dollar-weighted average maturity
of the Series will generally range between 10 and 20 years. Intermediate Series
invests primarily in municipal obligations with maturities between 3 and 15
years and will have a dollar-weighted average portfolio maturity of more than 3
and less than 10 years. Obligations with longer maturities generally offer both
higher yields and greater exposure to market fluctuation from changes in
interest rates than do those with shorter maturities.
TAX CONSIDERATIONS
National Municipals Fund may purchase municipal obligations of any state,
territory or possession of the United States, or any political subdivision
thereof. As a result, upon consummation of the Reorganizations, shareholders of
the Maryland or Michigan Series that are residents in Maryland or Michigan,
respectively, will be subject to certain state income taxes with respect to that
portion of National Municipals Fund's income not earned from municipal
obligations the income from which is exempt from Maryland or Michigan state
income taxes. Shareholders of each Series are advised to consult their own tax
advisers
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regarding specific questions as to federal, state or local taxes. Each of the
Series and National Municipals Fund has elected to qualify, and intends to
remain qualified, as a regulated investment company under the Internal Revenue
Code.
Interest on certain municipal bonds and municipal notes held by National
Municipals Fund may be subject to the federal alternative minimum tax. From time
to time, National Municipals Fund may purchase municipal bonds and municipal
notes that are "private activity bonds" (as defined in the Internal Revenue
Code), the interest on which is a tax preference subject to the alternative
minimum tax.
REALIGNMENT OF INVESTMENT PORTFOLIO
The portfolio manager of National Municipals Fund anticipates selling
certain securities in the investment portfolio of the combined Fund following
the consummation of such transaction. The portfolio manager of National
Municipals Fund expects that the sale of assets acquired from each Series and
the purchase of other securities may affect the aggregate amount of taxable
gains and losses generated by National Municipals Fund.
THE PROPOSED TRANSACTION
AGREEMENTS AND PLANS OF REORGANIZATION
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plans. Significant provisions of the Plans are
summarized below; however, this summary is qualified in its entirety by
reference to the Plans, a copy of each of which is attached as Appendix B to
this Prospectus and Proxy Statement.
The State Series Plan contemplates (i) National Municipals Fund acquiring
all of the assets of each of Maryland and Michigan Series in exchange for shares
of National Municipals Fund and the assumption by National Municipals Fund of
Maryland and Michigan Series' liabilities, if any, as of the Closing Date
(December 4, 1998, or such later date as the parties may agree) and (ii) the
constructive distribution on the date of the exchange, expected to occur on or
about the Closing Date, of Class A shares of National Municipals Fund to the
Class A, Class B and Class C shareholders of Maryland and Michigan Series as
provided for by the State Series Plan.
The Intermediate Series Plan contemplates (i) National Municipals Fund
acquiring all of the assets of Intermediate Series in exchange for shares of
National Municipals Fund and the assumption by National Municipals Fund of
Intermediate Series' liabilities, if any, as of the Closing Date (December 4,
1998, or such later date as the parties may agree) and (ii) the constructive
distribution on the date of the exchange, expected to occur on or about the
Closing Date, of Class A, Class B and Class C shares of National Municipals Fund
to the Class A, Class B and Class C shareholders of Intermediate Series and of
Class A shares of National Municipals Fund to the Class Z shareholders of
Intermediate Series, as provided for by the Intermediate Series Plan.
The assets of each Series to be acquired by National Municipals Fund shall
include, without limitation, all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by each Series and deferred or prepaid assets shown as assets on the books
of each Series. National Municipals Fund will assume from each Series all debts,
liabilities, obligations and duties of each Series of whatever kind or nature,
if any; provided, however, that each Series will utilize its best efforts, to
the extent practicable, to discharge all of its known debts, liabilities,
obligations and duties prior to the Closing Date. National Municipals Fund will
deliver to each Series Class A shares of National
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Municipals Fund, which the Maryland and Michigan Series will then distribute to
their Class A, Class B and Class C shareholders, respectively, and Intermediate
Series will then distribute to its Class A and Class Z shareholders,
respectively. National Municipals Fund will simultaneously deliver to
Intermediate Series Class B and Class C shares of National Municipals Fund which
Intermediate Series will then distribute to its Class B and Class C
shareholders, respectively. Share certificates in National Municipals Fund will
only be issued upon written request to Prudential Mutual Fund Services LLC. See
"Shareholder Guide" in National Municipals Fund's Prospectus.
The value of each Series' assets to be acquired and liabilities to be
assumed by National Municipals Fund and the net asset value of a share of
National Municipals Fund will be determined as of 4:15 P.M., New York time, on
the Closing Date in accordance with the valuation procedures of each respective
Fund's then current prospectus and statement of additional information.
As soon as practicable after the Closing Date, Series Fund and Municipal
Bond Fund will terminate the State Series and Intermediate Series, respectively,
and distribute PRO RATA to each respective Series' shareholders of record the
applicable shares of National Municipals Fund received by each Series in
exchange for the applicable shareholders' interests in the Series evidenced by
their shares of beneficial interest of the Series and each Fund will file with
the Secretary of State of the Commonwealth of Massachusetts a Certificate of
Termination terminating each respective Series. Such distribution will be
accomplished by opening accounts on the books of National Municipals Fund in the
name of each Series' shareholders and by transferring thereto the shares of
National Municipals Fund previously credited to the account of each Series on
those books. Each shareholder account shall represent the respective PRO RATA
number of National Municipals Fund shares of common stock due to such Series
shareholder. Fractional shares of National Municipals Fund will be rounded to
the third decimal place.
Accordingly, each shareholder of Class A, Class B and Class C shares of the
State Series and Class A and Class Z shares of Intermediate Series will own
Class A shares of National Municipals Fund immediately after the Reorganizations
that, except for rounding, will be equal to the value immediately prior to the
Reorganizations of that shareholder's Class A, Class B or Class C shares of
Maryland and Michigan Series or, in the case of Intermediate Series, the value
of that shareholder's Class A or Class Z shares. Each Class B and Class C
shareholder of the Intermediate Series will own Class B and Class C shares,
respectively, of National Municipals Fund immediately after the Reorganizations
that, except for rounding, will be equal to the value of that shareholder's
Class B or Class C shares, respectively, of Intermediate Series immediately
prior to the Reorganizations. Moreover, because shares of National Municipals
Fund will be issued at net asset value in exchange for net assets of each Series
that, except for rounding, will equal the aggregate value of those shares, the
net asset value per share of National Municipals Fund will be unchanged. Thus
the Reorganizations will not result in a dilution of the value of any
shareholder account. However, in general, the Reorganizations will substantially
reduce the percentage of ownership of each shareholder of the Series below such
shareholder's current percentage of ownership in that Series because, while such
shareholder will have the same dollar amount invested initially in National
Municipals Fund that he or she had invested in the Series, his or her investment
will represent a smaller percentage of the combined net assets of National
Municipals Fund and the Series.
Any transfer taxes payable upon issuance of shares of National Municipals
Fund in a name other than that of the registered holder of the shares on the
books of each Series as of that time shall be paid by the person to whom such
shares are to be issued as a condition of such transfer. Any reporting
responsibility of each Series will continue to be the responsibility of each
Series up to and including the Closing Date and such later date on which each
Series is terminated.
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On the effective date of the Reorganizations, the name of National
Municipals Fund will be unchanged.
The consummation of the proposed transactions is subject to a number of
conditions set forth in the Plans, some of which may be waived by the Directors
of National Municipals Fund and the Trustees of Series Fund and the Trustees of
Municipal Bond Fund. The Plans may be terminated and the proposed transactions
abandoned at any time with respect to one or more Series, before or after
approval by the shareholders of each Series, prior to the Closing Date. In
addition, the Plans may be amended with respect to each Series in any mutually
agreeable manner, except that no amendment may be made subsequent to the Meeting
of shareholders of each Series that would detrimentally affect the value of
National Municipals Fund shares to be distributed to each Series' shareholders.
REASONS FOR THE REORGANIZATIONS CONSIDERED BY THE TRUSTEES/DIRECTORS
The Trustees of Series Fund and the Trustees of Municipal Bond Fund,
including a majority of the Independent Trustees, have determined that the
interests of each Series' shareholders will not be diluted as a result of the
proposed transaction and that the proposed transaction is in the best interests
of the shareholders of the respective Series. In addition, the Directors of
National Municipals Fund, including a majority of the Independent Directors,
have determined that the interests of National Municipals Fund shareholders will
not be diluted as a result of the proposed transaction and that the proposed
transactions are in the best interests of the shareholders of National
Municipals Fund.
The reasons that the Reorganizations were proposed by PIFM are described
above under "Synopsis-- Reasons for the Reorganizations." The Trustees of Series
Fund and the Trustees of Municipal Bond Fund and the Directors of National
Municipals Fund based their decisions to approve the Plans on an inquiry into a
number of factors, including the following:
(1) The compatibility of the investment objectives, policies and
restrictions of National Municipals Fund and each respective Series, and the
fact that National Municipals Fund's portfolio is less susceptible to the
risks associated with investments concentrated in a single state;
(2) the relative past and current growth in assets, historical
investment performance and perceived future prospects of National Municipals
Fund and each of the Series;
(3) the effect of the proposed transactions on the expense ratios of
National Municipals Fund and each of the Series;
(4) the costs of the Reorganizations, which will be paid for by National
Municipals Fund and each of the Series in proportion to their respective
asset levels;
(5) the tax-free nature of the Reorganizations to National Municipals
Fund, each of the Series and their shareholders;
(6) with respect to the State Series Plan, if such Plan is approved,
former shareholders of Maryland and Michigan Series, who would have
otherwise received income generally exempt from Maryland or Michigan
taxation, respectively, from Maryland and Michigan Series, will be subject
to Maryland and Michigan state taxation on income derived from National
Municipals Fund following each Reorganization;
(7) the potential benefits to the shareholders of each of the Series and
National Municipals Fund; and
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(8) other options to each Reorganization, including a continuance of a
Series in its present form, a change of manager or investment objective or a
termination of a Series with the distribution of the cash proceeds to the
Series shareholders.
If a Plan is not approved by shareholders of any of the Series, Series
Fund's Trustees and Municipal Bond Fund's Trustees may consider other
appropriate action, such as the termination of the applicable Series or a merger
or other business combination with an investment company other than National
Municipals Fund. The Shareholders of each Series vote separately on the
respective Plan and the Reorganization of any Series into National Municipals
Fund is not contingent on the Plan being approved by any other Series.
DESCRIPTION OF SECURITIES TO BE ISSUED
National Municipals Fund's shares represent shares of common stock with $.01
par value per share. Shares of National Municipals Fund will be issued to each
Series' shareholders on the Closing Date as considered in each Plan. Each share
represents an equal and proportionate interest in National Municipals Fund with
each other share of the same class. Shares entitle their holders to one vote per
full share and fractional votes for fractional shares held. Each share of
National Municipals Fund has equal voting, dividend and liquidation rights with
other shares, except that each class has exclusive voting rights with respect to
its distribution plan, as noted under "Synopsis--Structure of the Series and
National Municipals Fund" above. Dividends paid by National Municipals Fund with
respect to each class of shares, to the extent any are paid, will be calculated
in the same manner, at the same time, on the same day, and will be in the same
amount, except that each class will bear its own distribution expenses,
generally resulting in lower dividends for Class B and Class C shares.
TAX CONSIDERATIONS
The Fund will have received opinions on the Closing Date from Swidler Berlin
Shereff Friedman, LLP to the effect that (1) the proposed transactions described
above will constitute reorganizations within the meaning of Section 368(a)(1)(C)
of the Internal Revenue Code; (2) no gain or loss will be recognized by
shareholders of the Series upon liquidation of each Series and the distribution
of shares of National Municipals Fund constructively in exchange for their
shares of that Series (Internal Revenue Code Section 354(a)(1)); (3) no gain or
loss will be recognized by each Series upon the transfer of that Series' assets
to National Municipals Fund in exchange solely for shares of National Municipals
Fund and the assumption by National Municipals Fund of such Series' liabilities,
if any, and the subsequent distribution of those shares to that Series'
shareholders in liquidation thereof (Internal Revenue Code Sections 361(a) and
357(a)); (4) no gain or loss will be recognized by National Municipals Fund upon
the receipt of such assets in exchange solely for National Municipals Fund's
shares and its assumption of the Series' liabilities, if any (Internal Revenue
Code Section 1032(a)); (5) National Municipals Fund's basis for the assets
received pursuant to each Reorganization will be the same as the basis thereof
in the hands of each Series immediately before the Reorganization, and the
holding period of those assets in the hands of National Municipals Fund will
include the holding period thereof in each Series' hands (Internal Revenue Code
Sections 362(b) and 1223(2)); (6) each Series' shareholders' basis for the
shares of National Municipals Fund to be received by them pursuant to each
Reorganization will be the same as their basis for the shares of each Series to
be constructively surrendered in exchange therefor (Internal Revenue Code
Section 358(a)(1)); and (7) the holding period of the shares of National
Municipals Fund to be received by the shareholders of each Series pursuant to
each Reorganization will include the period during which the shares of each
Series to be constructively surrendered in exchange therefor were held, provided
the latter shares were held as capital assets by the shareholders on the date of
the exchange (Internal Revenue Code Section 1223(1)). It should
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be noted that no rulings have been sought by the IRS and that an opinion of
counsel is not binding on the IRS or any court. If the IRS were to successfully
assert that the proposed transaction is taxable, then the proposed transactions
would be treated as taxable sales of each Series' assets to National Municipals
Fund followed by the taxable liquidation of each Series, and shareholders of
each Series would recognize gain or loss as a result of such transaction.
CERTAIN OTHER COMPARATIVE INFORMATION ABOUT THE FUNDS
National Municipals Fund is a Maryland corporation and the rights of its
shareholders are governed by its Articles of Incorporation, By-Laws and the
Maryland General Corporation Law. Series Fund and Municipal Bond Fund are each a
Massachusetts business trust and the rights of each Fund's shareholders are
governed by that Fund's Declaration of Trust, By-Laws and applicable
Massachusetts law. Certain relevant differences between the two forms of
organization are summarized below.
CAPITALIZATION. National Municipals Fund has issued shares of common stock,
par value $.01 per share. Its Articles of Incorporation authorize National
Municipals Fund to issue 750 million shares of common stock divided into three
classes, consisting of 250 million authorized Class A shares, 250 million
authorized Class B shares and 250 million authorized Class C shares. Series Fund
and Municipal Bond Fund each has issued shares of beneficial interest, par value
$.01 per share, currently divided into thirteen series and three series,
respectively. Series Fund's Declaration of Trust authorizes the State Series to
issue an unlimited number of shares of beneficial interest, divided into three
classes, designated Class A, Class B and Class C shares. Municipal Bond Fund's
Declaration of Trust authorizes Municipal Bond Fund to issue an unlimited number
of shares of beneficial interest, divided into four classes, designated Class A,
Class B, Class C and Class Z shares. The State Series currently offer Class A,
Class B and Class C shares. Intermediate Series currently offers Class A, Class
B, Class C and Class Z shares. The Board of Directors of National Municipals
Fund may authorize an increase in the number of authorized shares and the Board
of Directors/ Trustees of each Fund may reclassify unissued shares to authorize
additional classes of shares having terms and rights determined by its Board of
Directors/Trustees, all without shareholder approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, none of the Funds is
required to hold annual meetings of its shareholders. Each Fund is required to
call a meeting of shareholders for the purpose of voting upon the question of
removal of a Director/Trustee or to transact any other business when requested
in writing to do so by the holders of at least 10% of the Fund's outstanding
shares. In addition, each Fund is required to call a meeting of shareholders for
the purpose of electing Directors/Trustees if, at any time, less than a majority
of the Directors/Trustees holding office at the time were elected by
shareholders.
Under each of the Declarations of Trust of Municipal Bond Fund and Series
Fund, shareholders are entitled to vote only with respect to the following
matters: (1) the election or removal of Trustees if a meeting is called for such
purpose; (2) the adoption of any contract for which shareholder approval is
required by the Investment Company Act; (3) any amendment of the Declaration of
Trust, other than amendments to change the Fund's name, authorize additional
series of shares, supply any omission or cure, correct or supplement any
ambiguity or defective or inconsistent provision contained therein; (4) any
termination or reorganization of the Fund to the extent and as provided in the
Declaration of Trust; (5) a determination as to whether a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the applicable Fund or its shareholders, to
the same extent as the shareholders of a Massachusetts business corporation
would be entitled to vote on such a determination; (6) with respect to any plan
of distribution adopted pursuant to Rule 12b-1 under the Investment Company Act;
and (7) such additional matters relating to the applicable Fund as may be
required by law, the applicable Fund's
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Declaration of Trust, By-Laws, or any registration of the applicable Fund with
the Commission or any state securities commission, or as the Trustees may
consider necessary or desirable. Each Fund's shareholders also vote upon changes
in fundamental investment policies or restrictions.
Each Declaration of Trust provides that a "Majority Shareholder Vote" of the
Fund is required to decide any question. "Majority Shareholder Vote" means the
vote of the holders of a majority of shares, which shall consist of: (i) a
majority of shares represented in person or by proxy and entitled to vote at a
meeting of shareholders at which a quorum, as determined in accordance with the
By-Laws, is present; (ii) a majority of shares issued and outstanding and
entitled to vote when action is taken by written consent of shareholders; or
(iii) a "majority of the outstanding voting securities," as that phrase is
defined in the Investment Company Act, when action is taken by shareholders with
respect to approval of an investment advisory or management contract or an
underwriting or distribution agreement or continuance thereof.
Shareholders in National Municipals Fund are entitled to one vote for each
share on all matters submitted to a vote of its shareholders under Maryland law.
Approval of certain matters, such as an amendment to the charter, a merger,
consolidation or transfer of all or substantially all assets, dissolution and
removal of a Director, requires the affirmative vote of a majority of the votes
entitled to be cast. A plurality of votes cast is required to elect Directors.
Other matters require the approval of the affirmative vote of a majority of the
votes cast at a meeting at which a quorum is present.
Series Fund's, Municipal Bond Fund's and National Municipals Fund's By-Laws
each provide that a majority of the outstanding shares shall constitute a quorum
for the transaction of business at a shareholders' meeting. Matters requiring a
larger vote by law or under the organization documents for any of the Funds are
not affected by such quorum requirements.
SHAREHOLDER LIABILITY. Under Maryland law, National Municipals Fund's
shareholders have no personal liability as such for National Municipals Fund's
acts or obligations.
Under Massachusetts law, Series Fund's and Municipal Bond Fund's
shareholders, under certain circumstances, could be held personally liable for
their respective Fund's obligations. However, each Declaration of Trust of
Series Fund and Municipal Bond Fund disclaims shareholder liability for acts or
obligations of each Fund and requires that notice of such disclaimer be given in
each note, bond, contract, order, agreement, obligation or instrument entered
into or executed by such Fund or its Trustees. Each Fund's Declaration of Trust
provides for indemnification out of such Fund's property for all losses and
expenses of any shareholder held personally liable for such Fund's obligations
solely by reason of his or her being or having been a Fund shareholder and not
because of his or her acts or omissions or some other reason. Thus, each such
Fund considers the risk of a shareholder incurring financial loss on account of
shareholder liability to be remote since it is limited to circumstances in which
a disclaimer is inoperative or the Fund itself would be unable to meet its
obligations.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND TRUSTEES. Under Maryland
law, a Director or officer of National Municipals Fund is not liable to National
Municipals Fund or its shareholders for monetary damages for breach of fiduciary
duty as a Director or officer except to the extent such exemption from liability
or limitation thereof is not permitted by law, including the Investment Company
Act. National Municipals Fund's By-Laws provide that its Directors and officers
will not be liable to National Municipals Fund, and may be indemnified for
liabilities, for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties.
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The Declaration of Trust of Series Fund and Municipal Bond Fund provides
that no Trustee or officer of such Fund shall be liable to the Trust or
shareholders for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties. Under such Fund's
Declaration of Trust, a Trustee is entitled to indemnification against all
liability and expenses reasonably incurred by him or her in connection with the
defense or disposition of any threatened or actual proceeding by reason of his
or her being or having been a Trustee provided, generally, such Trustee acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Fund.
Under the Investment Company Act, a Director of National Municipals Fund and
a Trustee of Series Fund and Municipal Bond Fund may not be protected against
liability to National Municipals Fund, Series Fund or Municipal Bond Fund,
respectively, and their security holders to which he or she would otherwise be
subject as a result of his or her willful misfeasance, bad faith or gross
negligence in the performance of his or her duties, or by reason of reckless
disregard of his or her obligations and duties. The staff of the Commission
interprets the Investment Company Act to require additional limits on
indemnification of Directors, Trustees and officers.
23
<PAGE>
PRO FORMA CAPITALIZATION
The following table shows the capitalization of National Municipals Fund and
each Series as of June 30, 1998 and the pro forma combined capitalization as if
the reorganization had occurred on that date.
<TABLE>
<CAPTION>
NATIONAL
MUNICIPALS FUND MARYLAND SERIES MICHIGAN SERIES
-------------------------------------- ---------------------------------- ----------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets..... $480,442,843 $128,212,019 $1,658,644 $18,934,642 $11,894,140 $121,275 $30,555,911 $23,419,714 $437,827
Net Asset Value
per share..... $ 16.07 $ 16.11 $ 16.11 $ 11.23 $ 11.25 $ 11.25 $ 12.26 $ 12.25 $ 12.25
Shares
Outstanding... 29,888,170 7,957,475 102,944 1,685,367 1,057,361 10,781 2,492,518 1,911,495 35,735
<CAPTION>
INTERMEDIATE SERIES PRO FORMA COMBINED
---------------------------------------------- --------------------------------------
CLASS A CLASS B CLASS C CLASS Z CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets..... $14,102,410 $22,709,950 $456,914 $1,354,859 $581,263,822 $150,921,969 $2,115,558
Net Asset Value
per share..... $ 10.93 $ 10.93 $ 10.93 $ 10.93 $ 16.07 $ 16.11 $ 16.11
Shares
Outstanding... 1,290,031 2,076,916 41,787 123,929 36,162,033 9,367,155 131,306
</TABLE>
24
<PAGE>
INFORMATION ABOUT NATIONAL MUNICIPALS FUND
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
For additional condensed financial information for National Municipals Fund,
see "Financial Highlights" in the National Municipals Fund Prospectus, which
accompanies this Prospectus and Proxy Statement. The following financial
highlights contain selected data for a share of Class A, Class B and Class C
outstanding, total return, ratios to average net assets and other supplemental
data for the periods presented.
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
JUNE 30, 1998 (c) YEAR ENDED DECEMBER 31, 1997
---------------------------------- ----------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year...... $ 16.12 $ 16.16 $ 16.16 $ 15.56 $ 15.60 $ 15.60
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .40 .36 .34 .81(b) .75(b) .71(b)
Net realized and unrealized gain (loss)
on investment transactions............. (.05) (.05) (.05) .67 .67 .67
-------- -------- -------- -------- -------- --------
Total from investment operations.... .35 .31 .29 1.48 1.42 1.38
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.40) (.36) (.34) (.81) (.75) (.71)
Distributions in excess of net
investment income...................... -- -- -- (.01) (.01) (.01)
Distributions from net realized gains... -- -- -- (.10) (.10) (.10)
-------- -------- -------- -------- -------- --------
Total distributions................. (0.40) (0.36) (0.34) (.92) (.86) (.82)
-------- -------- -------- -------- -------- --------
Net asset value, end of year............ $ 16.07 $ 16.11 $ 16.11 $ 16.12 $ 16.16 $ 16.16
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
TOTAL RETURN (a):....................... 2.21% 2.00% 1.88% 9.80% 9.35% 9.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $480,443 $128,212 $ 1,659 $493,178 $141,528 $ 825
Average net assets (000)................ $485,960 $138,886 $ 1,168 $491,279 $151,938 $ 758
Ratios to average net assets:
Expenses, including distribution
fees................................. .73%(d) 1.13%(d) 1.38%(d) .70%(b) 1.10%(b) 1.35%(b)
Expenses, excluding distribution
fees................................. .63%(d) .63%(d) .63%(d) .60%(b) .60%(b) .60%(b)
Net investment income................. 4.96%(d) 4.56%(d) 4.31%(d) 5.15%(b) 4.75%(b) 4.50%(b)
Portfolio turnover...................... 14% 14% 14% 38% 38% 38%
</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)Figures are unaudited.
(d)Figures are annualized.
25
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of National Municipals Fund, see "General Information" and "Fund Highlights" in
the National Municipals Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of National Municipals Fund's investment objective and
policies and risk factors associated with an investment in National Municipals
Fund, see "How the Fund Invests" in the National Municipals Fund Prospectus.
DIRECTORS
For a discussion of the responsibilities of National Municipals Fund's Board
of Directors, see "How the Fund is Managed" in the National Municipals Fund
Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of National Municipals Fund's Manager, Subadviser portfolio
manager and Distributor, see "How the Fund is Managed--Manager" in the National
Municipals Fund Prospectus.
PERFORMANCE
For a discussion of National Municipals Fund's performance during the fiscal
year ended December 31, 1997 and the six-month period ended June 30, 1998, see
Appendix A hereto.
NATIONAL MUNICIPALS FUND'S SHARES
For a discussion of National Municipals Fund's shares, including voting
rights and exchange rights, and how the shares may be purchased and redeemed,
see "Shareholder Guide" and "How the Fund is Managed" in the National Municipals
Fund Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of National Municipals Fund's
shares is determined, see "How the Fund Values its Shares" in the National
Municipals Fund Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of National Municipals Fund's policy with respect to
dividends and distributions and the tax consequences of an investment in Class A
shares, see "Taxes, Dividends and Distributions" in the National Municipals Fund
Prospectus.
ADDITIONAL INFORMATION
National Municipals Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act and
in accordance therewith files reports and other information with the Securities
and Exchange Commission (Commission). Proxy material, reports and other
information filed by National Municipals Fund can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices in
New York (7 World Trade Center, Suite 1300, New York, New York 10048) and
Chicago (Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Shareholder inquiries should be addressed to National
Municipals Fund at Gateway Center Three, Newark, New Jersey 07102, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
26
<PAGE>
INFORMATION ABOUT THE SERIES
FINANCIAL INFORMATION
For condensed financial information for each Series, see "Financial
Highlights" in each Series' Prospectus, the State Series' Annual Reports to
Shareholders for the fiscal year ended August 31, 1998, and Intermediate Series'
Annual Report to Shareholders for the fiscal year ended April 30, 1998, which
are available without charge upon oral or written request to Series Fund or
Municipal Bond Fund, as applicable. See "Additional Information" below.
GENERAL
For a discussion of the organization, classification and sub-classification
of each Series, see "General Information" and "Fund Highlights" in each Series'
Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of the Series' investment objective and policies and risk
factors associated with an investment in the Series, see "How the Fund Invests"
in each Series' Prospectus.
TRUSTEES
For a discussion of the responsibilities of Series Fund's or Municipal Bond
Fund's Board of Trustees, see "How the Fund is Managed" in each Series'
Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of each Series' Manager and Subadviser and portfolio
manager, see "How the Fund is Managed--Manager" in each Series' Prospectus.
PERFORMANCE
For a discussion of each Series' performance during its fiscal year, see the
State Series Annual Reports to Shareholders for the fiscal year ended August 31,
1998, and the Intermediate Series' Annual Report to Shareholders for the fiscal
year ended April 30, 1998, which are available without charge upon oral or
written request to Series Fund or Municipal Bond Fund, respectively. See
"Additional Information" below.
SERIES FUND'S SHARES
For a discussion of each Series' shares, including voting rights and
exchange rights, and how the shares may be purchased and redeemed, see
"Shareholder Guide" and "How the Fund is Managed" in each Series' Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of each Series' shares is
determined, see "How the Fund Values its Shares" in each Series' Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of each Series' policy with respect to dividends and
distributions and the tax consequences of an investment in Class A shares, see
"Taxes, Dividends and Distributions" in each Series' Prospectus.
ADDITIONAL INFORMATION
Additional information concerning Maryland and Michigan Series is
incorporated herein by reference from the current Prospectus of each Series
dated October , 1998. Copies of each State Series' Prospectus and Annual
Report to Shareholders for the fiscal year ended August 31, 1998 are available
without charge
27
<PAGE>
upon oral or written request to Series Fund. Additional information concerning
Intermediate Series is incorporated herein by reference from Intermediate
Series' current prospectus dated July 1, 1998 and supplements dated August 27,
1998 and September 1, 1998. Copies of Intermediate Series' Prospectus and
Supplements thereto and Annual Report to Shareholders for the fiscal year ended
April 30, 1998 are available without charge upon oral or written request to
Municipal Bond Fund. To obtain a Maryland, Michigan or Intermediate Series
Prospectus or Annual Report, call (800) 225-1852 or write to Prudential Mutual
Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Shareholder
inquiries should be addressed to Series Fund at Gateway Center Three, Newark,
New Jersey 07102, or by telephone, at (800) 225-1852 (toll-free) or, from
outside the U.S.A., at (908) 417-7555 (collect).
Reports and other information filed by any of the Series can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices in New York (7 World Trade Center, Suite 1300, New
York, New York 10048) and Chicago (Citicorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511). Copies of such material can also be
obtained at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of Series Fund or the
Secretary of Municipal Bond Fund, as applicable, or by attendance at the
Meeting. If sufficient votes to approve the proposal are not received, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of Proxies. Any such adjournment will require the
affirmative vote of a majority of those shares present at the Meeting or
represented by proxy. Any questions as to an adjournment of the Meeting will be
voted on by the persons named in the enclosed Proxy in the same manner that the
Proxies are instructed to be voted. In the event that the Meeting is adjourned,
the same procedures will apply at a later Meeting date.
If a Proxy that is properly executed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a Proxy from a broker or nominee indicating that
such person has not received instructions from the beneficial owner or other
person entitled to vote shares on a particular matter with respect to which the
broker or nominee does not have discretionary power), the shares represented
thereby will be considered present for purposes of determining the existence of
a quorum for the transaction of business. Because approval of each proposed
Reorganization requires the affirmative vote of a majority of the total shares
outstanding of the respective Series, an abstention or broker non-vote will have
the effect of a vote against such proposed matters.
The close of business on October 15, 1998 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at, the
Series' Meeting. On that date, Maryland Series had [ ] Class A shares, [ ]
Class B shares and [ ] Class C shares outstanding and entitled to vote;
Michigan Series had [ ] Class A, [ ] Class B and [ ] Class C
shares outstanding and entitled to vote; and Intermediate Series had [ ]
Class A, [ ] Class B, [ ] Class C and [ ] Class Z shares
outstanding and entitled to vote.
28
<PAGE>
Each share of each Series will be entitled to one vote at the Series'
Meeting. It is expected that the Notice of Special Meeting, Prospectus and Proxy
Statement and form of Proxy will be mailed to the Series' shareholders on or
about October 30, 1998.
As of October 15, 1998, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of Maryland Series:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
- ---------------------------------------- -------------- -----------
<S> <C> <C>
</TABLE>
As of October 15, 1998, the Trustees and officers of Series Fund, as a
group, owned less than 1% of the outstanding shares of Maryland Series.
--------------
As of October 15, 1998, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of Michigan series:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
- ---------------------------------------- -------------- -----------
<S> <C> <C>
</TABLE>
As of October 15, 1998, the Trustees and officers of Series Fund, as a
group, owned less than 1% of the outstanding shares of Michigan Series.
--------------
As of October 15, 1998, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of Intermediate Series:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
- ---------------------------------------- -------------- -----------
<S> <C> <C>
</TABLE>
As of October 15, 1998, the Trustees and officers of Municipal Bond Fund, as
a group, owned less than 1% of the outstanding shares of Intermediate Series.
29
<PAGE>
As of October 15, 1998, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of National Municipals
Funds:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
- ---------------------------------------- -------------- -------------
<S> <C> <C>
[Registration [19,807/C 42.0%
Mrs. Christine Doyle
58 Remington Rd
Ridgefield CT 06877-4326
TSA Reality Associates Limited 4,716/C 10.0%
Partnership
555 Long Wharf Dr
New Haven CT 06511-6107
Huntington Newspapers Inc 7,104/C 15.1%]
ATTN: LARRY HENSLEY
PO Box 860
Huntington IN 46750-0860]
</TABLE>
As of October 15, 1998, the Directors and officers of National Municipals
Fund, as a group, owned less than 1% of the outstanding shares of such Fund.
The expenses of reorganization and solicitation will be borne by Series
Fund, Municipal Bond Fund and National Municipals Fund in proportion to their
respective assets and will include reimbursement to brokerage firms and others
for expenses in forwarding proxy solicitation material to shareholders. The
Trustees of Series Fund have retained Shareholder Communications Corporation, a
proxy solicitation firm, to assist in the solicitation of Proxies for the
Meeting. The fees and expenses of Shareholder Communications Corporation are not
expected to exceed $11,000, excluding mailing and printing costs. The
solicitation of Proxies will be largely by mail but may include telephonic,
telegraphic or oral communication by regular employees of Prudential Securities
and its affiliates, including PIFM. This cost, including specified expenses,
also will be borne by Series Fund, Municipal Bond Fund and National Municipals
Fund in proportion to their respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of each
Series arise, including any question as to an adjournment of the Meeting, the
persons named in the enclosed Proxy will vote thereon according to their best
judgment in the interests of each Series, taking into account all relevant
circumstances.
SHAREHOLDERS' PROPOSALS
A shareholder proposal intended to be presented at any subsequent meeting of
the shareholders of the State Series or Intermediate Series must be received by
Series Fund or Municipal Bond Fund, respectively, a reasonable time before the
Trustees' solicitation relating to such meeting is made in order to be included
in the Series' Proxy Statement and form of Proxy relating to that meeting. The
mere submission of a proposal by a shareholder does not guarantee that such
proposal will be included in the proxy statement because certain rules under the
federal securities laws must be complied with before inclusion of the proposal
is required. In the event that the Plans are approved at this Meeting with
respect to each Series, it is not expected that there will be any future
shareholder meetings of the Series.
30
<PAGE>
It is the present intent of the Board of Directors of National Municipals
Fund and the Trustees of Series Fund and the Trustees of Municipal Bond Fund not
to hold annual meetings of shareholders unless the election of
Directors/Trustees is required under the Investment Company Act nor to hold
special meetings of shareholders unless required by the Investment Company Act
or state law.
S. JANE ROSE
SECRETARY
Dated: [October , 1998]
31
<PAGE>
Prudential National Municipals Fund, Inc.
PERFORMANCE AT A GLANCE.
Long-term interest rates declined (and bond prices rose) in the U.S. as
inflation remained mild in 1997. Municipal bonds also indirectly benefited when
investors sought more dependable securities in the wake of an Asian economic
crisis. Your Prudential National Municipals Fund beat the Lipper Average by
investing in higher yielding bonds and non-callable bonds that gained sharply as
interest rates fell.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS(1) AS OF 12/31/97
- ------------------------------------------------------------------------------------------
One Five Ten Since
Year Years Years Inception(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 9.80% (9.73%) 39.44% (39.26%) N/A 83.23% (83.01%)
- ------------------------------------------------------------------------------------------
Class B 9.35 (9.28) 36.76 (36.59) 109.77% (109.51%) 342.44 (341.89)
- ------------------------------------------------------------------------------------------
Class C 9.08 (9.01) N/A N/A 25.92 (25.77)
- ------------------------------------------------------------------------------------------
Lipper Gen.
Muni Avg(3) 9.11 39.28 121.06 ***
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS(1) AS OF 12/31/97
- ------------------------------------------------------------------------------------------
One Five Ten Since
Year Years Years Inception(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 6.50% (6.44%) 6.23% (6.20%) N/A 7.51% (7.50%)
- ------------------------------------------------------------------------------------------
Class B 4.35 (4.28) 6.31 (6.28) 7.69% (7.68%) 8.77
- ------------------------------------------------------------------------------------------
Class C 8.08 (8.01) N/A N/A 6.98 (6.94)
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield(4)
Total Distributions 30-Day At Tax Rates Of
Paid for 12 Mos. SEC Yield 36% 39.6%
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DIVIDENDS Class A $0.92 4.22% 6.59% 6.99%
& YIELDS --------------------------------------------------------------------------------
AS OF Class B $0.86 3.95 6.17 6.54
12/31/97 --------------------------------------------------------------------------------
Class C $0.82 3.70 5.78 6.13
- ---------------------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 3% for Class A
shares and a declining, six-year contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1% and 1% for Class B shares. Class C shares have a 1% CDSC
for one year. Without waiver of management fees and/or expense subsidization,
the Fund's return would have been lower as indicated by the numbers in the ()
parentheses. Class B shares automatically convert to Class A shares on a
quarterly basis, after approximately seven years.
(2) Inception dates: Class A, 1/22/90; Class B, 4/25/80; and Class C, 8/1/94.
(3) Lipper General Muni Fund Average is based on the average of all funds in
this category for one-, five- and 10-year periods.
(4) Some investors may be subject to the federal alternative minimum tax and/or
state and local taxes. Taxable equivalent yields reflect federal taxes only.
***Lipper Since Inceptions returns were: Class A, 82.75%; Class B, 373.53; and
Class C, 27.95% for all funds in each Lipper share class.
HOW INVESTMENTS COMPARED.
(AS OF 12/31/97)
[GRAPH]
<TABLE>
<S> <C> <C>
12 mos 20 yrs
-------- --------
US GROWTH FUNDS 25.18 15.73
GENERAL BOND FUNDS 9.91 9.93
GENERAL MUNI DEBT FUNDS 9.11 7.39
U.S. TAXABLE MONEY FUNDS 4.9 7.69
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different - we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher yields means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments,
state agencies and/or municipalities. This investment provides income that is
usually exempt from federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value; they
don't fluctuate much in price but, historically, their returns have been
generally among the lowest of the major investment categories.
<PAGE>
Prudential National Municipals Fund, Inc.
PERFORMANCE AT A GLANCE.
A bountiful supply of new municipal bonds were issued by state and local
governments to take advantage of low borrowing costs over the past six months.
Despite the large supply, we encountered difficulty finding attractively priced,
medium-quality bonds to enhance our return to you. Then too, portfolio duration
(a measure of sensitivity to changing interest rates) was not longer than the
average fund so the Prudential National Municipal Fund did not gain as rapidly
as it could have when bond prices rose. As a result, the Fund's Class A shares
returned 2.21% compared to 2.26% for the Lipper General Municipal Average.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS(1) AS OF 6/30/98
- -------------------------------------------------------------------------------------------
Six One Five Ten Since
Months Year Years Years Inception(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A 2.21% 8.78% 32.17% (32.01) N/A 87.28% (87.04)
- -------------------------------------------------------------------------------------------
Class B 2.00 8.34 29.64 (29.48) 102.59% (102.34) 351.30 (350.74)
- -------------------------------------------------------------------------------------------
Class C 1.88 8.07 N/A N/A 28.28 (28.13)
- -------------------------------------------------------------------------------------------
Lipper General
Muni Average(3) 2.26 8.39 32.41 115.27 ***
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS(1) AS OF 6/30/98
- -------------------------------------------------------------------------------------------
One Five Ten Since
Year Years Years Inception(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 5.52% 5.10% (5.07) N/A 7.33% (7.32)
- -------------------------------------------------------------------------------------------
Class B 3.34 5.17 (5.14) 7.32% (7.30) 8.64
- -------------------------------------------------------------------------------------------
Class C 7.07 N/A N/A 6.57 (6.54)
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Taxable Equivalent Yield(4)
Total Distributions 30-Day At Tax Rates Of
Paid for Six Mos. SEC Yield 36% 39.6%
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTIONS Class A $0.40 4.17% 6.52% 6.90%
& YIELDS ------------------------------------------------------------------------------
AS OF Class B $0.37 3.90 6.09 6.46
6/30/98 ------------------------------------------------------------------------------
Class C $0.35 3.65 5.70 6.04
- ---------------------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
(1) Source: Prudential Investments Fund Management and Lipper Analytical
Services. The cumulative total returns do not take into account sales charges.
The average annual total returns do take into account applicable sales charges.
The Fund charges a maximum front-end sales load of 3% for Class A shares and a
declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%
for six years for Class B shares. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven years after purchase.
Class C shares have a 1% CDSC for one year. Without waiver of management fees
and/or expense subsidization, the Fund's cumulative and average annual total
returns and yields would have been lower, as indicated in parentheses ( ).
(2) Inception dates: Class A, 1/22/90; Class B, 4/25/80; and Class C, 8/1/94.
(3) Lipper average returns are for all funds in each share class for the
six-month, one-, five-, and ten-year periods.
(4) Some investors may be subject to the federal alternative minimum tax and/or
state and local taxes. Taxable equivalent yields reflect federal taxes only.
***Lipper Since Inception returns are 87.68% for Class A; 387.11% for Class B;
and 31.05% for Class C based on all funds in each share class.
HOW INVESTMENTS COMPARED.
(AS OF 6/30/98)
[GRAPH]
<TABLE>
<S> <C> <C>
12 mos 20 yrs
-------- --------
US GROWTH FUNDS 25.39 16.13
GENERAL BOND FUNDS 9.76 10.18
GENERAL MUNI DEBT FUNDS 8.39 7.77
U.S. TAXABLE MONEY FUNDS 4.96 7.66
</TABLE>
Source: Lipper Analytical Services. Financial markets change, so a mutual fund's
past performance should never be used to predict future results. The risks to
each of the investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Appendix B
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (Agreement) made as of the day of
October, 1998, by and between Prudential Municipal Bond Fund (Municipal Bond
Fund)--Intermediate Series and Prudential National Municipals Fund, Inc.
(National Municipals Fund) (collectively, with Intermediate Series and Municipal
Bond Fund, the Funds and each individually, a Fund). Municipal Bond Fund is a
business trust organized under the laws of the Commonwealth of Massachusetts and
the National Municipals Fund is a corporation organized under the laws of the
State of Maryland. Each Fund maintains its principal place of business at
Gateway Center Three, Newark, New Jersey 07102. Shares of National Municipals
Fund are divided into three classes, designated Class A, Class B and Class C.
Shares of Intermediate Series are divided into four classes, designated Class A,
Class B, Class C and Class Z. Municipal Bond Fund consists of three series, one
of which is Intermediate Series.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Upon receipt of such representations
from each of the Funds as Swidler Berlin Shereff Friedman, LLP may require,
Swidler Berlin Shereff Friedman, LLP will deliver the opinion referenced in
paragraph 8.6 herein. The reorganization will comprise the transfer of the
assets of Intermediate Series in exchange for shares of common stock of National
Municipals Fund, and National Municipals Fund's assumption of such Series'
liabilities, if any, and the constructive distribution, after the Closing Date
hereinafter referred to, of such shares of National Municipals Fund to the
shareholders of Intermediate Series, and the termination of Intermediate Series
as provided herein, all upon the terms and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF INTERMEDIATE SERIES IN EXCHANGE FOR SHARES OF NATIONAL
MUNICIPALS FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF
INTERMEDIATE SERIES
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Municipal Bond Fund on
behalf of Intermediate Series agrees to sell, assign, transfer and deliver the
assets of Intermediate Series, as set forth in paragraph 1.2, to National
Municipals Fund, and National Municipals Fund agrees (a) to issue and deliver to
Intermediate Series in exchange therefor the number of shares of Class A, Class
B and Class C shares of Common Stock in National Municipals Fund determined by
dividing the net asset value of the Intermediate Series allocable to Class A,
Class B and Class C shares of beneficial interest (computed in the manner and as
of the time and date set forth in paragraph 2.1) by the net asset value
allocable to a share of National Municipals Fund Class A, Class B and Class C
shares of Common Stock (computed in the manner and as of the time and date set
forth in paragraph 2.2); to issue and deliver to Intermediate Series in exchange
therefor the number of shares of Class A shares of Common Stock in National
Municipals Fund determined by dividing the net asset value of the Intermediate
Series allocable to Class Z shares of beneficial interest (computed in the
manner and as of the time and date set forth in paragraph 2.1) by the net asset
value allocable to a share of National Municipals Fund Class A shares of Common
Stock (computed in the manner and as of the time and date set forth in paragraph
2.2), and (c) to assume all of Intermediate Series' liabilities, if any, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3 (Closing).
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1.2 The assets of Intermediate Series to be acquired by National Municipals
Fund shall include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by such Series and any deferred or prepaid expenses shown as
assets on the books of such Series on the closing date provided in paragraph 3
(Closing Date). National Municipals Fund has no plan or intent to sell or
otherwise dispose of any assets of Intermediate Series, other than in the
ordinary course of business.
1.3 Except as otherwise provided herein, National Municipals Fund will assume
all debts, liabilities, obligations and duties of Intermediate Series of
whatever kind or nature, whether absolute, accrued, contingent or otherwise,
whether or not determinable as of the Closing Date and whether or not
specifically referred to in this Agreement; provided, however, that Intermediate
Series agrees to utilize its best efforts to cause such Series to discharge all
of the known debts, liabilities, obligations and duties of such Series prior to
the Closing Date.
1.4 On or immediately prior to the Closing Date, Intermediate Series will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of each of such Series' investment
company taxable income (computed without regard to any deduction for dividends
paid), net tax-exempt interest income, if any, and realized net capital gains,
if any, for all taxable years through its termination.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable, but in any event within 30 days of the Closing Date
Intermediate Series will distribute PRO RATA to its Class A, Class B and Class C
shareholders of record, determined as of the close of business on the Closing
Date, the Class A, Class B and Class C shares of National Municipals Fund and to
its Class Z shareholders of record, determined as of the close of business on
the Closing Date. The Class Z shares of National Municipals Fund received by
Intermediate Series pursuant to paragraph 1.1 in exchange for their interest in
such Series, and Municipal Bond Fund will file with the Secretary of State of
The Commonwealth of Massachusetts a Certificate of Termination terminating
Intermediate Series. Such distribution will be accomplished by opening accounts
on the books of National Municipals Fund in the names of Intermediate Series'
shareholders and transferring thereto the shares credited to the account of
Intermediate Series on the books of National Municipals Fund. Each account
opened shall be credited with the respective PRO RATA number of National
Municipals Fund Class A, Class B and Class C shares due such Series' Class A,
Class B and Class C shareholders, respectively. Fractional shares of National
Municipals Fund shall be rounded to the third decimal place.
1.6 National Municipals Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Intermediate Series
shareholder holding Intermediate Series receipts for shares of beneficial
interest as of the Closing Date, until National Municipals Fund is notified by
Municipal Bond Fund's transfer agent that such shareholder has surrendered his
or her outstanding Series receipts for shares of beneficial interest or, in the
event of lost, stolen or destroyed receipts for shares of beneficial interest,
posted adequate bond or submitted a lost certificate form, as the case may be,
National Municipals Fund will not permit such shareholder to (1) receive
dividends or other distributions on National Municipals Fund shares in cash
(although such dividends and distributions shall be credited to the account of
such shareholder established on National Municipals Fund's books pursuant to
paragraph 1.5, as provided in the next sentence), (2) exchange National
Municipals Fund shares credited to such shareholder's account for shares of
other Prudential Mutual Funds, or (3) pledge or redeem such shares. In the event
that a shareholder is not permitted to receive dividends or other distributions
on National Municipals Fund shares in cash as provided in the preceding
sentence, National Municipals Fund shall pay such dividends or other
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distributions in additional National Municipals Fund shares, notwithstanding any
election such shareholder shall have made previously with respect to the payment
of dividends or other distributions on shares of Intermediate Series.
Intermediate Series will, at its expense, request its shareholders to surrender
their outstanding Intermediate Series receipts for shares of beneficial
interest, post adequate bond or submit a lost certificate form, as the case may
be.
1.7 Ownership of National Municipals Fund shares will be shown on the books of
the National Municipals Fund's transfer agent. Shares of National Municipals
Fund will be issued in the manner described in National Municipals Fund's
then-current prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of National Municipals
Fund in exchange for shares of Intermediate Series in a name other than that of
the registered holder of the shares being exchanged on the books of Intermediate
Series as of that time shall be paid by the person to whom such shares are to be
issued as a condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission
(SEC) or any state securities commission of Municipal Bond Fund with respect to
Intermediate Series is and shall remain the responsibility of Intermediate
Series up to and including the Termination Date.
1.10 All books and records of Intermediate Series, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to National Municipals Fund from and after the Closing Date and shall
be turned over to National Municipals Fund on or prior to the Termination Date.
2. VALUATION
2.1 The value of Intermediate Series' assets and liabilities to be acquired and
assumed, respectively, by National Municipals Fund shall be the net asset value
computed as of 4:15 p.m., New York time, on the Closing Date (such time and date
being hereinafter called the Valuation Time), using the valuation procedures set
forth in Intermediate Series' then-current prospectus and Municipal Bond Fund's
statement of additional information.
2.2 The net asset value of a share of National Municipals Fund shall be the net
asset value per such share computed on a class-by-class basis as of the
Valuation Time, using the valuation procedures set forth in National Municipals
Fund's then-current prospectus and statement of additional information.
2.3 The number of National Municipals Fund shares to be issued (including
fractional shares, if any) in exchange for Intermediate Series' net assets shall
be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Investments Fund Management LLC (PIFM) in accordance with its
regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be December 4, 1998 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of National
Municipals Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
Intermediate Series, shall deliver to National Municipals Fund at the Closing a
certificate of an authorized officer of State Street stating that
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(a) Intermediate Series' portfolio securities, cash and any other assets have
been transferred in proper form to National Municipals Fund on the Closing Date
and (b) all necessary taxes, if any, have been paid, or provision for payment
has been made, in conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of Intermediate Series and of the net asset value
per share of National Municipals Fund is impracticable, the Closing Date shall
be postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
3.4 Municipal Bond Fund shall deliver to National Municipals Fund on or prior
to the Termination Date the names and addresses of each of the shareholders of
Intermediate Series and the number of outstanding shares owned by each such
shareholder, all as of the close of business on the Closing Date, certified by
the Secretary or Assistant Secretary of Municipal Bond Fund. National Municipals
Fund shall issue and deliver to Municipal Bond Fund at the Closing a
confirmation or other evidence satisfactory to Municipal Bond Fund that shares
of National Municipals Fund have been or will be credited to Intermediate
Series' account on the books of National Municipals Fund. At the Closing each
party shall deliver to the other such bills of sale, checks, assignments, share
certificates, receipts and other documents as such other party or its counsel
may reasonably request to effect the transactions contemplated by this
Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Municipal Bond Fund represents and warrants as follows:
4.1.1 Municipal Bond Fund is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts and
Intermediate Series has been duly established in accordance with the terms
of Series Fund's Declaration of Trust as a separate series of Municipal Bond
Fund;
4.1.2 Municipal Bond Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is
in full force and effect;
4.1.3 Municipal Bond Fund is not, and the execution, delivery and
performance of this Agreement will not, result in violation of any provision
of the Declaration of Trust or By-Laws of Municipal Bond Fund or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which Intermediate Series is a party or by which Intermediate
Series is bound;
4.1.4 All material contracts or other commitments to which Intermediate
Series, or the properties or assets of Intermediate Series, is subject, or
by which Intermediate Series is bound except this Agreement will be
terminated on or prior to the Closing Date without Intermediate Series or
National Municipals Fund incurring any liability or penalty with respect
thereto;
4.1.5 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Series Fund or any of the properties or assets
of Intermediate Series. Municipal Bond Fund knows of no facts that might
form the basis for the institution of such proceedings, and, with respect to
Intermediate Series, Municipal Bond Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
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4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of Intermediate Series at April 30, 1998 and for the year then
ended (copies of which have been furnished to National Municipals Fund) have
been audited by PricewaterhouseCoopers LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial
statements are prepared in accordance with generally accepted accounting
principles and present fairly, in all material respects, the financial
condition, results of operations, changes in net assets and financial
highlights of Intermediate Series as of and for the period ended on such
date, and there are no material known liabilities of Intermediate Series
(contingent or otherwise) not disclosed therein;
4.1.7 Since April 30, 1998, there has not been any material adverse change
in Intermediate Series' financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by Intermediate Series of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by National Municipals Fund. For the purposes of
this paragraph 4.1.7, a decline in net assets or change in the number of
shares outstanding shall not constitute a material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Intermediate Series required by law to have been
filed on or before such dates shall have been timely filed, and all federal
and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Municipal Bond Fund's knowledge, all federal or
other taxes required to be shown on any such return or report have been
shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations,
Intermediate Series has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and Municipal Bond Fund intends to cause such Series to meet those
requirements for the current taxable year; and, for each past calendar year
since it commenced operations, Intermediate Series has made such
distributions as are necessary to avoid the imposition of federal excise tax
or has paid or provided for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of Intermediate Series are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Intermediate Series will, at the time of the Closing, be held in
the name of the persons and in the amounts set forth in the list of
shareholders submitted to National Municipals Fund in accordance with the
provisions of paragraph 3.4. Intermediate Series does not have outstanding
any options, warrants or other rights to subscribe for or purchase any
shares, nor is there outstanding any security convertible into any of its
shares of Intermediate Series, except for the Class B shares of Intermediate
Series which have the conversion feature described in Intermediate Series'
Prospectus dated July 1, 1998;
4.1.11 At the Closing Date, the Municipal Bond Fund will have good and
marketable title to the assets of Intermediate Series to be transferred to
National Municipals Fund pursuant to paragraph 1.1, and full right, power
and authority to sell, assign, transfer and deliver such assets hereunder
free of any liens, claims, charges or other encumbrances, and, upon delivery
and payment for such assets, National Municipals Fund will acquire good and
marketable title thereto;
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4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Trustees of the Municipal Bond Fund and by all
necessary action, other than shareholder approval, on the part of
Intermediate Series, and this Agreement constitutes a valid and binding
obligation of Municipal Bond Fund and, subject to shareholder approval, of
Intermediate Series;
4.1.13 The information furnished and to be furnished by Municipal Bond Fund
for use in applications for orders, registration statements, proxy materials
and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.1.14 On the effective date of the registration statement filed with the
SEC by National Municipals Fund on Form N-14 relating to the shares of
National Municipals Fund issuable hereunder, and any supplement or amendment
thereto (Registration Statement), at the time of the meeting of the
shareholders of Intermediate Series and on the Closing Date, the Proxy
Statement of Intermediate Series, the Prospectus of National Municipals
Fund, and the Statement of Additional Information of National Municipals
Fund to be included in the Registration Statement (collectively, Proxy
Statement) (i) will comply in all material respects with the provisions and
regulations of the Securities Act of 1933 (1933 Act), the Securities
Exchange Act of 1934 (1934 Act) and the Investment Company Act, and the
rules and regulations under such Acts and (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein in light of the circumstances under which they were made or
necessary to make the statements therein not misleading; provided, however,
that the representations and warranties in this paragraph 4.1.14 shall not
apply to statements in or omissions from the Proxy Statement and
Registration Statement made in reliance upon and in conformity with
information furnished by National Municipals Fund for use therein.
4.2 National Municipals Fund represents and warrants as follows:
4.2.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 National Municipals Fund is an open-end, management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.2.3 National Municipals Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of National Municipals Fund or
of any material agreement, indenture, instrument, contract, lease or other
undertaking to which National Municipals Fund is a party or by which
National Municipals Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or
threatened against National Municipals Fund or any of its properties or
assets, except as previously disclosed in writing to the Municipal Bond
Fund. Except as previously disclosed in writing to Municipal Bond Fund,
National Municipals Fund knows of no facts that might form the basis for the
institution of such proceedings, and National Municipals Fund is not a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
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4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of National Municipals Fund at December 31, 1997 and for the
fiscal year then ended (copies of which have been furnished to Series Fund)
have been audited by PricewaterhouseCoopers LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial
statements are prepared in accordance with generally accepted accounting
principles and present fairly, in all material respects, the financial
condition, results of operations, changes in net assets and financial
highlights of National Municipals Fund as of and for the period ended on
such date, and there are no material known liabilities of National
Municipals Fund (contingent or otherwise) not disclosed therein;
4.2.6 Since December 31, 1997, there has not been any material adverse
change in National Municipals Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course
of business, or any incurrence by National Municipals Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by Municipal Bond Fund. For
the purposes of this paragraph 4.2.6, a decline in net asset value per share
or a decrease in the number of shares outstanding shall not constitute a
material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of National Municipals Fund required by law to have been
filed on or before such dates shall have been filed, and all federal and
other taxes shown as due on said returns and reports shall have been paid
insofar as due, or provision shall have been made for the payment thereof,
and, to the best of National Municipals Fund's knowledge, all federal or
other taxes required to be shown on any such return or report are shown on
such return or report, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations, National
Municipals Fund has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and intends to meet those requirements for the current taxable year;
and, for each past calendar year since it commenced operations, National
Municipals Fund has made such distributions as are necessary to avoid the
imposition of federal excise tax or has paid or provided for the payment of
any excise tax imposed;
4.2.9 All issued and outstanding shares of National Municipals Fund are,
and at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by this
Agreement, National Municipals Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares nor
is there outstanding any security convertible into any of its shares, except
for the Class B shares which have the conversion feature described in
National Municipals Fund's Prospectus dated March 4, 1998;
4.2.10 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of National Municipals Fund and by
all necessary corporate action on the part of National Municipals Fund, and
this Agreement constitutes a valid and binding obligation of National
Municipals Fund;
4.2.11 The shares of National Municipals Fund to be issued and delivered to
Municipal Bond Fund for and on behalf of Intermediate Series pursuant to
this Agreement will, at the Closing Date, have been duly authorized and,
when issued and delivered as provided in this Agreement, will be duly and
validly issued and outstanding shares of National Municipals Fund, fully
paid and non-assessable;
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4.2.12 The information furnished and to be furnished by National Municipals
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of
the meeting of the shareholders of Intermediate Series and on the Closing
Date, the Proxy Statement and the Registration Statement (i) will comply in
all material respects with the provisions of the 1933 Act, the 1934 Act and
the Investment Company Act and the rules and regulations under such Acts,
(ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information furnished by Intermediate
Series for use therein.
5. COVENANTS OF NATIONAL MUNICIPALS FUND AND MUNICIPAL BOND FUND
5.1 Municipal Bond Fund, with respect to Intermediate Series, and National
Municipals Fund each covenants to operate its respective business in the
ordinary course between the date hereof and the Closing Date, it being
understood that the ordinary course of business will include declaring and
paying customary dividends and other distributions and such changes in
operations as are contemplated by the normal operations of the Funds, except as
may otherwise be required by paragraph 1.4 hereof.
5.2 Municipal Bond Fund covenants to call a meeting of the shareholders of
Intermediate Series to consider and act upon this Agreement and to take all
other action necessary to obtain approval of the transactions contemplated
hereby (including the determinations of its Trustees as set forth in Rule
17a-8(a) under the Investment Company Act).
5.3 Municipal Bond Fund covenants that National Municipals Fund shares to be
received for and on behalf of Intermediate Series in accordance herewith are not
being acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4 Municipal Bond Fund covenants that it will assist National Municipals Fund
in obtaining such information as National Municipals Fund reasonably requests
concerning the beneficial ownership of Intermediate Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Municipal Bond Fund covenants to prepare the Proxy Statement in compliance
with the 1934 Act, the Investment Company Act and the rules and regulations
under each Act.
5.7 Municipal Bond Fund covenants that it will, from time to time, as and when
requested by National Municipals Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
or cause to be taken such further action, as National Municipals Fund may deem
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necessary or desirable in order to vest in and confirm to National Municipals
Fund title to and possession of all the assets of Intermediate Series to be
sold, assigned, transferred and delivered hereunder and otherwise to carry out
the intent and purpose of this Agreement.
5.8 National Municipals Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 National Municipals Fund covenants that it will, from time to time, as and
when requested by Municipal Bond Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
and cause to be taken such further action, as Municipal Series Fund may deem
necessary or desirable in order to (i) vest in and confirm to the Municipal Bond
Fund title to and possession of all the shares of National Municipals Fund to be
transferred to the shareholders of Intermediate Series pursuant to this
Agreement and (ii) assume all of the liabilities of Intermediate Series in
accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF MUNICIPAL BOND FUND
The obligations of Municipal Bond Fund to consummate the transactions
provided for herein shall be subject to the performance by National Municipals
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of National Municipals Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 National Municipals Fund shall have delivered to Municipal Bond Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of National Municipals Fund, in form and substance satisfactory to
Municipal Bond Fund and dated as of the Closing Date, to the effect that the
representations and warranties of National Municipals Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transaction contemplated by this Agreement, and as to such other matters
as Municipal Bond Fund shall reasonably request.
6.3 Municipal Bond Fund shall have received on the Closing Date a favorable
opinion from Swidler Berlin Shereff Friedman, LLP, counsel to National
Municipals Fund, dated as of the Closing Date, to the effect that:
6.3.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
National Municipals Fund and, assuming due authorization, execution and
delivery of the Agreement by Municipal Bond Fund on behalf of Intermediate
Series, is a valid and binding obligation of National Municipals Fund
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
B-9(A)
<PAGE>
6.3.3 The shares of National Municipals Fund to be distributed to the
shareholders of Intermediate Series under this Agreement, assuming their due
authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of National Municipals Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with National Municipals Fund's Articles of Incorporation or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement dated May 2,
1988 between National Municipals Fund and Prudential Investments Fund
Management LLC, as successor to Prudential Mutual Fund Management, Inc., (b)
the Custodian Contract dated July 26, 1990 between National Municipals Fund
and State Street Bank and Trust Company, (c) the Distribution Agreement
dated May 8, 1996 between National Municipals Fund and Prudential Securities
Incorporated and (d) the Transfer Agency and Service Agreement dated January
1, 1988 between National Municipals Fund and Prudential Mutual Fund Services
LLC, as successor to Prudential Mutual Fund Services, Inc.; provided,
however, that such counsel may state that they express no opinion as to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by National Municipals Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the Investment Company Act and such as may be
required under state Blue Sky or securities laws;
6.3.6 National Municipals Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or government proceeding
instituted or threatened against National Municipals Fund that could be
required to be disclosed in its registration statement on Form N-1A and is
not so disclosed.
Such opinion may rely on an opinion of Maryland Counsel to the extent it
addresses Maryland law.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND
The obligations of National Municipals Fund to complete the transactions
provided for herein shall be subject to the performance by Municipal Bond Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
7.1 All representations and warranties of Municipal Bond Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Series Fund shall have delivered to National Municipals Fund on the Closing
Date a statement of the assets and liabilities of Intermediate Series, which
shall be prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of the portfolio securities of
Intermediate Series showing the adjusted tax base of such securities by lot, as
of the Closing Date, certified by the Treasurer of Municipal Bond Fund.
B-10(A)
<PAGE>
7.3 Municipal Bond Fund shall have delivered to National Municipals Fund on the
Closing Date a certificate executed in its name by its President or one of its
Vice Presidents, in form and substance satisfactory to National Municipals Fund
and dated as of the Closing Date, to the effect that the representations and
warranties of Municipal Bond Fund made in this Agreement are true and correct at
and as of the Closing Date except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as National
Municipals Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Municipal Bond Fund shall have
declared and paid to the shareholders of record of Intermediate Series one or
more dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of such
Series' investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt interest income, if any, and
realized net capital gain, if any, of Intermediate Series for all completed
taxable years from the inception of such Series through April 30, 1998, and for
the period from and after April 30, 1998 through the Closing Date.
7.5 National Municipals Fund shall have received on the Closing Date a
favorable opinion from Swidler Berlin Shereff Friedman, LLP, special counsel to
Series Fund, dated as of the Closing Date, to the effect that:
7.5.1 Municipal Bond Fund is duly organized and validly existing under the
laws of the Commonwealth of Massachusetts with power under its Declaration
of Trust to own all of its properties and assets and, to the knowledge of
such counsel, to carry on its business as presently conducted and
Intermediate Series has been duly established in accordance with the terms
of the Municipal Bond Fund's Declaration of Trust as a separate series of
Municipal Bond Fund;
7.5.2 This Agreement has been duly authorized, executed and delivered by
Municipal Bond Fund and constitutes a valid and legally binding obligation
of Municipal Bond Fund enforceable against the assets of Intermediate Series
in accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Municipal Bond Fund of its obligations hereunder will not,
(i) violate Municipal Bond Fund's Declaration of Trust or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement, dated June
1, 1995, between Municipal Bond Fund and Prudential Investments Fund
Management LLC, as successor to Prudential Mutual Fund Management, Inc., (b)
the Custodian Contract, dated August 25, 1987, between Municipal Bond Fund
and State Street Bank and Trust Company, (c) the Distribution Agreement
dated May 8, 1996, between Municipal Bond Fund and Prudential Securities
Incorporated and the Transfer Agency and Service Agreement, dated January 1,
1988, between Municipal Bond Fund and Prudential Mutual Fund Services LLC,
as successor to Prudential Mutual Fund Services, Inc.; provided, however,
that such counsel may state that insofar as performance by Municipal Bond
Fund of its obligations under this Agreement is concerned they express no
opinion as to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Municipal Bond Fund under the federal laws of the United States
and the laws of The Commonwealth of Massachusetts for the consummation of
the transactions contemplated by this Agreement have been obtained;
B-11(A)
<PAGE>
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Series Fund, involving Intermediate Series,
that would be required to be disclosed in its Registration Statement on Form
N-1A and is not so disclosed; and
7.5.6 Municipal Bond Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND AND
MUNICIPAL BOND FUND
The obligations of National Municipals Fund and Municipal Bond Fund
hereunder are subject to the further conditions that on or before the Closing
Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Municipal Bond Fund and
the Board of Directors of National Municipals Fund, as to the determinations set
forth in Rule 17a-8(a) under the Investment Company Act, (b) the Board of
Directors of National Municipals Fund as to the assumption by the National
Municipals Fund of the liabilities of Intermediate Series and (c) the holders of
the outstanding shares of Intermediate Series in accordance with the provisions
of the Municipal Bond Fund's Declaration of Trust and By-Laws, and certified
copies of the resolutions evidencing such approvals shall have been delivered to
National Municipals Fund.
8.2 Any proposed change to National Municipals Fund's operations that may be
approved by the Board of Directors of National Municipals Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
National Municipals Fund shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of National Municipals Fund in accordance with
the Investment Company Act and the provisions of the General Corporation Law of
the State of Maryland, and certified copies of the resolution evidencing such
approval shall have been delivered to Municipal Bond Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by National Municipals Fund or Municipal Bond
Fund to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of National Municipals Fund or Intermediate
Series, provided, that either party hereto may for itself waive any part of this
condition.
B-12(A)
<PAGE>
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 The Funds shall have received on or before the Closing Date opinions of
Swidler Berlin Shereff Friedman, LLP or a ruling from the Internal Revenue
Service with respect to Intermediate Series satisfactory to each of them,
substantially to the effect that for federal income tax purposes:
8.6.1 The acquisition by National Municipals Fund of the assets of
Intermediate Series solely in exchange for voting shares of National
Municipals Fund and the assumption by National Municipals Fund of
Intermediate Series' liabilities, if any, followed by the distribution of
National Municipals Fund's voting shares pro rata to Intermediate Series'
shareholders, pursuant to its termination and constructively in exchange for
Intermediate Series' shares, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code, and each Fund
will be "a party to a reorganization" within the meaning of Section 368(b)
of the Internal Revenue Code;
8.6.2 Intermediate Series' shareholders will recognize no gain or loss upon
the constructive exchange of all of their shares of Intermediate Series
solely for shares of National Municipals Fund in complete termination of
such Series;
8.6.3 No gain or loss will be recognized to Intermediate Series upon the
transfer of its assets to National Municipals Fund solely in exchange for
shares of National Municipals Fund and the assumption by National Municipals
Fund of Intermediate Series' liabilities, if any, and the subsequent
distribution of those shares to Intermediate Series' shareholders in
complete termination of Intermediate Series;
8.6.4 No gain or loss will be recognized to National Municipals Fund upon
the acquisition of Intermediate Series' assets solely in exchange for shares
of National Municipals Fund and the assumption of Intermediate Series'
liabilities, if any;
8.6.5 National Municipals Fund's basis for the assets of Intermediate
Series acquired in the Reorganization will be the same as the basis thereof
when held by Intermediate Series immediately before the transfer, and the
holding period of such assets acquired by National Municipals Fund will
include the holding period thereof when held by Intermediate Series;
8.6.6 Intermediate Series shareholders' basis for the shares of National
Municipals Fund to be received by them pursuant to the reorganization will
be the same as their basis for the shares of Intermediate Series to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of National Municipals Fund shares to be received
by Intermediate Series' shareholders will include the period during which
the shares of Intermediate Series to be constructively surrendered in
exchange therefor were held; provided that the Intermediate Series shares
surrendered were held as capital assets by those shareholders on the date of
the exchange.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
B-13(A)
<PAGE>
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to National Municipals
Fund and Intermediate Series pro rata in a fair and equitable manner in
proportion to its assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
National Municipals Fund or Municipal Bond Fund as to Intermediate Series
may at its option terminate this Agreement at or prior to the Closing Date
because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Municipal Bond Fund and National Municipals
Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of National Municipals Fund or any Trustee or officer of Municipal Bond Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Municipal Bond Fund pursuant to paragraph 5.2, no such amendment may have the
effect of changing the provisions for determining the number of shares of
National Municipals Fund to be distributed to Intermediate Series' shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, Newark, New Jersey 07102,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
B-14(A)
<PAGE>
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF MUNICIPAL BOND FUND; AGREEMENT
AN OBLIGATION ONLY OF INTERMEDIATE SERIES, AND ENFORCEABLE ONLY AGAINST ASSETS
OF INTERMEDIATE SERIES.
The name "Prudential Municipal Bond Fund" is the designation of the Trustees
from time to time acting under an Amended and Restated Declaration of Trust
dated August 17, 1994, as the same may be from time to time amended, and the
name "Intermediate Series" is the designation of a portfolio of the assets of
Municipal Bond Fund. National Municipals Fund acknowledges that it must look,
and agrees that it shall look, solely to the assets of Intermediate Series for
the enforcement of any claims arising out of or based on the obligations of
Municipal Bond Fund hereunder, and with respect to obligations relating to
Intermediate Series, only to the assets of Intermediate Series, and in
particular that (i) neither the Trustees, officers, agents or shareholders of
Series Fund assume or shall have any personal liability for obligations of
Municipal Bond Fund hereunder, and (ii) none of the assets of Municipal Bond
Fund other than the portfolio assets of Intermediate Series may be resorted to
for the enforcement of any claim based on the obligations of Municipal Bond Fund
hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential Municipal Bond Fund
By /s/ Richard A. Redeker
----------------------
PRESIDENT
Prudential National Municipals Fund, Inc.
By /s/ Richard A. Redeker
----------------------
PRESIDENT
B-15(A)
<PAGE>
Appendix B
AGREEMENT AND PLAN OF REORGANIZATIONS
Agreement and Plan of Reorganizations (Agreement) made as of the day of
October, 1998, by and between Prudential Municipal Series Fund (Series
Fund)--Maryland Series and Michigan Series and Prudential National Municipals
Fund, Inc. (National Municipals Fund and, collectively with Series Fund, the
Funds and each individually, a Fund). The Series Fund is a business trust
organized under the laws of the Commonwealth of Massachusetts and the National
Municipals Fund is a corporation organized under the laws of the State of
Maryland. Each Fund maintains its principal place of business at Gateway Center
Three, Newark, New Jersey 07102. Shares of both Funds are divided into three
classes, designated Class A, Class B and Class C. Series Fund consists of
thirteen series, two of which are the Maryland Series and Michigan Series
(collectively, the Series and each individually, a Series).
This Agreement is intended to be, and is adopted as, a plan of
reorganizations pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganizations will comprise the
transfer of the assets of the Maryland Series and Michigan Series, respectively,
in exchange for shares of common stock of National Municipals Fund, and National
Municipals Fund's assumption of such Series' liabilities, if any, and the
constructive distribution, after the Closing Date hereinafter referred to, of
such shares of National Municipals Fund to the shareholders of the respective
Series, and the termination of the Series as provided herein, all upon the terms
and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE SERIES IN EXCHANGE FOR SHARES OF NATIONAL
MUNICIPALS FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF
THE SERIES
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Series Fund on behalf of
Maryland and Michigan Series agrees to sell, assign, transfer and deliver the
assets of each Series, as set forth in paragraph 1.2, to National Municipals
Fund, and National Municipals Fund agrees (a) to issue and deliver to each
Series in exchange therefor the number of shares of Class A Common Stock in
National Municipals Fund determined by dividing the net asset value of the
respective Series allocable to Class A, Class B and Class C shares of beneficial
interest (computed in the manner and as of the time and date set forth in
paragraph 2.1) by the net asset value allocable to a share of National
Municipals Fund Class A Common Stock (computed in the manner and as of the time
and date set forth in paragraph 2.2) and (b) to assume all of each Series'
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall take
place at the closing provided for in paragraph 3 (Closing).
1.2 The assets of each Series to be acquired by National Municipals Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by such Series and any deferred or prepaid expenses shown as assets on the
books of such Series on the closing date provided in paragraph 3 (Closing Date).
National Municipals Fund has no plan or intent to sell or otherwise dispose of
any assets of the Series, other than in the ordinary course of business.
B-1(B)
<PAGE>
1.3 Except as otherwise provided herein, National Municipals Fund will assume
all debts, liabilities, obligations and duties of each Series of whatever kind
or nature, whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date and whether or not specifically referred to
in this Agreement; provided, however, that each Series agrees to utilize its
best efforts to cause such Series to discharge all of the known debts,
liabilities, obligations and duties of such Series prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, each Series will declare and
pay to its shareholders of record dividends and/or other distributions so that
it will have distributed substantially all (and in any event not less than
ninety-eight percent) of each of such Series' investment company taxable income
(computed without regard to any deduction for dividends paid), net tax-exempt
interest income, if any, and realized net capital gains, if any, for all taxable
years through its termination.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable, but in any event within 30 days of the Closing Date
each Series will distribute PRO RATA to its Class A, Class B and Class C
shareholders of record, determined as of the close of business on the Closing
Date, the Class A shares of National Municipals Fund received by the Series
pursuant to paragraph 1.1 in exchange for their interest in such Series, and
Municipal Series Fund will file with the Secretary of State of The Commonwealth
of Massachusetts a Certificate of Termination terminating each Series. Such
distribution will be accomplished by opening accounts on the books of National
Municipals Fund in the names of each Series' shareholders and transferring
thereto the shares credited to the account of the respective Series on the books
of National Municipals Fund. Each account opened shall be credited with the
respective PRO RATA number of National Municipals Fund Class A shares due such
Series' Class A, Class B and Class C shareholders, respectively. Fractional
shares of National Municipals Fund shall be rounded to the third decimal place.
1.6 National Municipals Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Series shareholder
holding Series receipts for shares of beneficial interest as of the Closing
Date, until National Municipals Fund is notified by Series Fund's transfer agent
that such shareholder has surrendered his or her outstanding Series receipts for
shares of beneficial interest or, in the event of lost, stolen or destroyed
receipts for shares of beneficial interest, posted adequate bond or submitted a
lost certificate form, as the case may be, National Municipals Fund will not
permit such shareholder to (1) receive dividends or other distributions on
National Municipals Fund shares in cash (although such dividends and
distributions shall be credited to the account of such shareholder established
on National Municipals Fund's books pursuant to paragraph 1.5, as provided in
the next sentence), (2) exchange National Municipals Fund shares credited to
such shareholder's account for shares of other Prudential Mutual Funds, or (3)
pledge or redeem such shares. In the event that a shareholder is not permitted
to receive dividends or other distributions on National Municipals Fund shares
in cash as provided in the preceding sentence, National Municipals Fund shall
pay such dividends or other distributions in additional National Municipals Fund
shares, notwithstanding any election such shareholder shall have made previously
with respect to the payment of dividends or other distributions on shares of the
Series. Each Series will, at its expense, request its shareholders to surrender
their outstanding Series receipts for shares of beneficial interest, post
adequate bond or submit a lost certificate form, as the case may be.
1.7 Ownership of National Municipals Fund shares will be shown on the books of
the National Municipals Fund's transfer agent. Shares of National Municipals
Fund will be issued in the manner described in National Municipals Fund's
then-current prospectus and statement of additional information.
B-2(B)
<PAGE>
1.8 Any transfer taxes payable upon issuance of shares of National Municipals
Fund in exchange for shares of the Series in a name other than that of the
registered holder of the shares being exchanged on the books of that Series as
of that time shall be paid by the person to whom such shares are to be issued as
a condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission
(SEC) or any state securities commission of Series Fund with respect to a Series
is and shall remain the responsibility of the Series up to and including the
Termination Date.
1.10 All books and records of Series Fund, including all books and records
required to be maintained under the Investment Company Act of 1940, as amended
(Investment Company Act) and the rules and regulations thereunder, shall be
available to National Municipals Fund from and after the Closing Date and shall
be turned over to National Municipals Fund on or prior to the Termination Date.
2. VALUATION
2.1 The value of each Series' assets and liabilities to be acquired and
assumed, respectively, by National Municipals Fund shall be the net asset value
computed as of 4:15 p.m., New York time, on the Closing Date (such time and date
being hereinafter called the Valuation Time), using the valuation procedures set
forth in such Series' then-current prospectus and Series Fund's statement of
additional information.
2.2 The net asset value of a share of National Municipals Fund shall be the net
asset value per such share computed on a class-by-class basis as of the
Valuation Time, using the valuation procedures set forth in National Municipals
Fund's then-current prospectus and statement of additional information.
2.3 The number of National Municipals Fund shares to be issued (including
fractional shares, if any) in exchange for the Series' net assets shall be
calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Investments Fund Management LLC (PIFM) in accordance with its
regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be , 1998 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of National
Municipals Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for each
Series, shall deliver to National Municipals Fund at the Closing a certificate
of an authorized officer of State Street stating that (a) the applicable Series'
portfolio securities, cash and any other assets have been transferred in proper
form to National Municipals Fund on the Closing Date and (b) all necessary
taxes, if any, have been paid, or provision for payment has been made, in
conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of the Series and of the net asset value per share
of National Municipals Fund is impracticable, the Closing Date shall be
postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
B-3(B)
<PAGE>
3.4 Series Fund shall deliver to National Municipals Fund on or prior to the
Termination Date the names and addresses of each of the shareholders of each
Series and the number of outstanding shares owned by each such shareholder, all
as of the close of business on the Closing Date, certified by the Secretary or
Assistant Secretary of Series Fund. National Municipals Fund shall issue and
deliver to Series Fund at the Closing a confirmation or other evidence
satisfactory to Series Fund that shares of National Municipals Fund have been or
will be credited to each Series' account on the books of National Municipals
Fund. At the Closing each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, receipts and other documents as such
other party or its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Series Fund represents and warrants as follows:
4.1.1 Series Fund is a business trust duly organized and validly existing under
the laws of The Commonwealth of Massachusetts and each of the Series has been
duly established in accordance with the terms of Series Fund's Declaration of
Trust as a separate series of Series Fund;
4.1.2 Series Fund is an open-end, management investment company duly registered
under the Investment Company Act, and such registration is in full force and
effect;
4.1.3 Series Fund is not, and the execution, delivery and performance of this
Agreement will not, result in violation of any provision of the Declaration of
Trust or By-Laws of Series Fund or of any material agreement, indenture,
instrument, contract, lease or other undertaking to which any Series is a party
or by which any Series is bound;
4.1.4 All material contracts or other commitments to which any Series, or the
properties or assets of any Series, is subject, or by which any Series is bound
except this Agreement will be terminated on or prior to the Closing Date without
such Series or National Municipals Fund incurring any liability or penalty with
respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against Series Fund or any of the properties or assets of
any Series. Series Fund knows of no facts that might form the basis for the
institution of such proceedings, and, with respect to each Series, Series Fund
is not a party to or subject to the provisions of any order, decree or judgment
of any court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of each Series at August 31, 1997 and for the year then ended (copies
of which have been furnished to National Municipals Fund) have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are prepared in
accordance with generally accepted accounting principles and present fairly, in
all material respects, the financial condition, results of operations, changes
in net assets and financial highlights of such Series as of and for the period
ended on such date, and there are no material known liabilities of each such
Series (contingent or otherwise) not disclosed therein;
4.1.7 Since August 31, 1997, there has not been any material adverse change in
any Series' financial condition, assets, liabilities or business other than
changes occurring in the ordinary course of business, or any incurrence by any
Series of indebtedness maturing more than one year from the date such
indebtedness
B-4(B)
<PAGE>
was incurred, except as otherwise disclosed to and accepted by National
Municipals Fund. For the purposes of this paragraph 4.1.7, a decline in net
assets or change in the number of shares outstanding shall not constitute a
material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of each Series required by law to have been filed on or
before such dates shall have been timely filed, and all federal and other taxes
shown as due on said returns and reports shall have been paid insofar as due, or
provision shall have been made for the payment thereof, and, to the best of
Series Fund's knowledge, all federal or other taxes required to be shown on any
such return or report have been shown on such return or report, no such return
is currently under audit and no assessment has been asserted with respect to
such returns;
4.1.9 For each past taxable year since it commenced operations, each Series has
met the requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and Series Fund
intends to cause such Series to meet those requirements for the current taxable
year; and, for each past calendar year since it commenced operations, each
Series has made such distributions as are necessary to avoid the imposition of
federal excise tax or has paid or provided for the payment of any excise tax
imposed;
4.1.10 All issued and outstanding shares of the Series are, and at the Closing
Date will be, duly and validly authorized, issued and outstanding, fully paid
and non-assessable. All issued and outstanding shares of each Series will, at
the time of the Closing, be held in the name of the persons and in the amounts
set forth in the list of shareholders submitted to National Municipals Fund in
accordance with the provisions of paragraph 3.4. No Series has outstanding any
options, warrants or other rights to subscribe for or purchase any shares, nor
is there outstanding any security convertible into any of its shares of Series
Fund, except for the Class B shares of each Series which have the conversion
feature described in Series Fund's Prospectus dated October 30, 1997;
4.1.11 At the Closing Date, the Series Fund will have good and marketable title
to the assets of each Series to be transferred to National Municipals Fund
pursuant to paragraph 1.1, and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder free of any liens, claims, charges or
other encumbrances, and, upon delivery and payment for such assets, National
Municipals Fund will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been duly
authorized by the Trustees of the Series Fund and by all necessary action, other
than shareholder approval, on the part of each Series, and this Agreement
constitutes a valid and binding obligation of Series Fund and, subject to
shareholder approval, of each Series;
4.1.13 The information furnished and to be furnished by Series Fund for use in
applications for orders, registration statements, proxy materials and other
documents that may be necessary in connection with the transactions contemplated
hereby is and shall be accurate and complete in all material respects and is in
compliance and shall comply in all material respects with applicable federal
securities and other laws and regulations; and
4.1.14 On the effective date of the registration statement filed with the SEC
by National Municipals Fund on Form N-14 relating to the shares of National
Municipals Fund issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders of such
Series and on the Closing Date, the Proxy Statement of such Series, the
Prospectus of National Municipals Fund, and the Statement of Additional
Information of National Municipals Fund to be included in the Registration
B-5(B)
<PAGE>
Statement (collectively, Proxy Statement) (i) will comply in all material
respects with the provisions and regulations of the Securities Act of 1933 (1933
Act), the Securities Exchange Act of 1934 (1934 Act) and the Investment Company
Act, and the rules and regulations under such Acts and (ii) will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein in light of the circumstances under which they were made or
necessary to make the statements therein not misleading; provided, however, that
the representations and warranties in this paragraph 4.1.14 shall not apply to
statements in or omissions from the Proxy Statement and Registration Statement
made in reliance upon and in conformity with information furnished by National
Municipals Fund for use therein.
4.2 National Municipals Fund represents and warrants as follows:
4.2.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 National Municipals Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is in
full force and effect;
4.2.3 National Municipals Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision of
the Articles of Incorporation or By-Laws of National Municipals Fund or of any
material agreement, indenture, instrument, contract, lease or other undertaking
to which National Municipals Fund is a party or by which National Municipals
Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against National Municipals Fund or any of its properties or assets, except as
previously disclosed in writing to the Series Fund. Except as previously
disclosed in writing to Series Fund, National Municipals Fund knows of no facts
that might form the basis for the institution of such proceedings, and National
Municipals Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of National Municipals Fund at December 31, 1997 and for the fiscal
year then ended (copies of which have been furnished to Series Fund) have been
audited by PricewaterhouseCoopers LLP, independent accountants, in accordance
with generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and present
fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of National
Municipals Fund as of and for the period ended on such date, and there are no
material known liabilities of National Municipals Fund (contingent or otherwise)
not disclosed therein;
4.2.6 Since December 31, 1997, there has not been any material adverse change
in National Municipal Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by National Municipals Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise disclosed
to and accepted by Series Fund. For the purposes of this paragraph 4.2.6, a
decline in net asset value per share or a decrease in the number of shares
outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of National Municipals Fund required by law to have been
filed on or before such dates shall have been filed, and all federal and other
taxes shown as due on said returns and reports shall have been paid insofar as
due, or
B-6(B)
<PAGE>
provision shall have been made for the payment thereof, and, to the best of
National Municipals Fund's knowledge, all federal or other taxes required to be
shown on any such return or report are shown on such return or report, no such
return is currently under audit and no assessment has been asserted with respect
to such returns;
4.2.8 For each past taxable year since it commenced operations, National
Municipals Fund has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year; and, for each
past calendar year since it commenced operations, National Municipals Fund has
made such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of National Municipals Fund are, and at
the Closing Date will be, duly and validly authorized, issued and outstanding,
fully paid and non-assessable. Except as contemplated by this Agreement,
National Municipals Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares nor is there
outstanding any security convertible into any of its shares, except for the
Class B shares which have the conversion feature described in National
Municipals Fund's Prospectus dated March 4, 1998;
4.2.10 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Directors of National Municipals Fund and by all
necessary corporate action on the part of National Municipals Fund, and this
Agreement constitutes a valid and binding obligation of National Municipals
Fund;
4.2.11 The shares of National Municipals Fund to be issued and delivered to
Series Fund for and on behalf of each Series pursuant to this Agreement will, at
the Closing Date, have been duly authorized and, when issued and delivered as
provided in this Agreement, will be duly and validly issued and outstanding
shares of National Municipals Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by National Municipals
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in all
material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of the
meeting of the shareholders of each Series and on the Closing Date, the Proxy
Statement and the Registration Statement (i) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the Investment
Company Act and the rules and regulations under such Acts, (ii) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (iii) with respect to the Registration Statement, at the time it
becomes effective, it will not contain an untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein in the
light of the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this paragraph 4.2.13 shall
not apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon and in conformity with information
furnished by the Series for use therein.
B-7(B)
<PAGE>
5. COVENANTS OF NATIONAL MUNICIPALS FUND AND MUNICIPAL SERIES FUND
5.1 Series Fund, with respect to each Series, and National Municipals Fund each
covenants to operate its respective business in the ordinary course between the
date hereof and the Closing Date, it being understood that the ordinary course
of business will include declaring and paying customary dividends and other
distributions and such changes in operations as are contemplated by the normal
operations of the Funds, except as may otherwise be required by paragraph 1.4
hereof.
5.2 Series Fund covenants to call a meeting of the shareholders of each Series
to consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated hereby (including the
determinations of its Trustees as set forth in Rule 17a-8(a) under the
Investment Company Act).
5.3 Series Fund covenants that National Municipals Fund shares to be received
for and on behalf of each Series in accordance herewith are not being acquired
for the purpose of making any distribution thereof other than in accordance with
the terms of this Agreement.
5.4 Series Fund covenants that it will assist National Municipals Fund in
obtaining such information as National Municipals Fund reasonably requests
concerning the beneficial ownership of each Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Series Fund covenants to prepare the Proxy Statement in compliance with the
1934 Act, the Investment Company Act and the rules and regulations under each
Act.
5.7 Series Fund covenants that it will, from time to time, as and when
requested by National Municipals Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
or cause to be taken such further action, as National Municipals Fund may deem
necessary or desirable in order to vest in and confirm to National Municipals
Fund title to and possession of all the assets of each Series to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
5.8 National Municipals Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 National Municipals Fund covenants that it will, from time to time, as and
when requested by Series Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take and cause to
be taken such further action, as Municipal Series Fund may deem necessary or
desirable in order to (i) vest in and confirm to the Series Fund title to and
possession of all the shares of National Municipals Fund to be transferred to
the shareholders of each Series pursuant to this Agreement and (ii) assume all
of the liabilities of each Series in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SERIES FUND
The obligations of Series Fund to consummate the transactions provided for
herein shall be subject to the performance by National Municipals Fund of all
the obligations to be performed by it hereunder on or before the Closing Date
and the following further conditions:
B-8(B)
<PAGE>
6.1 All representations and warranties of National Municipals Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 National Municipals Fund shall have delivered to Series Fund on the Closing
Date a certificate executed in its name by the President or a Vice President of
National Municipals Fund, in form and substance satisfactory to Series Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of National Municipals Fund in this Agreement are true and correct at
and as of the Closing Date, except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as Series Fund
shall reasonably request.
6.3 Series Fund shall have received on the Closing Date a favorable opinion
from Swidler Berlin Shereff Friedman, LLP, counsel to National Municipals Fund,
dated as of the Closing Date, to the effect that:
6.3.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
National Municipals Fund and, assuming due authorization, execution and
delivery of the Agreement by Municipal Series Fund on behalf of each Series,
is a valid and binding obligation of National Municipals Fund enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
6.3.3 The shares of National Municipals Fund to be distributed to the
shareholders of each Series under this Agreement, assuming their due
authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of National Municipals Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with National Municipals Fund's Articles of Incorporation or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement dated
January 22, 1990 between National Municipals Fund and Prudential Investments
Fund Management LLC, as successor to Prudential Mutual Fund Management,
Inc., (b) the Custodian Contract dated July 26, 1990 between National
Municipals Fund and State Street Bank and Trust Company, (c) the
Distribution Agreement dated June 1, 1998 between National Municipals Fund
and Prudential Investment Management Services LLC and (d) the Transfer
Agency and Service Agreement dated January 1, 1990 between National
Municipals Fund and Prudential Mutual Fund Services LLC, as successor to
Prudential Mutual Fund Services, Inc.; provided, however, that such counsel
may state that they express no opinion as to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by National Municipals Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the Investment Company Act and such as may be
required under state Blue Sky or securities laws;
B-9(B)
<PAGE>
6.3.6 National Municipals Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or government proceeding
instituted or threatened against National Municipals Fund that could be
required to be disclosed in its registration statement on Form N-1A and is
not so disclosed.
Such opinion may rely on an opinion of Maryland Counsel to the extent it
addresses Maryland law.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND
The obligations of National Municipals Fund to complete the transactions
provided for herein shall be subject to the performance by Series Fund of all
the obligations to be performed by it hereunder on or before the Closing Date
and the following further conditions:
7.1 All representations and warranties of Series Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Series Fund shall have delivered to National Municipals Fund on the Closing
Date a statement of the assets and liabilities of each Series, which shall be
prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of the portfolio securities of each
Series showing the adjusted tax base of such securities by lot, as of the
Closing Date, certified by the Treasurer of Series Fund.
7.3 Series Fund shall have delivered to National Municipals Fund on the Closing
Date a certificate executed in its name by its President or one of its Vice
Presidents, in form and substance satisfactory to National Municipals Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of Series Fund made in this Agreement are true and correct at and as
of the Closing Date except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as National
Municipals Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Series Fund shall have
declared and paid to the shareholders of record of each Series one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of such
Series' investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt interest income, if any, and
realized net capital gain, if any, of such Series for all completed taxable
years from the inception of such Series through August 31, 1997, and for the
period from and after August 31, 1997 through the Closing Date.
7.5 National Municipals Fund shall have received on the Closing Date a
favorable opinion from Swidler Berlin Shereff Friedman, LLP, special counsel to
Series Fund, dated as of the Closing Date, to the effect that:
7.5.1 Series Fund is duly organized and validly existing under the laws of
the Commonwealth of Massachusetts with power under its Declaration of Trust
to own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted and each Series has
been duly established in accordance with the terms of the Series Fund's
Declaration of Trust as a separate series of Series Fund;
B-10(B)
<PAGE>
7.5.2 This Agreement has been duly authorized, executed and delivered by
Series Fund and constitutes a valid and legally binding obligation of Series
Fund enforceable against the assets of each Series in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Series Fund of its obligations hereunder will not, (i)
violate Series Fund's Declaration of Trust or By-Laws or (ii) result in a
default or a breach of (a) the Management Agreement, dated December 30,
1988, between Series Fund and Prudential Investments Fund Management LLC, as
successor to Prudential Mutual Fund Management, Inc., (b) the Custodian
Contract, dated August 1, 1990, between Series Fund and State Street Bank
and Trust Company, (c) the Distribution Agreement dated June 1, 1998,
between Series Fund and Prudential Investment Management Services LLC and
the Transfer Agency and Service Agreement, dated January 1, 1988, between
Series Fund and Prudential Mutual Fund Services LLC, as successor to
Prudential Mutual Fund Services, Inc.; provided, however, that such counsel
may state that insofar as performance by Series Fund of its obligations
under this Agreement is concerned they express no opinion as to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights and to
general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Series Fund under the federal laws of the United States and the
laws of The Commonwealth of Massachusetts for the consummation of the
transactions contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Series Fund, involving any Series, that
would be required to be disclosed in its Registration Statement on Form N-1A
and is not so disclosed; and
7.5.6 Series Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND AND
SERIES FUND
The obligations of National Municipals Fund and Series Fund hereunder are
subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Series Fund and the Board
of Directors of National Municipals Fund, as to the determinations set forth in
Rule 17a-8(a) under the Investment Company Act, (b) the Board of Directors of
National Municipals Fund as to the assumption by the National Municipals Fund of
the liabilities of each Series and (c) the holders of the outstanding shares of
each Series in accordance with the provisions of the Series Fund's Declaration
of Trust and By-Laws, and certified copies of the resolutions evidencing such
approvals shall have been delivered to National Municipals Fund.
8.2 Any proposed change to National Municipals Fund's operations that may be
approved by the Board of Directors of National Municipals Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
B-11(B)
<PAGE>
National Municipals Fund shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of National Municipals Fund in accordance with
the Investment Company Act and the provisions of the General Corporation Law of
the State of Maryland, and certified copies of the resolution evidencing such
approval shall have been delivered to Series Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by National Municipals Fund or Series Fund to
permit consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of National Municipals Fund or any Series, provided,
that either party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 The Funds shall have received on or before the Closing Date opinions of
Swidler Berlin Shereff Friedman, LLP or a ruling from the Internal Revenue
Service with respect to each Series satisfactory to each of them, substantially
to the effect that for federal income tax purposes:
8.6.1 The acquisition by National Municipals Fund of the assets of a Series
solely in exchange for voting shares of National Municipals Fund and the
assumption by National Municipals Fund of such Series' liabilities, if any,
followed by the distribution of National Municipals Fund's voting shares pro
rata to such Series' shareholders, pursuant to its termination and
constructively in exchange for such Series' shares, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code, and each Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Internal Revenue Code;
8.6.2 Each Series' shareholders will recognize no gain or loss upon the
constructive exchange of all of their shares of such Series solely for
shares of National Municipals Fund in complete termination of such Series;
8.6.3 No gain or loss will be recognized to any Series upon the transfer of
its assets to National Municipals Fund solely in exchange for shares of
National Municipals Fund and the assumption by National Municipals Fund of
such Series' liabilities, if any, and the subsequent distribution of those
shares to such Series' shareholders in complete termination of such Series;
8.6.4 No gain or loss will be recognized to National Municipals Fund upon
the acquisition of any Series' assets solely in exchange for shares of
National Municipals Fund and the assumption of such Series' liabilities, if
any;
B-12(B)
<PAGE>
8.6.5 National Municipals Fund's basis for the assets of each Series
acquired in the reorganizations will be the same as the basis thereof when
held by the respective Series immediately before the transfer, and the
holding period of such assets acquired by National Municipals Fund will
include the holding period thereof when held by such Series;
8.6.6 The Series shareholders' bases for the shares of National Municipals
Fund to be received by them pursuant to the reorganizations will be the same
as their basis for the shares of the respective Series to be constructively
surrendered in exchange therefor; and
8.6.7 The holding period of National Municipals Fund shares to be received
by each Series' shareholders will include the period during which the shares
of such Series to be constructively surrendered in exchange therefor were
held; provided that such Series' shares surrendered were held as capital
assets by those shareholders on the date of the exchange.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to National Municipals
Fund and each Series pro rata in a fair and equitable manner in proportion to
its assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
National Municipals Fund or Series Fund as to any Series may at its option
terminate this Agreement at or prior to the Closing Date because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Series Fund and National Municipals Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of National Municipals Fund or any Trustee or officer of Series Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Series Fund pursuant to paragraph 5.2, no such amendment may have the effect
of changing the provisions for determining the number of shares of National
Municipals Fund to be distributed to any Series' shareholders under this
Agreement to the detriment of such shareholders without their further approval.
B-13(B)
<PAGE>
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, Newark, New Jersey 07102,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
14.5 The terms of this Agreement shall apply separately with respect to each of
Maryland and Michigan Series. Nothing herein expressed or implied is intended or
shall be construed to imply that the approval or implementation of the
reorganization with respect to either Series is subject to or contingent upon
approval or implementation of the reorganization with respect to the other
Series.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF MUNICIPAL SERIES FUND;
AGREEMENT AN OBLIGATION ONLY OF THE RESPECTIVE SERIES, AND ENFORCEABLE ONLY
AGAINST ASSETS OF THE RESPECTIVE SERIES.
The name "Prudential Municipal Series Fund" is the designation of the
Trustees from time to time acting under an Amended and Restated Declaration of
Trust dated August 17, 1994, as the same may be from time to time amended, and
the name "Maryland Series" and "Michigan Series" is the designation of a
portfolio of the assets of Series Fund. National Municipals Fund acknowledges
that it must look, and agrees that it shall look, solely to the assets of each
Series for the enforcement of any claims arising out of or based on the
obligations of Series Fund hereunder, and with respect to obligations relating
to any Series, only to the assets of such Series, and in particular that (i)
neither the Trustees, officers, agents or shareholders of Series Fund assume or
shall have any personal liability for obligations of Series Fund hereunder, and
(ii) none of the assets of Series Fund other than the portfolio assets of the
Series may be resorted to for the enforcement of any claim based on the
obligations of Series Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President of each Fund.
Prudential Municipal Bond Fund
By /s/ Richard A. Redeker
----------------------
PRESIDENT
Prudential National Municipals Fund, Inc.
By /s/ Richard A. Redeker
----------------------
PRESIDENT
B-14(B)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS................................................................................................ 2
General............................................................................................. 2
The Proposed Reorganizations........................................................................ 2
Reasons for the Reorganizations..................................................................... 3
Structure of the Series and National Municipals Fund................................................ 7
Investment Objectives and Policies.................................................................. 8
Fees and Expenses................................................................................... 9
Management Fees................................................................................. 9
Distribution Fees............................................................................... 10
Other Expenses.................................................................................. 10
Shareholder Transaction Expenses................................................................ 11
Expense Ratios.................................................................................. 11
Pro Forma Expense Ratios........................................................................ 12
Purchases and Redemptions........................................................................... 13
Exchange Privileges................................................................................. 14
Dividends and Distributions......................................................................... 14
Federal Tax Consequences of Proposed Reorganization................................................. 14
PRINCIPAL RISK FACTORS.................................................................................. 15
Ratings............................................................................................. 15
Hedging and Return Enhancement Strategies........................................................... 15
Long Term Bonds..................................................................................... 16
Tax Considerations.................................................................................. 16
Realignment of Investment Portfolio................................................................. 17
THE PROPOSED TRANSACTION................................................................................ 17
Agreements and Plans of Reorganization.............................................................. 17
Reasons for the Reorganizations Considered by the Trustees/Directors................................ 19
Description of Securities to be Issued.............................................................. 20
Tax Considerations.................................................................................. 20
Certain Other Comparative Information About the Funds............................................... 21
Capitalization.................................................................................. 21
Shareholder Meetings and Voting Rights.......................................................... 21
Shareholder Liability........................................................................... 22
Liability and Indemnification of Directors and Trustees......................................... 22
Pro Forma Capitalization............................................................................ 24
INFORMATION ABOUT NATIONAL MUNICIPALS FUND.............................................................. 25
INFORMATION ABOUT THE SERIES............................................................................ 27
VOTING INFORMATION...................................................................................... 28
OTHER MATTERS........................................................................................... 30
SHAREHOLDERS' PROPOSALS................................................................................. 30
APPENDIX A--Performance Overview........................................................................ A-1
APPENDIX B--Agreement and Plan of Reorganization (Intermediate Series).................................. B-1(A)
Agreement and Plan of Reorganizations (State Series)...................................... B-1(B)
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Prudential National Municipals Fund, Inc. dated March 6, 1998, as supplemented on July
1, 1998 and September 1, 1998.
</TABLE>
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER , 1998
ACQUISITION OF ASSETS OF
MARYLAND AND MICHIGAN SERIES
OF PRUDENTIAL MUNICIPAL SERIES FUND
AND INTERMEDIATE SERIES OF
PRUDENTIAL MUNICIPAL BOND FUND
GATEWAY CENTER THREE
100 MULBERRY ST
NEWARK, NEW JERSEY 07102-9077
(800) 225-1852
------------------------
BY AND IN EXCHANGE FOR THE SHARES OF
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY ST
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all of the
liabilities, if any, of the Maryland and Michigan Series of Prudential Municipal
Series Fund and Intermediate Series of Municipal Bond Fund (collectively, the
Acquired Series) by Prudential National Municipals Fund, Inc. (the Acquiring
Fund) consists of this cover page and the following described documents, each of
which is attached hereto and incorporated by reference.
1. The Statement of Additional Information of the Acquiring Fund dated
March 4, 1998.
2. The Annual Report to Shareholders of the Acquiring Fund for the
fiscal year ended December 31, 1997.
3. The Semi-Annual Report to Shareholders of the Acquiring Fund for the
six-months ended June 30, 1998.
4. The Annual Reports to Shareholders of the Maryland Series for the
fiscal year ended August 31, 1998.
5. The Annual Report to Shareholders of the Michigan Series for the
fiscal year ended August 31, 1998.
6. The Annual Report to Shareholders of the Intermediate Series for the
fiscal year ended April 30, 1998.
The Statement of Additional Information is not a prospectus. A Prospectus and
Proxy Statement dated [ , 1998] relating to the above referenced matter may
be obtained from the Acquiring Fund without charge by writing or calling
Prudential National Municipals Fund, Inc. at the address or telephone number
listed above. This Statement of Additional Information relates to, and should be
read in conjunction with, the Prospectus and Proxy Statement.
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Additional Information
March 4, 1998
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, 100 Mulberry Street, 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 4, 1998, a copy of
which may be obtained from the Fund upon request at the address or telephone
noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
----- ---------------
<S> <C> <C>
General Information............................................................... B-2 25
Investment Objective and Policies................................................. B-2 8
Investment Restrictions........................................................... B-5 18
Directors and Officers............................................................ B-7 18
Manager........................................................................... B-10 18
Distributor....................................................................... B-12 19
Portfolio Transactions and Brokerage.............................................. B-14 21
Purchase and Redemption of Fund Shares............................................ B-15 26
Shareholder Investment Account.................................................... B-17 26
Net Asset Value................................................................... B-20 22
Taxes, Dividends and Distributions................................................ B-21 23
Performance Information........................................................... B-23 22
Custodian and Transfer and Dividend Disbursing Agent and Independent Accountants.. B-25 21
Financial Statements.............................................................. B-26 -
Report of Independent Accountants................................................. B-45 -
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 Prudential.................................... IV-1 -
</TABLE>
- -------------------------------------------------------------------------------
MF104B
<PAGE>
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name
from Prudential-Bache National Municipals Fund, Inc. to Prudential National
Municipals Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, the Fund intends to invest substantially all, and in any event at
least 80%, of its total assets in Municipal Bonds and Municipal Notes, except
in certain circumstances. From time to time the Fund may invest in Municipal
Bonds and Municipal Notes that are "private activity bonds" (as defined in the
Internal Revenue Code), the interest on which is a tax preference subject to
the alternative minimum tax. See "Taxes, Dividends and Distributions" in the
Prospectus. There can be no assurance that the Fund's investment objective will
be achieved. For a further description of the Fund's investment objective and
policies see "How the Fund Invests-Investment Objective and Policies" in the
Prospectus.
Municipal Notes
For liquidity purposes, pending investment in Municipal Bonds, or on a
temporary or defensive basis due to market conditions, the Fund may invest in
tax-exempt short-term debt obligations (maturing in one year or less). These
obligations, known as "Municipal Notes," include tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes. The interest from these Notes is exempt from federal income taxes.
The Fund will limit its investments in Municipal Notes to (1) those which are
rated, at the time of purchase, within the three highest grades assigned by
Moody's Investors Service (Moody's) or the two highest grades assigned by
Standard & Poor's Ratings Group (S&P) or comparably rated by any other
Nationally Recognized Statistical Rating Organization (NRSRO); (2) those of
issuers having, at the time of purchase, an issue of outstanding Municipal
Bonds rated within the four highest grades of Moody's or S&P or comparably
rated by any other NRSRO; or (3) those which are guaranteed by the U.S.
Government, its agents or instrumentalities.
Municipal Bonds
Municipal Bonds include debt obligations of a state, a territory, or a
possession of the United States, or any political subdivision thereof (e.g.,
counties, cities, towns, villages, districts, authorities) or the District of
Columbia issued to obtain funds for various purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which Municipal Bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to loan to public or private
institutions for the construction of facilities such as education, hospital and
housing facilities. In addition, certain types of private activity bonds may be
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or
water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. Such obligations
are included within the term Municipal Bonds if the interest paid thereon is at
the time of issuance, in the opinion of the issuer's bond counsel, exempt from
federal income tax. The current federal tax laws, however, substantially limit
the amount of such obligations that can be issued in each state. See "Taxes,
Dividends and Distributions."
The two principal classifications of Municipal Bonds are "general obligation"
and limited obligation or "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest, whereas revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Private activity bonds that are Municipal Bonds are in most cases revenue bonds
and do not generally constitute the pledge of the credit of the issuer of such
bonds. The credit quality of private activity revenue bonds is usually directly
related to the credit standing of the industrial user involved. There are, in
addition, a variety of hybrid and special types of municipal obligations as
well as numerous differences in the security of Municipal Bonds, both within
and between the two principal classifications described above.
The interest rates payable on certain Municipal Bonds and Municipal Notes are
not fixed and may fluctuate based upon changes in market rates. Municipal Bonds
and Notes of this type are called "variable rate" obligations. The interest
rate payable on a variable rate obligation is adjusted either at predesignated
intervals or whenever there is a change in the market rate of interest on which
the interest rate payable is based. Other features may include the right
whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity (a demand feature) and the right of the
issuer to prepay the principal
B-2
<PAGE>
amount prior to maturity. The principal benefit of a variable rate obligation
is that the interest rate adjustment minimizes changes in the market value of
the obligation. As a result, the purchase of variable rate obligations should
enhance the ability of the Fund to maintain a stable NAV 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, 1996 and 1997 the Fund's portfolio turnover rates were 46% and
38%, respectively.
Financial Futures Contracts
The Fund will engage in transactions in financial futures contracts for
return enhancement and risk management purposes as well as to hedge against
interest rate related fluctuations in the value of securities which are held in
the Fund's portfolio or which the Fund intends to purchase. The Fund will
engage in such transactions consistent with the Fund's investment objective. A
clearing
B-3
<PAGE>
corporation associated with the commodities exchange on which a futures
contract trades assumes responsibility for the completion of transactions and
guarantees that open futures contracts will be performed. Although interest
rate futures contracts call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.
Options on Financial Futures. The Fund may enter into options on future
contracts for certain bona fide hedging, risk management and return enhancement
purposes. This includes the ability to purchase put and call options and write
(i.e. sell) "covered" put and call options on futures contracts that are traded
on commodity and futures exchanges.
Limitations on Purchase and Sale. Under regulations of the Commodity Exchange
Act, investment companies registered under the Investment Company Act of 1940,
as amended (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 an amount of cash
or other liquid assets so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the
market value of the futures contracts, and thereby insure that the use of
futures contracts is unleveraged. The Fund will continue to invest at least 80%
of its total assets in Municipal Bonds and Municipal Notes except in certain
circumstances, as described in the Prospectus under "How the Fund
Invests-Investment Objective and Policies." The Fund may not enter into futures
contracts if, immediately thereafter, the sum of the amount of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options thereon, would exceed 20% of the total assets of the
Fund.
Risks of Financial Futures Transactions. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests-Investment Objective and Policies" in the Prospectus, there
are a number of other risks associated with the use of financial futures for
hedging purposes.
Hedging involves the risk of imperfect correlation because changes in the
price of futures contracts only generally parallel but do not necessarily equal
changes in the prices of the securities being hedged. The risk of imperfect
correlation increases as the composition of the Fund's securities portfolio
diverges from the securities that are the subject of the futures contract, for
example, those included in the municipal index. Because the change in price of
the futures contract may be more or less than the change in prices of the
underlying securities, even a correct forecast of interest rate changes may not
result in a successful hedging transaction.
The Fund intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in such futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that
a liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, in the event futures contracts have
been sold to hedge portfolio securities, such securities will not be sold until
the offsetting futures contracts can be executed. Similarly, in the event
futures have been bought to hedge anticipated securities purchases, such
purchases will not be executed until the offsetting futures contracts can be
sold.
The hours of trading of interest rate futures contracts may not conform to
the hours during which the Fund may trade Municipal Bonds. To the extent that
the futures markets close before the municipal bond market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.
Risks of Transactions in Options on Financial Futures. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Compared to the sale of financial futures, the purchase of
put options on financial futures involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
put option on a financial future would result in a loss to the Fund when the
sale of a financial future would not, such as when there is no movement in the
price of debt securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although the Fund generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in
B-4
<PAGE>
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the sale of underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Options Clearing
Corporation as a result of trades on that exchange could continue to be
exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
Illiquid Securities
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of
a readily available market or contractual restrictions on resale. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period. Mutual funds do not typically hold a significant amount of illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the Fund's 15% limitation on illiquid securities provided the investment
adviser determines that there is a readily available market for such
securities. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). With respect to municipal lease obligations, the investment
adviser also considers: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed
by nationally recognized statistical rating organizations in evaluating the
credit quality of a municipal lease obligation, including (i) whether the lease
can be cancelled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's
general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); (v) the legal recourse in the event of failure
to appropriate; and (4) any other factors unique to municipal lease obligations
as determined by the investment adviser.
Segregated Accounts
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account. "Liquid assets" means cash, U.S. Government securities, equity
securities (including foreign securities), debt obligations or other liquid,
unencumbered assets, marked-to-market daily.
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.
B-5
<PAGE>
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.
(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 331/3% 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 331/3% of the
value of its total assets to secure such borrowings. Secured borrowings may
take the form of reverse repurchase agreements, pursuant to which the Fund
would sell portfolio securities for cash and simultaneously agree to repurchase
them at a specified date for the same amount of cash plus an interest
component. The Fund would maintain, in a segregated account with its Custodian,
liquid assets equal in value to the amount owed. For purposes of this
restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements, the purchase and sale of securities on a when-issued
or delayed delivery basis, the purchase and sale of financial futures contracts
and options and collateral arrangements with respect to margins for financial
futures contracts and with respect to options are not deemed to be the issuance
of a senior security or a pledge of assets.
(5) Engage in the underwriting of securities or purchase any securities as to
which registration under the Securities Act of 1933 would be required for
resale of such securities to the public.
(6) Purchase or sell real estate or real estate mortgage loans, although it
may purchase Municipal Bonds or Notes secured by interests in real estate.
(7) Make loans of money or securities except through the purchase of debt
obligations or repurchase agreements.
(8) Purchase securities of other investment companies, except in the open
market involving any customary brokerage commissions and as a result of which
not more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.
(9) Invest for the purpose of exercising control or management of another
company.
(10) Purchase industrial revenue bonds if, as a result of such purchase, more
than 5% of total Fund assets would be invested in industrial revenue bonds
where payment of principal and interest are the responsibility of companies
with less than three years of operating history.
(11) Purchase or sell commodities or commodities futures contracts except
financial futures contracts and options thereon.
(12) Invest more than 25% of the value of its total assets in securities
whose issuers are located in any one state.
Whenever any fundamental investment policy or investment restriction states a
maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings, as required by applicable law.
B-6
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position With Principal Occupations
Name, Address and Age(1) Fund During Past 5 Years
- -------------------------- -------------- ---------------------------------------------------------------------------
<S> <C> <C>
President and Director of BMC Fund, Inc., a closed-end investment
company, formerly, 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;
Edward D. Beach (73) Director Director of The High Yield Income Fund, Inc.
Retired President, Chief Executive Officer and Trustee of the Gannett Foun-
dation (now Freedom Forum); former Publisher of four Gannett newspa-
pers and Vice President of Gannett Company; past Chairman of Indepen-
dent 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, The High Yield Income
Eugene C. Dorsey (71) Director Fund, Inc.; and First Financial Fund, Inc.
Marketing and Management Consultant; Director of The High Yield Income
Delayne Dedrick Gold (59) Director Fund, Inc.
Vice President (since September 1997), Prudential Investments; Executive
Vice President and Treasurer (since December 1996); Prudential Invest-
ments Fund Management LLC (PIFM); Senior Vice President (since
March 1987) of Prudential Securities Incorporated (Prudential Securi-
ties); formerly Chief Administrative Officer (July 1990-September 1996),
Director (January 1989-September 1996), Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice President and Director
Director and of The Asia Pacific Fund, Inc. (since May 1989); Director of The High
*Robert F. Gunia (51) Vice President Yield Income Fund, Inc.
Senior Director (since January 1986) of Prudential Securities; formerly In-
terim Chairman and Chief Executive Officer of Prudential Mutual Fund
Management, Inc. (June-September 1993); formerly Chairman of the
Board of Prudential Securities (1982-1985) and Chairman of the Board
*Harry A. Jacobs, Jr. (76) and Chief Executive Officer of Bache Group Inc. (1977-1982); Director of
1 Seaport Plaza The First Australia Fund, Inc., The First Australia Prime Income Fund,
New York, NY Director Inc. and The High Yield Income Fund, Inc.
Chief Investment Officer (since October 1996) of Prudential Mutual Funds;
formerly Chief Financial Officer (November 1995-September 1996) of
Prudential Investments, Senior Vice President and Chief Financial Offi-
cer (April 1993-November 1995) of Prudential Preferred Financial Servic-
es, Managing Director (April 1991-April 1993) of Prudential Investment
*Mendel A. Melzer CFA (37) Advisors and Senior Vice President (July 1989-April 1991) of Prudential
751 Broad Street Capital Corporation; Chairman and Director of Prudential Series Fund,
Newark, NJ Director Inc., Director of The High Yield Income Fund, Inc.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with The Prudential Insurance Company of America (Prudential)
or Prudential Securities.
B-7
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age(1) Position with Fund During Past 5 Years
- ------------------------ ----------------------- --------------------------------------------------------------------------
<S> <C> <C>
President of the Greater Rochester Metro Chamber of Commerce; former
Rochester City Manager; Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester, The Business Council of New
York State, Monroe County Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast Midwest Institute and The High
Yield Income Fund, Inc.; President, Director and Treasurer of First
Thomas T. Mooney (56) Director Financial Fund, Inc. and The High Yield Plus Fund, Inc.
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 and President of Winthrop Regional Health Systems,
and United Presbyterian Homes; Director of Ridgewood Savings Bank;
Trustee of Hofstra University; Director of The High Yield Income
Thomas H. O'Brien (73) Director Fund, Inc.
Employee of Prudential Investments; formerly President, Chief Executive
Officer and Director (October 1993-September 1996) of Prudential
Mutual Fund Management, Inc.; Executive Vice President, Director and
Member of the Operating Committee (October 1993-September 1996) of
Prudential Securities; Director (since October 1993-September 1996) of
Prudential Securities Group, Inc.; Executive Vice President, The
Prudential Investment Corporation (January 1994-September 1996);
Director (January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc., and Prudential Mutual Fund Services, Inc. and Senior
*Richard A. Redeker (55) Executive Vice President and Director of Kemper Financial Services, Inc.
751 Broad Street (September 1978-September 1993); President and Director of The High
Newark, NJ President and Director Yield Income Fund, Inc.
Economist, formerly Vice President and Chief Economist (March 1986-June
1990) of International Business Machines Corporation; Member of the
Board of Governors of the Horace Rockham School of Graduate Studies
of the University of Michigan; Director of Inland Steel Industries (since
Nancy H. Teeters (67) Director July 1991) and The High Yield Income Fund, Inc.
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.; formerly,
Publisher of Time Magazine (May 1989-March 1991), President,
Publisher and Chief Executive Officer of the Detroit News (February
1986-August 1989), and member of the Advisory Board, Chase
Manhattan Bank-Westchester; Director of The High Yield Income Fund,
Louis A. Weil, III (56) Director Inc.
Senior Vice President (since December 1996) of PIFM; Senior Vice Presi-
dent and Senior Counsel (since July 1992) of Prudential Securities; for-
merly Senior Vice President (January 1991-September 1996) and Senior
Counsel (June 1987-September 1996) of Prudential Mutual Fund man-
S. Jane Rose (52) Secretary agement, Inc.
First Vice President (since December 1996) of PIFM; First Vice President
(since March 1994) of Prudential Securities; formerly First Vice President
Treasurer and Principal (March 1994-September 1996) of Prudential Mutual Fund Management,
Financial and Inc. and Vice President (July 1989-March 1994) of Bankers Trust Corpo-
Grace C. Torres (38) Accounting Officer ration.
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age(1) Position with Fund During Past 5 Years
- ------------------------ ------------------- -------------------------------------------------------------------------
<S> <C> <C>
Tax Director (since March 1996) of Prudential Investments and the Private
Asset Group of The Prudential Insurance Company of America (Pruden-
tial); formerly First Vice President of Prudential Mutual Fund Manage-
ment, Inc. (February 1993-September 1996) and Senior Tax Manager of
Stephen M. Ungerman (44) Assistant Treasurer Price Waterhouse (1981-January 1993).
Vice President (since December 1996) of PIFM; formerly Vice President
and Associate General Counsel (June 1991-September 1996) of PIFM;
Deborah A. Docs (40) Assistant Secretary Vice President and Associate General Counsel of Prudential Securities.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential or Prudential Securities or PIFM.
(1) Unless otherwise noted the address for each of the above persons is c/o:
Prudential Investments 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.
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 PIFM
or Prudential Investments annual compensation of $4,500, 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 on whose Boards
the Director may 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 Commission, at the daily rate of return of the Fund. 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. 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, 1997 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 PIFM (Fund
Complex) for the calendar year ended December 31, 1997.
B-9
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
Total 1996
Pension or Compensation
Retirement Estimated From Fund
Aggregate Benefits Accrued Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
- ------------------------------------------------ ------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Edward D. Beach -Director....................... $4,500 None N/A $135,000(38/63)*
Eugene C. Dorsey-Director**..................... $4,500 None N/A $70,000(16/43)*
Delayne Dedrick Gold-Director................... $4,500 None N/A $135,000(38/63)*
Robert F. Gunia-Director and Vice President(1).. - - - -
Harry A. Jacobs, Jr.-Director(1)................ - - - -
Donald D. Lennox-Retired Director............... $4,500 None N/A $90,000(26/50)*
Mendel A. Melzer-Director(1).................... - - - -
Thomas T. Mooney-Director**..................... $4,500 None N/A $115,000(31/64)*
Thomas H. O'Brien-Director...................... $4,500 None N/A $ 45,000(11/29)*
Richard A. Redeker-Director and President(1).... - None N/A -
Nancy H. Teeters-Director....................... $4,500 None N/A $90,000(23/42)*
Louis A. Weil, III-Director..................... $4,500 - - $90,000(26/50)*
</TABLE>
- -------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund
complex (including the Fund).
** Total compensation from all of the funds in the Fund complex for the
calendar year ended December 31, 1997, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $87,401 and
$143,909 for Messrs. Dorsey and Mooney, respectively.
As of February 6, 1998, 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 6, 1998, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest
were: Christine V. Doyle, 58 Remington Road, Ridgefield, CT 06877-4326 who held
20,960 Class C Shares (42%); Huntington Newspapers Inc., Attn: Larry Hensley,
P.O. Box 860, Huntington, IN 46750-0860 which held 8,787 Class C shares
(76.9%); and Mrs. Eloyse Ewell TTEE, C.L. Ewell Family Trust, 180 Forest Ridge
Way, Honolulu, HI 96822-5002, who had 3,329 Class C Shares of the Fund (6.4%).
As of February 6, 1998, Prudential Securities was the record holder for other
beneficial owners of 10,359,069 Class A shares (or 34% of the outstanding Class
A shares), 3,274,184 Class B shares (or 37% of the outstanding Class B shares),
and 42,339 Class C shares (or 81% 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 Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM 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, 1998, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $63 billion. According to the Investment
Company Institute, as of October 31, 1997, the Prudential Mutual Funds were the
17th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities Incorporated and Prudential.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a
wholly-owned subsidiary of PIFM, 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), PIFM, 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, PIFM is obligated to keep certain books and records of
the Fund. PIFM 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 PIFM is free to, and
does, render management services to others.
For its services, PIFM 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 PIFM, 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 PIFM will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PIFM will be paid by
PIFM to the Fund. No such reductions were required during the fiscal year ended
December 31, 1997. No jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PIFM
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 PIFM or
the Fund's investment adviser;
(b) all expenses incurred by PIFM 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 the Subadviser or the investment
adviser), pursuant to the subadvisory agreement between PIFM 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 Commission, and
paying the fees and expenses of notice filings made in accordance with 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 PIFM 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 22,
1997 and by shareholders of the Fund on April 28, 1988.
B-11
<PAGE>
For the fiscal years ended December 31, 1997, 1996 and 1995, the Fund paid
PIFM management fees of $2,869,410 (net of waiver of $215,979), $2,996,081 (net
of waiver of $351,073) and $2,983,142 (net of waiver of $349,455),
respectively.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. PIFM continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser is reimbursed by PIFM for the reasonable costs and expenses incurred
by the Subadviser 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 22, 1997, 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, PIFM or the Subadviser 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 the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the 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), the Distributor incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares. 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 Class C plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid for providing personal
service and/or maintaining shareholder accounts, and (ii) up to .75 of 1% of
the average daily net assets of the Class C shares may be paid for
distribution-related expenses with respect to the Class C shares. The Plans
were last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on May 22, 1997. 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.
B-12
<PAGE>
Class A Plan. For the fiscal year ended December 31, 1997, the Distributor
received $491,279 under the Class A Plan. This amount was primarily expended on
commission credits to the Distributor 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, 1997, the Distributor also received
approximately $52,100 in initial sales charges.
Class B Plan. For the fiscal year ended December 31, 1997, the Distributor
received $759,692 from the Fund under the Class B Plan. It is estimated that
the Distributor spent approximately $456,200 in distributing the Fund's Class B
shares, on behalf of the Fund during the year ended December 31, 1997. It is
estimated that of this amount approximately $6,600 (1.5%) was spent on printing
and mailing of prospectuses to other than current shareholders; $112,200
(24.6%) 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 $337,400 (73.9%) on the aggregate of (i)
payments of commissions to financial advisers ($246,400 or 54.0%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($91,000 or 19.9%). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating the
Distributor's branch offices in connection with the sale of Fund shares,
including lease costs, the salaries and employee benefits of operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies, (b) the costs of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares and (d)
other incidental expenses relating to branch promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred
Sales Charge " in the Prospectus. For the fiscal year ended December 31, 1997,
the Distributor 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, 1997 the Distributor
received $5,686 under the Class C Plan and spent approximately $5,000 in
distributing Class C shares. The Distributor 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, 1997, the Distributor received approximately $3,900 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 federal securities law. A restated Distribution Agreement was
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 22, 1997.
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.
B-13
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures contracts for the Fund, the selection of brokers, dealers and futures
commission merchants to effect the transactions and the negotiation of
brokerage commissions, if any. The term "Manager" as used in this section
includes the "Subadviser." Fixed-income securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. The Fund will not deal
with Prudential Securities in any transaction in which Prudential Securities
acts as principal. Purchases and sales of securities on a securities exchange,
while infrequent, and purchases and sales of futures on a commodities exchange
or board of trade will be effected through brokers who charge a commission for
their services. Orders may be directed to any broker including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available.
Within the framework of the policy of obtaining most favorable price and
efficient execution, the Manager will consider research and investment services
provided by brokers or dealers who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of transactions
for the Fund may be used in managing other investment accounts. 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 Commission. 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, as amended, 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.
B-14
<PAGE>
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 (NAV) 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 Commission 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."
Issuance of Fund Shares for Securities
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, and (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
market, and (d) are approved by the Fund's investment advisor.
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 NAV. Using the
Fund's NAV at December 31, 1997, the maximum offering price of the Fund's
shares is as follows:
<TABLE>
<CAPTION>
Class A
<S> <C>
NAV and redemption price per Class A share................... $16.12
Maximum sales charge (3% of offering price).................. .50
------
Offering price to public..................................... $16.62
======
Class B
NAV, offering price and redemption price per Class B share*.. $16.16
======
Class C
NAV, offering price and redemption price per Class C share*.. $16.16
======
</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);
B-15
<PAGE>
(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 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 (NAV 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.
B-16
<PAGE>
Waiver of the Contingent Deferred Sales Charge-Class B Shares
The contingent deferred sales charge (CDSC) 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>
A copy of the shareholder's death certificate or, in the
case of a trust, a copy of the grantor's death certificate,
Death plus a copy of the trust agreement identifying the grantor.
Disability-An individual will be considered disabled if he or she is A copy of the Social Security Administration award letter
unable to engage in any substantial gainful activity by reason of any or a letter from a physician on the physician's letterhead
medically determinable physical or mental impairment which can be stating that the shareholder (or, in the case of a trust, the
expected to result in death or to be of long-continued and indefinite grantor) is permanently disabled. The letter must also in-
duration. dicate the 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:
<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 NAV
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 NAV per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholder will receive credit for any CDSC paid in connection with the amount
of proceeds being reinvested.
B-17
<PAGE>
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 the relative NAV 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) (Class A shares)
(U.S. Treasury Money Market Series) (Class A shares)
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. (Class A shares)
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. 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.
B-18
<PAGE>
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the 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
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals2.
<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
See "Automatic Savings Accumulation Plan (ASAP)."
</TABLE>
- -------
1Source 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.
2The 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."
B-19
<PAGE>
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.
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 (NAV) per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. NAV is calculated separately for each class. The Fund will
compute its NAV 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 NAV.
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 NAV of the Fund's shares shall
be determined at a time between such closing and 4:15 P.M., New York time. The
New York Stock Exchange is closed on the following holidays: New Years Day,
Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities for which reliable market quotations are readily
available or for which the pricing agent or principal market maker does not
provide a valuation or methodology or provides a valuation or methodology that,
in the judgment of the Manager or Subadvisor, are valued by the Valuation
Committee or Board of Directors in coordination with the Manager or Subadvisor.
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.
NAV is calculated separately for each class. The NAV of Class B and Class C
shares will generally be lower than the NAV of Class A shares as a result of
the larger distribution-related fee to which Class B and Class C shares are
subject. It is expected, 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.
B-20
<PAGE>
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.
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 taxable investment
income and net short-term capital gains in excess of net long-term capital
losses and 90% of its net tax-exempt interest income 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 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 capital
gains or losses the character of which will depend upon the Fund's holding
period in the securities. The acquisition of a put by the Fund may affect the
holding period of securities held by the Fund. 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 character
of the capital gain or loss on the sale of the futures contract depending on
the contract's holding period.
B-21
<PAGE>
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 capital gain or
loss, the character of which depends 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 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, the character of which depends 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.
Interest on indebtedness incurred or continued by a shareholder, whether a
corporation or an individual, to purchase or carry shares of the Fund is not
deductible to the extent that distributions from the Fund are exempt from
Federal income tax. The Treasury has the authority to issue regulations which
would disallow the interest deduction if incurred to purchase or carry shares
of the Fund owned by the taxpayer's spouse, minor child or an entity controlled
by the taxpayer. Shareholders who have held their shares for six months or less
may be subject to a disallowance of losses from the sale or exchange of those
shares to the extent of any dividends received by the shareholders on such
shares and, if such losses are not disallowed, they will be treated as
long-term capital losses to the extent of any distribution of long-term capital
gains received by the shareholders with respect to such shares. Entities or
persons who are "substantial users" (or related persons) of facilities financed
by private activity bonds should consult their tax advisers before purchasing
shares of the Fund.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
A shareholder who acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
Exempt-interest dividends attributable to interest on certain "private
activity" tax-exempt obligations is a preference item for purposes of computing
the alternative minimum tax for both individuals and corporations. Moreover,
exempt-interest dividends, whether or not on private activity bonds, that are
held by corporations will be taken into account (i) in determining the
alternative minimum tax imposed on 75% of the excess of adjusted current
earnings over alternative minimum taxable income, (ii) in calculating the
environmental tax equal to 0.12 percent of a corporation's modified alternative
minimum taxable income in excess of $2 million, and (iii) in determining the
foreign branch profits tax imposed on the effectively connected earnings and
profits (with adjustments) of United States branches of foreign corporations.
The Fund plans to avoid to the extent possible investing in private activity
tax-exempt obligations.
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.
B-22
<PAGE>
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, 1997 for the Fund's Class
A, Class B and Class C shares was 4.22%, 3.95% and 3.70%, 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 NAV, market conditions, the level of interest rates and the level of
Fund income and expenses.
Tax Equivalent Yield. The Fund may also calculate the tax equivalent yield
over a 30-day period. The tax equivalent yield is determined separately for
Class A, Class B and Class C shares. The tax equivalent yield will be
determined by first computing the yield as discussed above. The Fund will then
determine what portion of the yield is attributable to securities, the income
of which is exempt for federal income tax purposes. This portion of the yield
will then be divided by one minus 39.6% (the assumed maximum tax rate for
individual taxpayers not subject to Alternative Minimum Tax) and then added to
the portion of the yield that is attributable to other securities.
Tax equivalent yield is calculated according to the following formula:
TAX EQUIVALENT YIELD = Yield
- -----
1-.396
The tax equivalent yield for the 30-day period ended December 31, 1997 for
the Fund's Class A, Class B and Class C shares was 6.99%, 6.54% and 6.13%,
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 (adjusted for management fee waiver) with
respect to the Class A shares for the one year, five year and since inception
(January 22, 1990) periods ended December 31, 1997 was 6.50%, 6.23% and 7.51%,
respectively. The average annual total return (adjusted for management fee
waiver) with respect to the Class B shares of the Fund for the one, five, and
ten year periods ended on December 31, 1997 was 4.35%, 6.31% and 7.69%,
respectively. The average annual total return (adjusted for management fee
waiver) for Class C shares for the one year and since inception (August 1,
1994) periods ended December 31, 1997 was 8.08% and 6.98%, respectively.
B-23
<PAGE>
The average annual total return (before management fee waiver) with respect
to the Class A shares for the one year, five year and since inception (January
22, 1990) periods ended December 31, 1997 was 6.44%, 6.20% and 7.50%,
respectively. The average annual total return (before management fee waiver)
with respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1997 was 4.28%, 6.28% and 7.68%, respectively.
The average annual total return (before management fee waiver) for Class C
shares for the one year and since inception (August 1, 1994) periods ended
December 31, 1997 was 8.01% and 6.94%, respectively.
(PIFM eliminated its management fee waiver of .05 of 1%, effective September
1, 1997. See "Fee Waivers" in the Prospectus.)
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 (after management fee waiver) with respect to the
Class A shares for the one year, five year and since inception (January 22,
1990) periods ended December 31, 1997 was 9.80%, 39.44% and 83.23%,
respectively. The aggregate total return (after management fee waiver) with
respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1997 was 9.35%, 36.76% and 109.77%, respectively.
The aggregate total return (after management fee waiver) for Class C shares for
the one year and since inception (August 1, 1994) periods ended December 31,
1997 was 9.08% and 25.92%, respectively.
The aggregate total return (before management fee waiver) with respect to the
Class A shares for the one year, five year and since inception (January 22,
1990) periods ended December 31, 1997 was 9.73%, 39.26% and 83.01%,
respectively. The aggregate total return (before management fee waiver) with
respect to the Class B shares of the Fund for the one, five and ten-year
periods ended on December 31, 1997 was 9.28%, 36.59% and 109.51%, respectively.
The aggregate total return (before management fee waiver) for Class C shares
for the one year and since inception (August 1, 1994) periods ended December
31, 1997 was 9.01% and 25.77%, respectively.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.1
[CHART]
- -------
1Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation-1997
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.
B-24
<PAGE>
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 PIFM. 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,
1997, the Fund incurred fees of $413,100 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>
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.
I-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.
Standard Deviation
Standard deviation is an absolute (non-relative) measure of volatility which,
for a mutual fund, depicts how widely the returns varied over a certain period
of time. When a fund has a high standard deviation, its range of performance
has been very wide, implying greater volatility potential. Standard deviation
is only one of several measures of a fund's volatility.
II-1
<PAGE>
APPENDIX III
HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
Source: Stocks, Bonds, Bills, and Inflation 1997 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 1996. 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.
1Lehman 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.
2Lehman 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).
3Lehman 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.
4Lehman 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.
5Salomon 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.
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annual renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
III-3
<PAGE>
APPENDIX IV
INFORMATION RELATING TO 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,
1996 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 PIC1 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,
1996. Principal products and services include life and health insurance, other
health care products, property and casualty insurance securities, brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and 6,400
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 nearly 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 22 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for
approximately 1.6 million cars and insures approximately 1.2 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.
As of December 31, 1996, 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. In Pensions and Investments, May 12, 1996,
Prudential was ranked third in terms of total assets under management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,500 brokers and
agents across the United States.2
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
Information about the Prudential Mutual Funds
As of October 31, 1997 Prudential Investments Fund Management LLC was the
17th largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- -------
1 Prudential Investments Fund Investment Management 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 Mercater Asset Management, L.P., as subadviser
to International Stock Series, a portfolio of Prudential World Fund, Inc.
There are multiple subadvisers for The Target Portfolio Trust.
2 As of December 31, 1996.
IV-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.3 Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets-from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers-from Pulp and Paper Forecaster to Women's
Wear Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data.4 On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.5 Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In
1994, the Prudential Mutual Funds effected more than 40,000 trades in money
market securities and held on average $20 billion of money market securities.6
- -------
3 As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
4 Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
5 Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
6 As of December 31, 1994.
IV-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
Information about Prudential Securities
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at Prudential Securities.7
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A(compared to an industry average
of B+) .
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.8
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- -------
7 As of December 31, 1994.
8 On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.
IV-3
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.7%
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--1.7%
Anchorage Alaska Elec. Utility Rev.,
M.B.I.A. Aaa 6.50% 12/01/12 $ 3,400 (h) $ 4,014,516
M.B.I.A. Aaa 6.50 12/01/13 2,500 (h) 2,956,775
M.B.I.A. Aaa 6.50 12/01/14 3,455 4,089,960
------------
11,061,251
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--4.0%
Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25,
B.I.G. Aaa 7.875 8/01/14 2,250 3,019,275
Maricopa Cnty. Sch. Dist., A.M.B.A.C.,
No. 3 Tempe Elem. Aaa Zero 7/01/09 1,500 872,280
No. 3 Tempe Elem. Aaa Zero 7/01/14 1,500 651,360
Maricopa Cnty. Unified Sch. Dist.,
No. 80 Chandler, F.G.I.C. Aaa Zero 7/01/09 1,330 773,422
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/10 1,050 575,410
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/11 1,200 618,516
No. 80 Chandler, F.G.I.C. Aaa 6.25 7/01/11 1,000 1,156,910
Phoenix St. & Hwy. User Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 3,000 1,461,840
Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 2,095 2,345,625
Pima Cnty. Unified Sch. Dist., Gen. Oblig., F.G.I.C.
No. 1, Tuscan Aaa 7.50 7/01/10 3,000 (f) 3,830,040
No. 16, Catalina Foothills Aaa Zero 7/01/09 3,455 2,009,152
Tucson Gen. Oblig.,
Ser. A Aa3 7.375 7/01/11 1,000 1,259,410
Ser. A Aa3 7.375 7/01/12 1,100 1,392,138
Ser. A Aa3 7.375 7/01/13 4,500 5,722,425
------------
25,687,803
- ------------------------------------------------------------------------------------------------------------------------------
California--9.1%
Anaheim Pub. Fin. Auth. Lease Rev., F.S.A.,
Sr. Pub. Impvts. Proj., Ser. A Aaa 6.00 9/01/24 5,500 6,334,240
Sub. Pub. Impvts. Proj., Ser. C Aaa 6.00 9/01/16 6,690 7,565,253
Encinitas Union Cap. Sch. Dist., M.B.I.A. Aaa Zero 8/01/21 3,810 1,121,626
Kern California High Sch. Dist., Ser. A, M.B.I.A. Aaa 6.30 2/01/10 2,490 2,891,487
Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125 7/01/23 6,000 6,229,620
Long Beach Harbor Rev., F.G.I.C., A.M.T. Aaa 6.00 5/15/18 4,000 (g) 4,419,320
Los Angeles Unified Sch. Dist., F.G.I.C. Aaa 6.00 7/01/15 1,000 1,130,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont.d.)
Orange Cnty. Local Transp. Auth. Rev., A.M.B.A.C. Aaa 5.70% 2/15/11 $ 4,000 $ 4,404,720
San Jose Redev. Proj., Agcy. Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 5,000 5,668,500
Santa Cruz Cnty. Pub. Fin. Auth. Rev., A-(d) 6.20 9/01/23 2,000 2,122,740
Santa Margarita/Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3-3A-484A Aaa 7.25 8/01/10 2,450 3,078,327
Impvt. Dists. 3-3A-484A, Ser. B Aaa 7.25 8/01/09 2,000 2,498,360
Impvt. Dists. 3-3A-484A, Ser. B Aaa 7.25 8/01/14 2,000 2,547,820
So. California Pub. Pwr. Auth. Transmission Proj. Rev.,
Ser. A, M.B.I.A. Aaa 5.00 7/01/22 4,000 3,884,480
So. Orange Cnty. Pub. Fin. Auth. Rev., Foothill Area
Proj., F.G.I.C. Aaa 6.50 8/15/10 2,000 2,371,240
West Contra Costa Sch. Dist., Cert. of Part. Baa3 7.125 1/01/24 1,600 1,749,184
------------
58,017,717
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--4.8%
Arapahoe Cnty. Cap. Impvt. Trust Fund,
Pub. Hwy. Rev., Ser. E-470 Aaa 7.00 8/31/26 3,000 3,583,080
Colorado Hsg. Fin. Auth.,
Singl. Fam. Proj., A.M.T. Aa2 8.00 6/01/25 4,100 4,599,216
Singl. Fam. Proj., Ser. A-2, A.M.T. Aa2 7.25 5/01/27 2,000 2,255,000
Singl. Fam. Proj., Ser. B-1, A.M.T. Aa2 7.90 12/01/25 2,540 2,859,938
Singl. Fam. Proj., Ser. C-1, M.B.I.A., A.M.T. Aaa 7.65 12/01/25 5,290 5,996,903
Singl. Fam. Proj., Ser. C-2, A.M.T. Aa2 6.875 11/01/28 2,000 2,213,140
Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB+(d) 7.00 1/01/22 7,960 8,718,031
------------
30,225,308
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--2.7%
Connecticut St. Hlth. & Edu. Facs. Auth. Rev.,
Hosp. for Special Care Baa2 5.50 7/01/27 2,500 2,478,375
St. Mary's Hosp. Issue, Ser. E A3 5.50 7/01/20 5,650 5,707,573
St. Mary's Hosp. Issue, Ser. E A3 5.875 7/01/22 1,750 1,810,358
Univ. of Hartford Ba2 6.75 7/01/12 5,475 5,852,994
Connecticut St. Spec. Tax Oblig. Rev., Trans.
Infrastructure, Ser. A A1 7.125 6/01/10 1,000 1,220,800
------------
17,070,100
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
Florida--2.7%
Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South Proj. A 7.95% 12/01/08 $ 8,300 $ 9,048,411
Florida St. Brd. of Ed.,
Admin. Cap. Outlay, Aa2 9.125 6/01/14 1,260 1,819,289
Admin. Cap. Outlay, E.T.M. Aaa 9.125 6/01/14 195 277,278
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev., Tampa
Elec. Proj., Ser. 92 Ser. 9 Aa3 8.00 5/01/22 5,000 5,813,900
------------
16,958,878
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--4.1%
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Fac. Rev. NR 9.25 6/01/10 5,160 (b) 5,821,099
Burke Cnty. Dev. Auth., M.B.I.A.,
Georgia Pwr. Plant Co., Vogtle Proj., Ser. 7 Aaa 6.625 10/01/24 500 528,635
Oglethorpe Pwr. Corp. Aaa 8.00 1/01/22 5,000 5,965,700
Forsyth Cnty. Sch. Dist. Dev. Rev., Ser. A Aa3 6.75 7/01/16 500 607,550
Fulton Cnty. Sch. Dist. Rev., Lindbrook Square Fndtn. AA 6.375 5/01/17 750 881,955
Georgia Mun. Elec. Auth. Pwr. Rev. Ref.,
Ser. B A 6.25 1/01/17 475 534,751
Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000 5,859,550
Ser. Z, M.B.I.A. Aaa 5.50 1/01/20 5,000 5,359,100
Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 525 568,055
------------
26,126,395
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--1.4%
Hawaii St. Arpt. Sys. Rev.,
2nd Ser. 90, F.G.I.C., A.M.T. Aaa 7.50 7/01/20 500 543,420
2nd Ser., A.M.T. A 7.00 7/01/18 365 397,638
Hawaii St. Dept. Budget & Fin.,
Hawaiian Elec. Co., Ser. A, M.B.I.A., A.M.T. Aaa 5.65 10/01/27 5,000 5,182,150
Hawaiian Elec. Co., Ser. C, M.B.I.A., A.M.T. Aaa 7.375 12/01/20 500 546,920
Kapiolani Hlth. Care Sys. A 6.30 7/01/08 500 541,560
Kapiolani Hosp. A 6.00 7/01/11 250 267,070
Hawaii St. Gen. Oblig., Ser. CJ Aaa 6.25 1/01/15 650 (b) 724,256
Hawaii St. Harbor Cap. Impvt. Rev.,
F.G.I.C., A.M.T. Aaa 6.25 7/01/10 250 274,005
F.G.I.C., A.M.T. Aaa 6.25 7/01/15 500 545,075
------------
9,022,094
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--4.7%
Cook and Du Page Cntys. Cap. Apprec., High Sch. Dist. No.
210, F.S.A. Aaa Zero 12/01/11 $ 3,035 $ 1,512,007
Illinois Dev. Fin. Auth. Rev., Cmnty. Rehab. Providers-A BBB(d) 6.00% 7/01/15 2,000 2,101,840
Illinois Hlth. Facs. Auth. Rev., M.B.I.A.,
Loyola Univ. Hlth. Sys., Ser. A Aaa 6.00 7/01/13 1,500 1,670,790
Loyola Univ. Hlth. Sys., Ser. A Aaa 6.00 7/01/14 3,500 3,894,310
Kane & De Kalb Cntys. Cmnty. United Sch. Dist., No. 301,
A.M.B.A.C. Aaa Zero 12/01/10 3,055 1,620,403
Metropolitan Pier & Expo. Auth Hosp. Fac. Rev., McCormick
Place Convention BBB-(d) 7.00 7/01/26 12,910 15,831,920
Regional Transp. Auth. Rev., F.G.I.C. Aaa 6.00 6/01/15 2,750 3,091,165
------------
29,722,435
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--2.0%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan Bloedel
Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,672,120
Jefferson Cnty. Poll. Ctrl. Rev., Louisville Gas & Elec.,
Ser. A, A.M.T. Aa2 7.75 2/01/19 5,700 5,832,240
------------
12,504,360
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--4.8%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 13,500 7,833,645
Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90 2/01/07 5,780 7,664,338
St. Charles Parish, Environ. Impt. Rev., Louisiana Pwr. &
Lt. Co., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,500,900
St. Charles Parish, Lousiana Poll. Ctrl. Rev.,
Lousiana Pwr. & Lt. Co. Baa3 8.25 6/01/14 4,000 4,309,160
Lousiana Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 5,000 5,445,000
------------
30,753,043
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--0.6%
Northeast Waste Disp. Auth., Baltimore City Sludge Proj. NR 7.25 7/01/07 3,629 4,003,368
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--2.1%
Mass. St. Wtr. Res. Auth. Rev.,
Ser. B, M.B.I.A. Aaa 6.25 12/01/11 6,720 7,774,838
Ser. B, M.B.I.A. Aaa 6.25 12/01/12 5,000 5,783,150
------------
13,557,988
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--1.2%
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg. Rev., Ser. B AA-(d) 7.55% 4/01/23 $ 1,000 $ 1,072,870
Sngl. Fam. Mtge., Ser. A AA+(d) 7.50 6/01/15 5,185 5,437,250
Okemos Pub. Sch. Dist., M.B.I.A.,
Cnty. of Ingham Aaa Zero 5/01/12 1,100 544,247
Cnty. of Ingham Aaa Zero 5/01/13 1,000 467,560
------------
7,521,927
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.7%
Anoka Hennepin Indpt. Sch. Dist., No. 11, Ser. C, F.S.A. Aaa Zero 2/01/12 1,575 788,886
Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam.
Mtge., G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 830 877,974
Minneapolis St. Paul Met. Arpts. Comm., Ser. 7, A.M.T. Aaa 7.80 1/01/14 1,000 1,057,230
St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 769 832,316
Univ. of Minnesota, Ser. A, E.T.M. Aa3 6.00 2/01/11 1,000 1,041,600
------------
4,598,006
- ------------------------------------------------------------------------------------------------------------------------------
Mississippi--0.4%
Mississippi Hosp. Equip. & Facs, Auth. Rev.,
Rush Med. Fndtn. Proj., Ser. B Baa3 6.00 1/01/16 1,480 1,540,473
Rush Med. Fndtn. Proj., Ser. B Baa3 6.00 1/01/22 1,000 1,036,680
------------
2,577,153
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--1.4%
Missouri St. Hsg. Dev. Comn. Mtge Rev., Single Family
Homeowner Loan, Ser. A, G.N.M.A., A.M.T. AAA(d) 7.20 9/01/26 4,920 5,547,202
Sikeston Missouri Elec. Rev., M.B.I.A. Aaa 6.00 6/01/16 3,175 3,574,637
------------
9,121,839
- ------------------------------------------------------------------------------------------------------------------------------
Nevada--2.3%
Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Ser. A,
A.M.T. Baa2 6.50 12/01/33 10,000 10,716,100
Nevada Hsg. Div. Multi Unit Hsg., Arville Et Cetera Proj.,
F.N.M.A., A.M.T. AAA(d) 6.60 10/01/23 3,475 3,706,539
------------
14,422,639
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
New Hampshire--0.3%
New Hampshire Higher Ed. & Hlth. Facs. Auth. Rev.,
New Hampshire College BBB-(d) 6.30% 1/01/16 $ 500 $ 531,415
New Hampshire College BBB-(d) 6.375 1/01/27 1,000 1,062,170
------------
1,593,585
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--2.4%
New Jersey St. Hsg. & Mtge. Fin. Agcy., Ser. D, M.B.I.A.,
A.M.T. Aaa 7.70 10/01/29 2,090 2,193,434
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 13,052,490
------------
15,245,924
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.8%
New Mexico Mtge. Fin. Auth., Singl. Fam. Mtge., A.M.T. AAA(d) 6.30 7/01/28 5,000 5,302,550
- ------------------------------------------------------------------------------------------------------------------------------
New York--14.2%
Greece Central Sch. Dist.
F.G.I.C. Aaa 6.00 6/15/16 950 1,074,716
F.G.I.C. Aaa 6.00 6/15/17 950 1,077,509
F.G.I.C. Aaa 6.00 6/15/18 950 1,078,697
Metropolitan Trans. Auth., Trans. Facs. Rev., Ser. A,
F.S.A. Aaa 6.00 7/01/16 2,500 2,735,275
New York City Ind. Dev. Agcy.,
Brooklyn Navy Yard Cogen Partners, A.M.T. Baa3 5.65 10/01/28 7,000 7,073,570
Brooklyn Navy Yard Cogen Partners, A.M.T. Baa3 5.75 10/01/36 5,000 5,060,850
Spec. Fac. Rev., Terminal One Group Assoc. Proj.,
A.M.T. A 6.00 1/01/19 2,500 2,621,200
New York City Mun. Wtr. Fin. Auth.
F.G.I.C. Aaa 6.75 6/15/16 6,000 (b) 6,566,580
F.G.I.C. Aaa 6.75 6/15/16 10,565 11,468,202
New York City, Gen. Oblig.,
Ser. A Baa1 7.75 8/15/04 1,555 (b) 1,762,033
Ser. A Baa1 7.75 8/15/04 445 495,645
Ser. B Baa1 8.25 6/01/06 1,500 1,847,985
Ser. B Baa1 7.25 8/15/07 3,500 4,133,605
Ser. D Baa1 8.00 8/01/03 2,020 2,277,146
Ser. D Aaa 8.00 8/01/04 1,005 (b) 1,148,454
Ser. D Baa1 8.00 8/01/04 165 186,004
Ser. D Aaa 7.65 2/01/07 4,605 (b) 5,269,041
Ser. D Baa1 7.65 2/01/07 395 443,498
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
Ser. F BBB+(d) 8.25% 11/15/02 $ 800 (b) $ 926,704
Ser. F Baa1 8.25 11/15/02 4,200 (b) 4,809,084
New York St. Local Gov't. Assist. Corp., Ser. E A3 6.00 4/01/14 10,000 11,245,800
New York St. Urban Dev. Corp. Rev. Ref., F.S.A.,
Correctional Facs. Aaa 6.50 1/01/09 3,000 3,513,240
Correctional Facs., Ser. A Aaa 5.50 1/01/14 3,000 3,215,280
Triborough Bridge & Tunl. Auth., Ser. X, M.B.I.A. Aaa 6.625 1/01/12 8,500 10,125,965
------------
90,156,083
- ------------------------------------------------------------------------------------------------------------------------------
North Carolina--0.5%
North Carolina Eastern Mun. Pwr. Agcy., Pwr. Sys. Rev.,
M.B.I.A. Aaa 5.375 1/01/24 3,000 3,043,770
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.7%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C Aaa 7.20 6/30/13 9,000 10,986,210
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--2.4%
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Buckeye
Pwr. Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 12,585 15,049,269
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--5.1%
McGee Creek Auth. Wtr. Rev., M.B.I.A. Aaa 6.00 1/01/23 7,000 7,981,750
Oklahoma St. Inds. Auth. Rev., Deaconess Hlth. Care, Ser.
A Baa2 5.75 10/01/17 3,770 3,821,083
Tulsa Mun. Arpt. Trust Rev., American Airlines, Inc.,
A.M.T. Baa2 7.375 12/01/20 19,000 20,733,750
------------
32,536,583
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--1.0%
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Fac., Ser.
A Baa1 6.20 7/01/19 3,000 3,209,940
Philadelphia Wtr. & Waste Auth. Rev., M.B.I.A. Aaa 6.25 8/01/11 2,500 2,866,675
------------
6,076,615
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--5.6%
Puerto Rico Comnwlth., Gen. Oblig. M.B.I.A. Baa1 6.50 7/01/13 3,000 3,509,850
Puerto Rico Comnwlth., Hwy. & Trans. Auth., Hwy. Rev.,
Ser. V Baa1 6.625 7/01/12 4,000 4,402,200
Ser. W Baa1 5.50 7/01/15 2,500 2,626,725
Ser. Z, F.S.A. Aaa 6.00 7/01/18 5,000 5,667,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico (cont'd.)
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O Baa1 5.00% 7/01/12 $ 600 $ 598,164
Puerto Rico Hwy. & Trans. Auth. Rev., Ser. V Baa1 6.375 7/01/08 500 540,335
Puerto Rico Ind., Tourist Ed. Med. & Env. Ctrl. Facs.,
Doctor Pila Hosp. Proj., F.H.A. AAA(d) 6.125 8/01/25 500 547,240
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/16 500 551,735
Puerto Rico Mun. Fin. Agcy., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 270,575
Puerto Rico Public Bldgs. Auth. Rev., Ser. L, F.S.A. Aaa 5.75 7/01/10 5,065 5,624,277
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.424(c) 1/25/07 4,100 4,499,750
Ser. I, M.B.I.A. Aaa 6.915(c) 1/16/15 6,150 6,457,500
------------
35,296,251
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.6%
Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 10,358,458
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.8%
Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp.,
F.G.I.C. Aaa 6.75 9/01/10 5,000 6,017,550
McMinn Cnty. Ind. Dev. Brd. Solid Waste Rev., Calhoun
Nwsprnt. Recycling Fac., A.M.T. Baa1 7.40 12/01/22 5,000 5,599,000
------------
11,616,550
- ------------------------------------------------------------------------------------------------------------------------------
Texas--4.6%
Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., Baptist Hlth.
Sys., Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 6,401,180
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 4,115,930
Ser. A Aaa 7.375 11/01/09 3,500 4,093,215
Keller Independent Sch. Dist. Rev. Aaa 6.00 8/15/23 3,970 4,508,451
New Braunfels Indpt. Sch. Dist.,
Cap. Apprec. Aaa Zero 2/01/10 2,335 1,297,840
Cap. Apprec. Aaa Zero 2/01/11 2,365 1,236,280
Port Corpus Christi Auth. Rev., A2 7.50 8/01/12 2,000 2,203,260
San Antonio Elec. & Gas Rev., Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 2,949,250
Univ. Texas Univ. Rev., Fen. Sys., Ser. B Aa1 6.75 8/15/13 2,035 2,235,346
------------
29,040,752
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
U. S. Virgin Islands--0.1%
Virgin Islands Pub. Fin. Auth. Rev.,
Gov't. Dev. Proj., Ser. B, A.M.T. BBB-(d) 7.375% 10/01/10 $ 300 $ 337,116
Matching Loan Notes, Ser. A NR 7.25 10/01/18 250 280,500
------------
617,616
- ------------------------------------------------------------------------------------------------------------------------------
Washington--4.5%
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River Rock
Hydro Elec. Sys. Rev., Ser. A, M.B.I.A. Aaa Zero 6/01/15 15,000 6,113,850
Pierce Cnty. Washington Sch. Dist. No. 1, F.G.I.C. Aaa 6.00 12/01/10 1,000 1,133,070
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00 7/01/08 4,000 4,764,760
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 6,080,450
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 5,400 5,604,552
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 3,000 2,019,600
Washington St. Rev., Ser. R-97A Aa1 Zero 7/01/16 8,000 3,034,080
------------
28,750,362
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin--0.4%
Wisconsin Hsg. & Econ. Dev. Auth. Home Ownership Rev.,
A.M.T. Aa 6.20 3/01/27 2,100 2,205,126
------------
Total long-term investments (cost $569,621,190) 620,828,008
------------
SHORT-TERM INVESTMENTS--1.5%
- ------------------------------------------------------------------------------------------------------------------------------
North Carolina--0.7%
North Carolina Med. Care Comm. Hlth. Care Fac. Rev., Ser.
97, F.R.D.D. VMIG1 5.00 1/02/98 2,500 2,500,000
North Carolina Med. Care Comm. Hosp. Rev., Ser. 96A,
F.R.D.D. VMIG1 5.00 1/02/98 1,900 1,900,000
------------
4,400,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--0.4%
Southwest Higher Ed. Auth. Inc. Rev., Ser. 85, F.R.D.D. VMIG1 5.00 1/02/98 600 600,000
Trinity River Auth. Poll. Coll. Util., Texas Elec. Util.
Co., Ser. 96A F.R.D.D. VMIG1 5.10 1/02/98 2,000 2,000,000
------------
2,600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
Portfolio of Investments as
of December 31, 1997 PRUDENTIAL NATIONAL MUNICIPALS 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>
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--0.4%
Campbell Cnty. Ind. Dev. Auth. Rev., Ser. 90A, F.R.D.D. Aa2 5.30% 1/02/98 $ 2,900 $ 2,900,000
------------
Total short-term investments (cost $9,900,000) 9,900,000
------------
Total Investments--99.2%
(cost $579,521,190) 630,728,008
Other assets in excess of liabilities--0.8% 4,803,231
------------
Net Assets--100% $635,531,239
------------
------------
</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.H.A.--Federal Housing Authority
F.N.M.A.--Federal National Mortgage Association
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.
(f) Pledged as initial margin on financial futures contracts.
(g) Represents when-issued or extended settlement security.
(h) Pledged as collateral for when-issued or extended settlement security.
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. 12
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1997
<S> <C>
Investments, at value (cost $579,521,190)............................................................... $ 630,728,008
Cash.................................................................................................... 116,854
Interest receivable..................................................................................... 10,666,603
Receivable for investments sold......................................................................... 321,781
Receivable for Fund shares sold......................................................................... 164,434
Prepaid expenses and other assets....................................................................... 16,268
-----------------
Total assets......................................................................................... 642,013,948
-----------------
Liabilities
Payable for investments purchased....................................................................... 4,339,707
Payable for Fund shares reacquired...................................................................... 914,698
Dividends payable....................................................................................... 655,765
Management fee payable.................................................................................. 242,634
Accrued expenses........................................................................................ 214,733
Distribution fee payable................................................................................ 102,672
Due to broker - variation margin........................................................................ 12,500
-----------------
Total liabilities.................................................................................... 6,482,709
-----------------
Net Assets.............................................................................................. $ 635,531,239
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 393,965
Paid-in capital in excess of par..................................................................... 583,000,111
-----------------
583,394,076
Accumulated net realized gain on investments......................................................... 1,042,845
Net unrealized appreciation on investments........................................................... 51,094,318
-----------------
Net assets, December 31, 1997........................................................................... $ 635,531,239
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($493,177,888 / 30,588,012 shares of common stock issued and outstanding)......................... $16.12
Maximum sales charge (3% of offering price).......................................................... .50
-----------------
Maximum offering price to public..................................................................... $16.62
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($141,527,978 / 8,757,460 shares of common stock issued and outstanding).......................... $16.16
-----------------
Class C:
Net asset value, offering price and redemption price per share
($825,373 / 51,073 shares of common stock issued and outstanding)................................. $16.16
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1997
<S> <C>
Income
Interest.............................. $37,659,685
-----------------
Expenses
Management fee........................ 3,085,389
Distribution fee--Class A............. 491,279
Distribution fee--Class B............. 759,692
Distribution fee--Class C............. 5,686
Transfer agent's fees and expense..... 544,000
Custodian's fees and expenses......... 123,000
Reports to shareholders............... 128,000
Legal fees and expenses............... 73,000
Registration fees..................... 50,000
Audit fees and expenses............... 39,000
Directors' fees and expenses.......... 28,000
Insurance expense..................... 11,700
Miscellaneous......................... 2,119
-----------------
Total expenses..................... 5,340,865
Less: Management fee waiver........... (215,979)
Custodian fee credit............... (14,132)
-----------------
Net expenses....................... 5,110,754
-----------------
Net investment income.................... 32,548,931
-----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... 9,597,743
Financial futures contracts........... (1,286,578)
Written options....................... 18,260
-----------------
8,329,425
-----------------
Net change in unrealized appreciation
(depreciation) of:
Investments........................... 19,425,487
Futures............................... (112,500)
-----------------
19,312,987
-----------------
Net gain on investment transactions...... 27,642,412
-----------------
Net Increase in Net Assets
Resulting from Operations................ $60,191,343
-----------------
-----------------
</TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income........ $ 32,548,931 $ 36,516,570
Net realized gain on
investment transactions... 8,329,425 6,573,149
Net change in unrealized
appreciation of
investments............... 19,312,987 (26,789,525)
------------- -------------
Net increase in net assets
resulting from
operations................ 60,191,343 16,300,194
------------- -------------
Dividends and distributions
(Note 1)
Dividends from net investment
income
Class A................... (25,293,360) (26,993,477)
Class B................... (7,221,480) (9,491,599)
Class C................... (34,091) (31,494)
------------- -------------
(32,548,931) (36,516,570)
------------- -------------
Distributions in excess of
net investment income
Class A................... (152,363) (129,414)
Class B................... (43,542) (43,154)
Class C................... (256) (196)
------------- -------------
(196,161) (172,764)
------------- -------------
Distributions paid from
capital gains
Class A................... (3,169,156) --
Class B................... (905,674) --
Class C................... (5,317) --
------------- -------------
(4,080,147) --
------------- -------------
Fund share transactions (net of
share conversions) (Note 5 &
6):
Net proceeds from shares
sold...................... 143,282,681 132,494,761
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 22,849,312 22,304,782
Cost of shares reacquired.... (225,662,512) (224,127,599)
------------- -------------
Net decrease in net assets
from Fund share
transactions.............. (59,530,519) (69,328,056)
------------- -------------
Total decrease.................. (36,164,415) (89,717,196)
Net Assets
Beginning of year............... 671,695,654 761,412,850
------------- -------------
End of year..................... $ 635,531,239 $ 671,695,654
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<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 Board of 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option. The Fund, as purchaser of an option, bears the
risk of the potential inability of the counterparties to meet the terms of their
contracts.
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.
- --------------------------------------------------------------------------------
15
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
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 and decrease accumulated realized gain on investment by $196,161. 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.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM 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. Prior to September 1, 1997,
PIFM had agreed to waive a portion (.05 of 1% of the Fund's average daily net
assets) of its management fee which amounted to $215,979 ($.005 per share for
Class A, B and C shares). The Fund is not required to reimburse PIFM for such
waiver. Effective September 1, 1997, PIFM eliminated its management fee 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, 1997.
PSI has advised the Fund that it received approximately $52,100 in front-end
sales charges resulting from sales of Class A shares during the year ended
December 31, 1997. From these fees, PSI paid such sales charges to dealers,
which in turn paid commissions to salespersons and incurred other distribution
costs.
PSI has advised the Fund that for the year ended December 31, 1997, it received
approximately $274,100 and $200 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM 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'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. 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 did not borrow any amounts pursuant to the Agreement during the year ended
December 31, 1997. 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
- --------------------------------------------------------------------------------
16
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
accrued and paid quarterly on a pro rata basis by the Funds. The Agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended December 31, 1997,
the Fund incurred fees of approximately $413,100 for the services of PMFS. As of
December 31, 1997, $33,200 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, 1997, were $237,337,219 and $315,859,062,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1997 was
substantially the same as for financial reporting purposes and, accordingly, net
and gross unrealized appreciation for federal income tax purposes was
$51,206,818.
The Fund utilized its capital loss carryforward of approximately $3,010,300 to
offset net taxable gains recognized during the year ended December 31, 1997.
During the year ended December 31, 1997, the Fund entered into financial futures
contracts. Details of open contracts at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Value at
Value at December Unrealized
Number of Expiration Trade 31, Appreciation
Contracts Type Date Date 1997 (Depreciation)
- --------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Short
Position:
U.S.
Treasury
100 Index Mar. 1998 $11,825,000 $12,046,875 $ (221,875)
Long
Position:
U.S.
Treasury
100 Index Mar. 1998 12,203,125 12,312,500 109,375
--------------
$ (112,500)
--------------
--------------
</TABLE>
Transactions in written options during the year ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
----------- ----------
<S> <C> <C>
Options written................... 200 $ 92,000
Options terminated in closing
purchase transactions........... (200) (92,000)
--- ----------
Options outstanding at December
31, 1997........................ 0 $ 0
--- ----------
--- ----------
</TABLE>
- ------------------------------------------------------------
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%. 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,
authorized 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, 1997:
Shares sold...................... 7,770,406 $ 121,265,504
Shares issued in connection with
the acquisition of Prudential
Municipal Series Fund-Hawaii
Income Series (Note 6)......... 896,395 14,045,247
Shares issued in reinvestment of
dividends and distributions.... 1,127,948 17,779,927
Shares reacquired................ (12,541,415) (197,015,549)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (2,746,666) (43,924,871)
Shares issued upon conversion
from Class B................... 1,028,246 16,211,378
----------- -------------
Net decrease in shares
outstanding.................... (1,718,420) $ (27,713,493)
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<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)
----------- -------------
----------- -------------
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold...................... 493,868 $ 7,772,752
Shares issued in reinvestment of
dividends and distributions.... 319,319 5,042,204
Shares reacquired................ (1,812,567) (28,445,531)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (999,380) (15,630,575)
Shares reacquired upon conversion
into Class A................... (1,025,835) (16,211,378)
----------- -------------
Net decrease in shares
outstanding.................... (2,025,215) $ (31,841,953)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold...................... 12,662 $ 199,178
Shares issued in reinvestment of
dividends and distributions.... 1,717 27,181
Shares reacquired................ (12,783) (201,432)
----------- -------------
Net increase in shares
outstanding.................... 1,596 $ 24,927
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
</TABLE>
- ------------------------------------------------------------
Note 6. Acquisition of Prudential Municipal Series Fund--Hawaii Income Series
On June 27, 1997, the Fund acquired all the net assets of Prudential Municipal
Series Fund--Hawaii Income Series ('Hawaii') pursuant to a plan of
reorganization approved by Hawaii shareholders on June 16, 1997. The acquisition
was accomplished by a tax-free exchange of 896,395 Class A shares of the Fund
(valued at $14,045,247 in the aggregate) for the Class A, B and C shares of
Hawaii outstanding on June 27, 1997. Hawaii net assets at that date
($14,045,247), including $731,983 of unrealized appreciation, were combined with
those of the Fund. The aggregate net assets of the Fund and Hawaii immediately
before the acquisition were $635,872,295 and $14,045,247, respectively.
- --------------------------------------------------------------------------------
18
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................... $ 15.56 $ 15.98 $ 14.42 $ 16.30 $ 15.94
-------- -------- -------- ------- -------
Income from investment operations
Net investment income................................. .81(b) .82(b) .81(b) .81 .90
Net realized and unrealized gain (loss) on investment
transactions....................................... .67 (.42) 1.57 (1.78) 1.05
-------- -------- -------- ------- -------
Total from investment operations................... 1.48 .40 2.38 (.97) 1.95
-------- -------- -------- ------- -------
Less distributions
Dividends from net investment income.................. (.81) (.82) (.81) (.81) (.90)
Distributions in excess of net investment income...... (.01) -- (c) (.01) -- --
Distributions from net realized gains................. (.10) -- -- (.10) (.69)
-------- -------- -------- ------- -------
Total distributions................................ (.92) (.82) (.82) (.91) (1.59)
-------- -------- -------- ------- -------
Net asset value, end of year.......................... $ 16.12 $ 15.56 $ 15.98 $ 14.42 $ 16.30
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):...................................... 9.80% 2.66% 16.91% (6.04)% 12.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)......................... $493,178 $502,739 $538,145 $12,721 $14,167
Average net assets (000).............................. $491,279 $508,159 $446,350 $14,116 $11,786
Ratios to average net assets:
Expenses, including distribution fees.............. .70%(b) .68%(b) .75%(b) .77% .69%
Expenses, excluding distribution fees.............. .60%(b) .58%(b) .65%(b) .67% .59%
Net investment income.............................. 5.15%(b) 5.31%(b) 5.34%(b) 5.38% 5.49%
For Class A, B and C shares:
Portfolio turnover rate............................ 38% 46% 98% 120% 82%
</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. 19
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................... $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97
-------- -------- -------- -------- --------
Income from investment operations
Net investment income................................. .75(b) .76(b) .76(b) .75 .84
Net realized and unrealized gain (loss) on investment
transactions....................................... .67 (.42) 1.58 (1.78) 1.05
-------- -------- -------- -------- --------
Total from investment operations................... 1.42 .34 2.34 (1.03) 1.89
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.................. (.75) (.76) (.76) (.75) (.84)
Distributions in excess of net investment income...... (.01) -- (c) (.01) -- --
Distributions from net realized gains................. (.10) -- -- (.10) (.69)
-------- -------- -------- -------- --------
Total distributions................................ (.86) (.76) (.77) (.85) (1.53)
-------- -------- -------- -------- --------
Net asset value, end of year.......................... $ 16.16 $ 15.60 $ 16.02 $ 14.45 $ 16.33
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):...................................... 9.35% 2.26% 16.49% (6.39)% 12.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)......................... $141,528 $168,185 $222,865 $672,272 $848,299
Average net assets (000).............................. $151,938 $193,312 $252,313 $751,623 $854,919
Ratios to average net assets:
Expenses, including distribution fees.............. 1.10%(b) 1.08%(b) 1.15%(b) 1.17% 1.09%
Expenses, excluding distribution fees.............. .60%(b) .58%(b) .65%(b) .67% .59%
Net investment income.............................. 4.75%(b) 4.91%(b) 4.96%(b) 4.96% 5.09%
</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. 20
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------------------------------------------------
August 1,
1994(e)
Year Ended December 31, through
----------------------------------- December 31,
1997 1996 1995 1994
------- ------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 15.60 $16.02 $14.44 $15.13
------- ------ ----- -----
Income from investment operations
Net investment income................................. .71(b) .72(b) .72(b) .29
Net realized and unrealized gain (loss) on investment
transactions....................................... .67 (.42) 1.59 (.69)
------- ------ ----- -----
Total from investment operations................... 1.38 .30 2.31 (.40)
------- ------ ----- -----
Less distributions
Dividends from net investment income.................. (.71) (.72) (.72) (.29)
Distributions in excess of net investment income...... (.01) -- (c) (.01) --
Distributions from net realized gains................. (.10) -- -- --
------- ------ ----- -----
Total distributions................................ (.82) (.72) (.73) (.29)
------- ------ ----- -----
Net asset value, end of period........................ $ 16.16 $15.60 $16.02 $14.44
------- ------ ----- -----
------- ------ ----- -----
TOTAL RETURN(a):...................................... 9.08% 2.01% 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $825 $772 $403 $141
Average net assets (000).............................. $758 $674 $247 $103
Ratios to average net assets:
Expenses, including distribution fees.............. 1.35%(b) 1.33%(b) 1.40%(b) 1.51%(d)
Expenses, excluding distribution fees.............. .60%(b) .58%(b) .65%(b) .76%(d)
Net investment income.............................. 4.50%(b) 4.67%(b) 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. 21
<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, 1997, 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 periods
presented, 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, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998
- --------------------------------------------------------------------------------
22
<PAGE>
Tax Information PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (December 31, 1997) as to the federal tax status of
dividends paid by the Fund during such fiscal year. Accordingly, we are advising
you that in the fiscal year ended December 31, 1997, dividends paid from net
investment income totalling $.81 per Class A share, $.75 per Class B share and
$.71 per Class C shares were all federally tax-exempt interest dividends. In
addition, the Fund paid an ordinary distribution of $.005 per share (taxable as
ordinary income) and a long-term capital gain distribution of $.104 of which
$.063 is taxable at 28% and $.041 is taxable at 20%.
The portion of your dividends which may be subject to the Alternative Minimum
Tax (AMT) as well as information with respect to the state taxability of your
investment in the Fund was sent to you under separate cover.
For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.
- --------------------------------------------------------------------------------
23
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.0%
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--1.8%
Anchorage Elec. Utility Rev.,
M.B.I.A. Aaa 6.50% 12/01/12 $ 3,400 (h) $ 4,011,966
M.B.I.A. Aaa 6.50 12/01/13 2,500 (h) 2,959,200
M.B.I.A. Aaa 6.50 12/01/14 3,455 (h) 4,095,073
------------
11,066,239
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--4.2%
Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25, B.I.G. Aaa 7.875 8/01/14 2,250 (h) 3,000,960
Maricopa Cnty. Sch. Dist., A.M.B.A.C.,
No. 3 Tempe Elem., Aaa Zero 7/01/09 1,500 896,820
No. 3 Tempe Elem., Aaa Zero 7/01/14 1,500 671,070
Maricopa Cnty. Unified Sch. Dist.,
No. 80 Chandler, F.G.I.C. Aaa Zero 7/01/09 1,330 795,180
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/10 1,050 594,899
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/11 1,200 640,272
No. 80 Chandler, F.G.I.C. NR 6.25 7/01/11 1,000 1,155,605
Phoenix St. & Hwy. User Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 2,500 1,253,725
Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 2,095 (h) 2,335,087
Pima Cnty. Unified Sch. Dist., Gen. Oblig., F.G.I.C.,
No. 1, Tuscan Aaa 7.50 7/01/10 3,000 (f) 3,795,600
No. 16, Catalina Foothills Aaa Zero 7/01/09 3,455 2,065,675
Tucson, Gen. Oblig.,
Ser. A Aa3 7.375 7/01/11 1,000 1,261,420
Ser. A Aa3 7.375 7/01/12 1,100 1,390,268
Ser. A Aa3 7.375 7/01/13 4,500 5,706,810
------------
25,563,391
- ------------------------------------------------------------------------------------------------------------------------------
California--8.5%
Abag Fin. Auth. for Nonprofit Corps. Ref., Amer. Baptist
Homes., Ser. A BBB(d) 6.20 10/01/27 2,200 2,337,214
Anaheim Pub. Fin. Auth. Lease Rev., F.S.A.,
Sr. Pub. Impvts. Proj., Ser. A Aaa 6.00 9/01/24 5,500 6,306,300
Sub. Pub. Impvts. Proj., Ser. C Aaa 6.00 9/01/16 6,690 7,542,105
Encinitas Union Cap. Sch. Dist., M.B.I.A. Aaa Zero 8/01/21 3,810 1,153,516
Kern High Sch. Dist., Ser. A, M.B.I.A. Aaa 6.30 2/01/10 2,490 2,869,202
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL
MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125% 7/01/23 $ 6,000 $ 6,289,500
Long Beach Harbor Rev., F.G.I.C., A.M.T. Aaa 6.00 5/15/18 4,000 4,467,560
Los Angeles Unified Sch. Distr., Ser. A, F.G.I.C. Aaa 6.00 7/01/15 1,000 1,128,400
San Jose Redev. Proj., Agcy. Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 5,000 5,655,950
Santa Cruz Cnty. Pub. Fin. Auth. Rev., Ser. A A-(d) 6.20 9/01/23 2,000 2,119,200
Santa Margarita/Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3-3A-484A, Ser. B Aaa 7.25 8/01/09 2,000 2,469,920
Impvt. Dists. 3-3A-484A, Ser. B Aaa 7.25 8/01/10 2,450 3,044,100
Impvt. Dists. 3-3A-484A, Ser. B Aaa 7.25 8/01/14 2,000 2,531,720
So. Orange Cnty. Pub. Fin. Auth. Rev., Foothill Area Proj.,
Ser. C, F.G.I.C. Aaa 6.50 8/15/10 2,000 2,352,060
West Contra Costa Sch. Dist., Cert. of Part., Ref. Baa3 7.125 1/01/24 1,600 1,752,784
------------
52,019,531
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--4.7%
Arapahoe Cnty. Cap. Impvt. Trust Fund, Pub. Hwy. Rev., Ser.
E-470 Aaa 7.00 8/31/26 3,000(b) 3,565,260
Colorado Hsg. Fin. Auth., A.M.T.
Singl. Fam. Proj., Ser. A-2 Aa2 7.25 5/01/27 2,000 2,255,260
Singl. Fam. Proj., Ser. B-1 Aa2 7.90 12/01/25 2,290 2,536,885
Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa 7.65 12/01/25 4,920 5,532,147
Singl. Fam. Proj., Ser. C-2 Aa2 6.875 11/01/28 2,000 2,233,540
Singl. Fam. Proj. Aa2 8.00 6/01/25 3,610 3,999,230
Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB+(d) 7.00 1/01/22 5,000(f) 5,500,100
Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB+(d) 7.00 1/01/22 2,960 3,256,059
------------
28,878,481
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--2.9%
Connecticut St. Hlth. & Edu. Facs. Auth. Rev.,
St. Mary's Hosp. Issue, Ser. E A3 5.50 7/01/20 5,650 5,729,156
St. Mary's Hosp. Issue, Ser. E A3 5.875 7/01/22 1,750 1,815,048
The Griffin Hosp., Ser. A Baa2 5.75 7/01/23 3,280 3,298,368
Univ. of Hartford Ba2 6.75 7/01/12 5,475 5,810,070
Connecticut St. Spec. Tax Oblig. Rev., Trans. Infrastructure,
Ser. A A1 7.125 6/01/10 1,000 1,227,570
------------
17,880,212
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.8%
Dist. of Columbia, Gen. Oblig. Ref., Ser. B, M.B.I.A. Aaa 6.00 6/01/21 10,075 11,291,859
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Florida--2.7%
Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South Proj. A-(d) 7.95% 12/01/08 $ 8,300 $ 8,922,334
Florida St. Brd. of Ed., Admin. Cap. Outlay Aa2 9.125 6/01/14 1,260 (h) 1,806,512
Hillsborough Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev., Tampa
Elec. Proj., Ser. 92 Ser. 9 Aa3 8.00 5/01/22 5,000 5,767,050
------------
16,495,896
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., M.B.I.A.,
Georgia Pwr. Plant Co., Vogtle Proj., Ser. 7 Aaa 6.625 10/01/24 500 (h) 524,130
Oglethorpe Pwr. Corp. Aaa 8.00 1/01/22 5,000 (b)(h) 5,903,350
Forsyth Cnty. Sch. Dist. Dev. Rev., Ser. A Aa3 6.75 7/01/16 500 603,065
Fulton Cnty. Sch. Dist. Rev., Lindbrook Square Fndtn. Aa2 6.375 5/01/17 750 (h) 876,848
Georgia Mun. Elec. Auth. Pwr. Rev. Ref.,
Ser. B A 6.25 1/01/17 475 536,246
Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000 5,818,750
Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 460 496,220
------------
14,758,609
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--1.5%
Hawaii St. Arpt. Sys. Rev.,
2nd Ser. 90, F.G.I.C., A.M.T. Aaa 7.50 7/01/20 500 538,370
2nd Ser., A.M.T. A 7.00 7/01/18 365 394,711
Hawaii St. Dept. of Budget & Fin.,
Hawaiian Elec. Co., Ser. A, M.B.I.A., A.M.T. Aaa 5.65 10/01/27 5,000 5,197,000
Hawaiian Elec. Co., Ser. C, M.B.I.A., A.M.T. Aaa 7.375 12/01/20 500 542,885
Kapiolani Hlth. Care Sys. A 6.30 7/01/08 500 545,095
Kapiolani Hosp. A 6.00 7/01/11 250 270,513
Hawaii St. Gen., Oblig., Ser. CJ Aaa 6.25 1/01/15 650 (b) 721,630
Hawaii St. Harbor Cap. Impvt. Rev.,
F.G.I.C., A.M.T. Aaa 6.25 7/01/10 250 272,885
F.G.I.C., A.M.T. Aaa 6.25 7/01/15 500 542,215
------------
9,025,304
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--4.8%
Cook and Du Page Cntys., Cap. Apprec., High Sch. Dist. No.
210, F.S.A. Aaa Zero 12/01/11 3,035 1,578,777
Illinois Dev. Fin. Auth. Rev.,
Cmnty. Rehab. Providers-A BBB(d) 6.00 7/01/15 2,000 2,083,400
Cmnty. Rehab. Providers-A BBB(d) 5.70 7/01/19 1,600 1,614,960
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Illinois (cont'd.)
Illinois Educ. Facs. Auth. Rev., Univ. of Chicago, Ser. A Aa1 5.125% 7/01/25 $ 4,000 $ 3,933,920
Illinois Hlth. Facs. Auth. Rev., Loyola Univ. Hlth. Sys., Ser.
A, M.B.I.A. Aaa 6.00 7/01/14 3,500 3,911,180
Metropolitan Pier & Expo. Auth., Hosp. Fac. Rev., McCormick
Place Convention BBB-(d) 7.00 7/01/26 12,910 16,283,641
------------
29,405,878
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--1.1%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan Bloedel
Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,549,120
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--5.0%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 13,500 7,870,095
Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90 2/01/07 5,780 (h) 7,614,052
St. Charles Parish, Environ. Impt. Rev., Louisiana Pwr. & Lt.
Co., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,536,100
St. Charles Parish, Lousiana Poll. Ctrl. Rev.,
Lousiana Pwr. & Lt. Co. Baa3 8.25 6/01/14 4,000 4,248,760
Lousiana Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 5,000 5,379,850
------------
30,648,857
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--0.6%
Northeast Waste Disp. Auth., Baltimore City Sludge Proj. NR 7.25 7/01/07 3,370 3,728,871
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--2.5%
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Mass. Inst. of Tech.
Ser. I-1 Aaa 5.20 1/01/28 1,500 1,550,745
Mass. St. Wtr. Res. Auth. Rev.,
Ser. B, M.B.I.A. Aaa 6.25 12/01/11 6,720 7,776,854
Ser. B, M.B.I.A. Aaa 6.25 12/01/12 5,000 5,776,300
------------
15,103,899
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--3.2%
Dexter Cmnty. Schs., F.G.I.C. Aaa 5.10 5/01/28 8,000 8,122,800
Michigan St. Hosp. Fin. Auth. Rev., Genesys Regl. Hosp., Ser.
A Baa2 5.50 10/01/27 3,000 2,969,580
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg. Rev., Ser. B AA-(d) 7.55 4/01/23 1,000 1,069,870
Sngl. Fam. Mtge., Ser. A AA+(d) 7.50 6/01/15 5,185 5,412,414
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan (cont'd)
Okemos Pub. Sch. Dist., M.B.I.A.,
Cnty. of Ingham Aaa Zero 5/01/12 $ 1,100 $ 559,966
Cnty. of Ingham Aaa Zero 5/01/13 1,000 481,310
St. John's Public Schs. Ref., F.G.I.C. Aaa 5.10% 5/01/25 1,000 1,010,180
------------
19,626,120
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.7%
Anoka Hennepin Indpt. Sch. Dist., No. 11, Ser. C, F.S.A. Aaa Zero 2/01/12 1,575 (h) 817,000
Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam. Mtge.,
G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 775 816,757
Minneapolis St. Paul Met. Arpts. Comm., Ser. 7, A.M.T. Aaa 7.80 1/01/14 1,000 (h) 1,039,720
St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 685 (h) 723,116
Univ. of Minnesota, Ser. A, E.T.M. Aa3 6.00 2/01/11 1,000 987,080
------------
4,383,673
- ------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.4%
Mississippi Hosp. Equip. & Facs, Auth. Rev.,
Rush Med. Fndtn. Proj., Ser. B Baa3 6.00 1/01/16 1,480 1,530,083
Rush Med. Fndtn. Proj., Ser. B Baa3 6.00 1/01/22 1,000 1,029,840
------------
2,559,923
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--0.9%
Missouri St. Hsg. Dev. Comn. Mtge Rev., Sngl. Fam. Homeowner
Ln., Ser. A, G.N.M.A., A.M.T. AAA(d) 7.20 9/01/26 4,920 5,531,015
- ------------------------------------------------------------------------------------------------------------------------------
Nevada--2.4%
Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Ser. A,
A.M.T. Baa2 6.50 12/01/33 10,000 10,728,600
Nevada Hsg. Div., Multi Unit Hsg., Arville Et Cetera Proj.,
F.N.M.A., A.M.T. AAA(d) 6.60 10/01/23 3,475 3,730,343
------------
14,458,943
- ------------------------------------------------------------------------------------------------------------------------------
New Hampshire--0.3%
New Hampshire Higher Ed. & Hlth. Facs. Auth. Rev.,
New Hampshire College BBB-(d) 6.30 1/01/16 500 534,885
New Hampshire College BBB-(d) 6.375 1/01/27 1,000 1,069,110
------------
1,603,995
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--2.5%
New Jersey St. Hsg. & Mtge. Fin. Agcy., Ser. D, M.B.I.A.,
A.M.T. Aaa 7.70% 10/01/29 $ 2,035 $ 2,119,941
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 13,002,220
------------
15,122,161
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.9%
New Mexico Mtge. Fin. Auth., Sngl. Fam. Mtge., A.M.T. AAA(d) 6.30 7/01/28 5,000 5,297,250
- ------------------------------------------------------------------------------------------------------------------------------
New York--13.9%
Greece Central Sch. Dist.,
F.G.I.C. Aaa 6.00 6/15/16 950 1,070,175
F.G.I.C. Aaa 6.00 6/15/17 950 1,071,743
F.G.I.C. Aaa 6.00 6/15/18 950 1,072,949
Metropolitan Trans. Auth., Trans. Facs. Rev., Ser. A, F.S.A. Aaa 6.00 7/01/16 2,500 2,721,150
New York City Ind. Dev. Agcy.,
Brooklyn Navy Yard Cogen Partners, A.M.T. Baa3 5.65 10/01/28 3,000 3,026,670
Brooklyn Navy Yard Cogen Partners, A.M.T. Baa3 5.75 10/01/36 5,000 5,094,250
Spec. Fac. Rev., Terminal One Group Assoc. Proj., A.M.T. A1 6.00 1/01/19 2,500 2,643,600
New York City Mun. Wtr. Fin. Auth.,
F.G.I.C. Aaa 6.75 6/15/16 6,000 (b) 6,518,400
F.G.I.C. Aaa 6.75 6/15/16 10,565 (f) 11,381,991
New York City, Gen. Oblig.,
Ser. A A-(d) 7.75 8/15/04 1,875 (b) 2,101,988
Ser. A A3 7.75 8/15/04 125 138,246
Ser. B A3 8.25 6/01/06 1,500 1,851,795
Ser. B A3 7.25 8/15/07 3,500 4,148,690
Ser. D Aaa 8.00 8/01/03 1,635 (b) 1,846,242
Ser. D A3 8.00 8/01/03 385 430,923
Ser. D Aaa 8.00 8/01/04 1,005 (b) 1,134,846
Ser. D A3 8.00 8/01/04 165 184,681
Ser. D Aaa 7.65 2/01/07 4,605 (b) 5,214,932
Ser. D A3 7.65 2/01/07 395 442,250
Ser. F A-(d) 8.25 11/15/02 4,185 (b) 4,790,234
Ser. F A3 8.25 11/15/02 815 924,748
New York St. Dorm. Auth. Rev., Mem. Sloan Kettering Cancer
Ctr., M.B.I.A. Aaa 5.75 7/01/20 4,000 4,386,280
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
New York St. Local Gov't. Assist. Corp., Ref., Ser. E A3 6.00% 4/01/14 $ 5,000 $ 5,627,850
New York St. Urban Dev. Corp., Rev., Ref., F.S.A.,
Correctional Facs. Aaa 6.50 1/01/09 3,000 3,476,010
Correctional Facs., Ser. A Aaa 5.50 1/01/14 3,000 3,210,780
Triborough Bridge & Tunl. Auth., Ser. X, M.B.I.A. Aaa 6.625 1/01/12 8,500 (h) 10,070,545
------------
84,581,968
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.8%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C. Aaa 7.20 6/30/13 9,000 11,082,870
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--2.4%
Ohio St. Wtr. Dev. Auth., Poll. Ctrl. Facs. Rev., Buckeye Pwr.
Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 12,585 14,933,613
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--4.6%
McGee Creek Auth. Wtr. Rev., M.B.I.A. Aaa 6.00 1/01/23 7,000 7,950,250
Tulsa Mun. Arpt. Trust Rev., American Airlines, Inc., A.M.T. Baa2 7.375 12/01/20 19,000 20,436,020
------------
28,386,270
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--1.0%
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Fac., Ser. A Baa1 6.20 7/01/19 3,000 3,246,450
Philadelphia Wtr. & Waste Auth. Rev., M.B.I.A. Aaa 6.25 8/01/11 2,500 2,864,875
------------
6,111,325
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.4%
Puerto Rico Comnwlth., Gen. Oblig., M.B.I.A. Baa1 6.50 7/01/13 3,000 3,502,260
Puerto Rico Comnwlth., Hwy. & Trans. Auth., Hwy. Rev.,
Ser. V Baa1 6.625 7/01/12 4,000 4,392,360
Ser. V Baa1 6.375 7/01/08 500 540,840
Puerto Rico Ind., Tourist Ed. Med. & Env. Ctrl. Facs.,
Doctor Pila Hosp. Proj., F.H.A. AAA(d) 6.125 8/01/25 500 550,755
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/16 500 555,145
Puerto Rico Mun. Fin. Agcy., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 272,268
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.667(c) 1/25/07 4,100 4,504,875
Ser. I, M.B.I.A. Aaa 6.996(c) 1/16/15 6,150 6,557,437
------------
20,875,940
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.7%
Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375% 1/01/10 $ 7,415(h) $ 10,319,159
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.9%
Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp.,
F.G.I.C. Aaa 6.75 9/01/10 5,000(f) 5,982,500
McMinn Cnty. Ind. Dev. Brd. Solid Waste Rev., Calhoun Nwsprnt.
Recycling Fac., A.M.T. Baa1 7.40 12/01/22 5,000 5,580,250
------------
11,562,750
- ------------------------------------------------------------------------------------------------------------------------------
Texas--4.8%
Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., Baptist Hlth. Sys.,
Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 6,367,010
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 4,094,720
Ser. A Aaa 7.375 11/01/09 3,500 4,094,720
Keller Indpt. Sch. Dist. Rev. Aaa 6.00 8/15/23 3,970 4,534,137
New Braunfels Indpt. Sch. Dist.,
Cap. Apprec. Aaa Zero 2/01/10 2,335 1,344,727
Cap. Apprec. Aaa Zero 2/01/11 2,365 1,282,776
Port Corpus Christi Auth. Rev., A2 7.50 8/01/12 2,000 2,174,460
San Antonio Elec. & Gas Rev., Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 3,038,750
Univ. of Texas Rev., Fen. Sys., Ser. B Aa1 6.75 8/15/13 2,035 2,217,336
------------
29,148,636
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Virgin Islands--0.1%
Virgin Islands Pub. Fin. Auth. Rev.,
Gov't. Dev. Proj., Ser. B, A.M.T. NR 7.375 10/01/10 300 353,409
Matching Loan Notes, Ser. A NR 7.25 10/01/18 250 (b) 284,738
------------
638,147
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--0.4%
Pocahontas Parkway Assoc. Toll Road, Variable Ref., Kinder
Care Ctrs., Ser. B. Baa3 Zero 8/15/16 7,000 (g) 2,500,960
- ------------------------------------------------------------------------------------------------------------------------------
Washington--4.8%
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River Rock
Hydro Elec. Sys. Rev., Ser. A, M.B.I.A. Aaa Zero 6/01/15 15,000 6,314,100
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description(a) Rating Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Washington (cont'd.)
Pierce Cnty. Sch. Dist. No. 1, F.G.I.C. Aaa 6.00% 12/01/10 $ 1,000 $ 1,129,270
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00 7/01/08 4,000 4,734,560
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 6,037,700
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 5,400 5,627,340
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 3,000 2,068,530
Washington St. Rev., Ser. R-97A Aa1 Zero 7/01/16 8,000 3,180,400
------------
29,091,900
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin--0.4%
Wisconsin Hsg. & Econ. Dev. Auth., Home Ownership Rev., A.M.T. Aa 6.20 3/01/27 2,100 2,206,470
------------
Total long-term investments (cost $545,571,656) 592,439,235
------------
SHORT-TERM INVESTMENTS--2.4%
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--0.7%
Dist. of Columbia, Gen. Oblig. Ref., Ser. 92A-4, F.R.D.D. VMIG1 4.00 7/01/98 4,300 4,300,000
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--1.6%
Calcasieu Parish Inc. Ind. Dev. Brd. Environ. Rev., F.R.D.D.,
A.M.T. VMIG1 4.00 7/01/98 500 500,000
Plaquemines Parish Environ. Rev., A.M.T.,
British Petroleum Co., Expl. & Oil Proj., F.R.D.D., Ser. 94 P1 3.95 7/01/98 100 100,000
British Petroleum Co., Expl. & Oil Proj., F.R.D.D., Ser. 95 P1 3.95 7/01/98 300 300,000
West Baton Rouge Parish Ind. Dist. No. 3 Rev., Dow Chemical
Co. Proj., Ser. 93, F.R.D.D., A.M.T. P1 4.05 7/01/98 8,600 8,600,000
------------
9,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--0.1%
Hopewell Ind. Dev. Auth. Rev., Hadson Pwr. Prog. 13, Ser. 90A,
F.R.D.D., A.M.T. P1 4.05 7/01/98 600 600,000
King George Cnty. Ind. Dev. Auth., Birchwood Pwr. Proj., Ser.
94A, F.R.D.D., A.M.T. A1+(d) 4.10 7/01/98 100 100,000
------------
700,000
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
Portfolio of Investments
as of June 30, 1998 (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Description(a) Contracts (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
CALL OPTIONS PURCHASED--0.1%
United States Treasury Bond Future, expiring 11/20/98 @$125. 300 $ 496,875
------------
Total short-term investments (cost $14,891,687) 14,996,875
------------
Total Investments--99.5%
(cost $560,463,343) 607,436,110
Other assets in excess of liabilities--0.5% 2,877,396
------------
Net Assets--100% $610,313,506
------------
------------
</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.H.A.--Federal Housing Authority
F.N.M.A.--Federal National Mortgage Association
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.
(f) Pledged as initial margin on financial futures contracts.
(g) Represents when-issued or extended settlement security.
(h) Pledged as collateral for when-issued or extended settlement security.
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. 12
<PAGE>
Statement of Assets and Liabilities
(Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
Assets June 30, 1998
<S> <C>
Investments, at value (cost $560,463,343)................................................................... $607,436,110
Cash........................................................................................................ 421,300
Interest receivable......................................................................................... 9,841,509
Receivable for investments sold............................................................................. 555,924
Receivable for Fund shares sold............................................................................. 229,100
Due from broker--variation margin........................................................................... 56,250
Deferred expenses and other assets.......................................................................... 10,648
-------------
Total assets............................................................................................. 618,550,841
-------------
Liabilities
Payable for investments purchased........................................................................... 6,442,790
Payable for Fund shares reacquired.......................................................................... 801,123
Dividends payable........................................................................................... 408,837
Accrued expenses............................................................................................ 258,571
Management fee payable...................................................................................... 226,301
Distribution fee payable.................................................................................... 94,295
Deferred director's fee..................................................................................... 5,418
-------------
Total liabilities........................................................................................ 8,237,335
-------------
Net Assets.................................................................................................. $610,313,506
-------------
-------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 379,486
Paid-in capital in excess of par......................................................................... 559,713,928
-------------
560,093,414
Accumulated net realized gain on investments............................................................. 3,131,700
Net unrealized appreciation on investments............................................................... 47,088,392
-------------
Net assets, June 30, 1998................................................................................... $610,313,506
-------------
-------------
Class A:
Net asset value and redemption price per share
($480,442,843 / 29,888,170 shares of common stock issued and outstanding)............................. $16.07
Maximum sales charge (3% of offering price).............................................................. .50
-------------
Maximum offering price to public......................................................................... $16.57
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($128,212,019 / 7,957,475 shares of common stock issued and outstanding).............................. $16.11
-------------
Class C:
Net asset value, offering price and redemption price per share
($1,658,644 / 102,944 shares of common stock issued and outstanding).................................. $16.11
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income June 30, 1998
<S> <C>
Income
Interest................................... $17,592,359
-------------
Expenses
Management fee............................. 1,485,469
Distribution fee--Class A.................. 240,983
Distribution fee--Class B.................. 339,402
Distribution fee--Class C.................. 4,343
Transfer agent's fees and expense.......... 268,000
Custodian's fees and expenses.............. 71,000
Reports to shareholders.................... 45,000
Registration fees.......................... 25,000
Audit fees and expenses.................... 17,000
Legal fees and expenses.................... 16,000
Directors' fees and expenses............... 14,000
Insurance expense.......................... 4,000
Miscellaneous.............................. 3,548
-------------
Total expenses.......................... 2,533,745
Less: Custodian fee credit................. (2,205)
-------------
Net expenses............................ 2,531,540
-------------
Net investment income......................... 15,060,819
-------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 3,469,738
Financial futures contracts................ (1,380,883)
-------------
2,088,855
-------------
Net change in unrealized appreciation
(depreciation) of:
Investments................................ (4,234,051)
Futures.................................... 228,125
-------------
(4,005,926)
-------------
Net loss on investment transactions........... (1,917,071)
-------------
Net Increase in Net Assets
Resulting from Operations..................... $13,143,748
-------------
-------------
</TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) June 30, December 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........ $ 15,060,819 $ 32,548,931
Net realized gain on
investment transactions... 2,088,855 8,329,425
Net change in unrealized
appreciation
(depreciation) of
investments............... (4,005,926) 19,312,987
------------- -------------
Net increase in net assets
resulting from
operations................ 13,143,748 60,191,343
------------- -------------
Dividends and distributions
(Note 1)
Dividends from net investment
income
Class A................... (11,943,682) (25,293,360)
Class B................... (3,092,086) (7,221,480)
Class C................... (25,051) (34,091)
------------- -------------
(15,060,819) (32,548,931)
------------- -------------
Distributions paid from
capital gains
Class A................... -- (3,169,156)
Class B................... -- (905,674)
Class C................... -- (5,317)
------------- -------------
-- (4,080,147)
------------- -------------
Distributions in excess of
net investment income
Class A................... -- (152,363)
Class B................... -- (43,542)
Class C................... -- (256)
------------- -------------
-- (196,161)
------------- -------------
Fund share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold...................... 14,267,923 143,282,681
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 9,285,437 22,849,312
Cost of shares reacquired.... (46,854,022) (225,662,512)
------------- -------------
Net decrease in net assets
from Fund share
transactions.............. (23,300,662) (59,530,519)
------------- -------------
Total decrease.................. (25,217,733) (36,164,415)
Net Assets
Beginning of period............. 635,531,239 671,695,654
------------- -------------
End of period................... $ 610,313,506 $ 635,531,239
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes by investing substantially all of its
total assets in carefully selected long-term municipal bonds of medium quality.
The ability of the issuers of debt securities held by the Fund to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a "when-issued" basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Board of Directors. All Securities are valued as
of 4:15 p.m., New York time.
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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option. The Fund, as purchaser of an option, bears the
risk of the potential inability of the counterparties to meet the terms of their
contracts.
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.
- --------------------------------------------------------------------------------
15
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
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.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly at an annual
rate of .50% of the Fund's average daily net assets up to and including $250
million, .475% of the next $250 million, .45% of the next $500 million, .425% of
the next $250 million, .40% of the next $250 million and .375% of the Fund's
average daily net assets in excess of $1.5 billion.
The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acted as the distributor of the Class A, Class B and Class C
shares of the Fund. The Fund compensated 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 were accrued daily and payable monthly. Effective
July 1, 1998, Prudential Investment Management Services LLC ("PIMS") became the
distributor of the Fund and is serving the Fund under the same terms and
conditions as under the arrangment with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensated 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 six months ended June 30, 1998.
PSI has advised the Fund that it received approximately $39,700 in front-end
sales charges resulting from sales of Class A shares during the six months ended
June 30, 1998. From these fees, PSI paid such sales charges to dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended June 30, 1998, it
received approximately $71,500 in contingent deferred sales charges imposed upon
certain redemptions by Class B and Class C shareholders.
PSI, PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. 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 did not borrow any amounts pursuant to the Agreement during the six months
ended June 30, 1998. 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. The Agreement expires on
December 29, 1998.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the six months ended June 30,
1998, the Fund incurred fees of approximately $196,200 for the services of PMFS.
As of June 30, 1998, $32,400 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 nonaffiliates.
- --------------------------------------------------------------------------------
16
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 1998, were $86,131,037 and $113,863,128,
respectively.
The federal income tax basis of the Fund's investments at June 30, 1998 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $46,972,767 (gross
unrealized appreciation--$47,016,655; gross unrealized depreciation--$43,888).
During the six months ended June 30, 1998, the Fund entered into financial
futures contracts. Details of open contracts at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration Trade June 30, Appreciation
Contracts Type Date Date 1998 (Depreciation)
- --------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Long
Position:
U.S.
Treasury
200 Index Sep. 1998 $24,603,125 $24,718,750 $ 115,625
--------------
--------------
</TABLE>
- ------------------------------------------------------------
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%. 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,
authorized divided into three classes, designated Class A, Class B and Class C
common stock, each of which consists of 250 million authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Six months ended June 30, 1998:
Shares sold...................... 479,047 $ 7,720,930
Shares issued in reinvestment of
dividends and distributions.... 460,284 7,397,481
Shares reaquired................. (1,968,482) (31,655,706)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,029,151) (16,537,295)
Shares issued upon conversion
and/or exchange from Class B... 329,309 5,300,294
----------- -------------
Net decrease in shares
outstanding.................... (699,842) $ (11,237,001)
----------- -------------
----------- -------------
<CAPTION>
Shares Amount
----------- -------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold...................... 7,770,406 $ 121,265,504
Shares issued in connection with
the acquisition of Prudential
Municipal Series Fund-Hawaii
Income Series (Note 6)......... 896,395 14,045,247
Shares issued in reinvestment of
dividends and distributions.... 1,127,948 17,779,927
Shares reacquired................ (12,541,415) (197,015,549)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (2,746,666) (43,924,871)
Shares issued upon conversion
from Class B................... 1,028,246 16,211,378
----------- -------------
Net decrease in shares
outstanding.................... (1,718,420) $ (27,713,493)
----------- -------------
----------- -------------
<CAPTION>
Class B
- ---------------------------------
Six months ended June 30, 1998:
Shares sold...................... 353,556 $ 5,705,840
Shares issued in reinvestment of
dividends and distributions.... 115,968 1,868,184
Shares reaquired................. (941,016) (15,171,468)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (471,492) (7,597,444)
Shares reacquired upon conversion
and/or exchange from Class A... (328,493) (5,300,294)
----------- -------------
Net decrease in shares
outstanding.................... (799,985) $ (12,897,738)
----------- -------------
----------- -------------
Year ended December 31, 1997:
Shares sold...................... 493,868 $ 7,772,752
Shares issued in reinvestment of
dividends and distributions.... 319,319 5,042,204
Shares reaquired................. (1,812,567) (28,445,531)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (999,380) (15,630,575)
Shares issued upon conversion
and/or exchange from Class A... (1,025,835) (16,211,378)
----------- -------------
Net decrease in shares
outstanding.................... (2,025,215) $ (31,641,953)
----------- -------------
----------- -------------
<CAPTION>
Class C
- ---------------------------------
Six months ended June 30, 1998:
Shares sold...................... 52,310 $ 841,153
Shares issued in reinvestment of
dividends and distributions.... 1,229 19,772
Shares reacquired................ (1,668) (26,848)
----------- -------------
Net increase in shares
outstanding.................... 51,871 $ 834,077
----------- -------------
----------- -------------
Year ended December 31, 1997:
Shares sold...................... 12,662 $ 199,178
Shares issued in reinvestment of
dividends and distributions.... 1,717 27,181
Shares reacquired................ (12,783) (201,432)
----------- -------------
Net increase in shares
outstanding.................... 1,596 $ 24,927
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 16.12 $ 15.56 $ 15.98 $ 14.42 $ 16.30 $ 15.94
---------- -------- -------- -------- ------- -------
Income from investment operations
Net investment income............................... .40 .81(b) .82(b) .81(b) .81 .90
Net realized and unrealized gain (loss) on
investment transactions.......................... (.05) .67 (.42) 1.57 (1.78) 1.05
---------- -------- -------- -------- ------- -------
Total from investment operations................. .35 1.48 .40 2.38 (.97) 1.95
---------- -------- -------- -------- ------- -------
Less distributions
Dividends from net investment income................ (.40) (.81) (.82) (.81) (.81) (.90)
Distributions in excess of net investment income.... -- (.01) -- (c) (.01) -- --
Distributions from net realized gains............... -- (.10) -- -- (.10) (.69)
---------- -------- -------- -------- ------- -------
Total distributions.............................. (.40) (.92) (.82) (.82) (.91) (1.59)
---------- -------- -------- -------- ------- -------
Net asset value, end of period...................... $ 16.07 $ 16.12 $ 15.56 $ 15.98 $ 14.42 $ 16.30
---------- -------- -------- -------- ------- -------
---------- -------- -------- -------- ------- -------
TOTAL RETURN(a):.................................... 2.21% 9.80% 2.66% 16.91% (6.04)% 12.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $ 480,443 $493,178 $502,739 $538,145 $12,721 $14,167
Average net assets (000)............................ $ 485,960 $491,279 $508,159 $446,350 $14,116 $11,786
Ratios to average net assets:
Expenses, including distribution fees............ .73%(d) .70%(b) .68%(b) .75%(b) .77% .69%
Expenses, excluding distribution fees............ .63%(d) .60%(b) .58%(b) .65%(b) .67% .59%
Net investment income............................ 4.96%(d) 5.15%(b) 5.31%(b) 5.34%(b) 5.38% 5.49%
For Class A, B and C shares:
Portfolio turnover rate.......................... 14% 38% 46% 98% 120% 82%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, ------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 16.16 $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97
---------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income............................... .36 .75(b) .76(b) .76(b) .75 .84
Net realized and unrealized gain (loss) on
investment transactions.......................... (.05) .67 (.42) 1.58 (1.78) 1.05
---------- -------- -------- -------- -------- --------
Total from investment operations................. .31 1.42 .34 2.34 (1.03) 1.89
---------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.36) (.75) (.76) (.76) (.75) (.84)
Distributions in excess of net investment income.... -- (.01) -- (c) (.01) -- --
Distributions from net realized gains............... -- (.10) -- -- (.10) (.69)
---------- -------- -------- -------- -------- --------
Total distributions.............................. (.36) (.86) (.76) (.77) (.85) (1.53)
---------- -------- -------- -------- -------- --------
Net asset value, end of period...................... $ 16.11 $ 16.16 $ 15.60 $ 16.02 $ 14.45 $ 16.33
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
TOTAL RETURN(a):.................................... 2.00% 9.35% 2.26% 16.49% (6.39)% 12.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $128,212 $141,528 $168,185 $222,865 $672,272 $848,299
Average net assets (000)............................ $138,886 $151,938 $193,312 $252,313 $751,623 $854,919
Ratios to average net assets:
Expenses, including distribution fees............ 1.13%(d) 1.10%(b) 1.08%(b) 1.15%(b) 1.17% 1.09%
Expenses, excluding distribution fees............ .63%(d) .60%(b) .58%(b) .65%(b) .67% .59%
Net investment income............................ 4.56%(d) 4.75%(b) 4.91%(b) 4.96%(b) 4.96% 5.09%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 19
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, --------------------------------------------------
1998 1997 1996 1995 1994
---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 16.16 $ 15.60 $ 16.02 $14.44 $15.13
---------- ------- ------- ------ ------
Income from investment operations
Net investment income............................... .34 .71(b) .72(b) .72(b) .29
Net realized and unrealized gain (loss) on
investment transactions.......................... (.05) .67 (.42) 1.59 (.69)
---------- ------- ------- ------ ------
Total from investment operations................. .29 1.38 .30 2.31 (.40)
---------- ------- ------- ------ ------
Less distributions
Dividends from net investment income................ (.34) (.71) (.72) (.72) (.29)
Distributions in excess of net investment income.... -- (.01) -- (c) (.01) --
Distributions from net realized gains............... -- (.10) -- -- --
---------- ------- ------- ------ ------
Total distributions.............................. (.34) (.82) (.72) (.73) (.29)
---------- ------- ------- ------ ------
Net asset value, end of period...................... $ 16.11 $ 16.16 $ 15.60 $16.02 $14.44
---------- ------- ------- ------ ------
---------- ------- ------- ------ ------
TOTAL RETURN(a):.................................... 1.88% 9.08% 2.01% 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $1,659 $825 $772 $403 $141
Average net assets (000)............................ $1,168 $758 $674 $247 $103
Ratios to average net assets:
Expenses, including distribution fees............ 1.38%(d) 1.35%(b) 1.33%(b) 1.40%(b) 1.51%(d)
Expenses, excluding distribution fees............ .63%(d) .60%(b) .58%(b) .65%(b) .76%(d)
Net investment income............................ 4.31%(d) 4.50%(b) 4.67%(b) 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. 20
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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%
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--1.8%
Coconino Cnty. Pol. Ctrl. Corp. Rev.
Tucson Elec. Pwr., Navajo A B2 7.125% 10/01/32 $ 5,000 $ 5,706,500
Tucson Elec. Pwr., Navajo B B2 7.00 10/01/32 1,700 1,934,175
Pima Cnty. Ind. Dev. Auth.,
Multifam. Mtge. Rev., La Cholla Proj. NR 8.50 7/01/20 9,680 10,103,694
Tuscon Elec. Pwr. Co., Ser. A B2 6.10 9/01/25 2,000 2,044,000
--------------
19,788,369
- ------------------------------------------------------------------------------------------------------------------------------
Arkansas--0.7%
Northwest Arkansas Reg'l. Arpt. Auth. Rev. NR 7.625 2/01/27 7,000 8,012,130
- ------------------------------------------------------------------------------------------------------------------------------
California--10.4%
Abag Fin. Auth. For Nonprofit Corps. Ref. Amer. Baptist
Homes., Ser. A BBB(b) 6.20 10/01/27 3,200 3,353,312
California Hsg. Fin. Agcy. Rev., Home Mtge., Ser. G Aa 8.15 8/01/19 795 813,841
Corona Ctfs. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 10,000 11,161,600
Delano Ctfs. of Part., Reg'l. Med. Ctr., Ser. A NR 9.25 1/01/22 6,710 7,811,245
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130(c) 3,369,351
Long Beach Harbor Rev. Ref., Ser. A, F.G.I.C. Aaa 6.00 5/15/19 4,000 4,379,280
Long Beach Redev. Agcy. Hsg.,
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 6,195(e) 3,407,250
Multifam. Hsg. Rev., Pacific Court Apts., Issue B NR 6.80 9/01/13 3,805(e) 2,092,750
Los Angeles Regl. Arpts. Impvt. Corp., Cont. Air
Sublease NR 9.25 8/01/24 10,270 12,303,357
Orange Cnty. Cmnty. Loc. Trans. Auth., Reg. Linked
Savrs. & Ribs Aa3 6.20 2/14/11 7,000 7,862,330
Richmond Redev. Agcy. Rev., Multifam. Bridge Affordable
Hsg. NR 7.50 9/01/23 10,000 10,041,400
Roseville Joint Union H.S. Dist.,
Ser. B, F.G.I.C. Aaa Zero 8/01/09 1,740 1,010,296
Ser. B, F.G.I.C. Aaa Zero 8/01/11 1,890 970,893
Ser. B, F.G.I.C. Aaa Zero 8/01/14 2,220 948,695
Sacramento City Fin. Auth. Rev., Tax Alloc., M.B.I.A. Aaa Zero 11/01/15 5,695 2,256,473
Sacramento Cnty. Spec. Tax Rev., Dist. No. 1 NR 8.25 12/01/20 4,500(c) 5,025,735
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. Aaa Zero 1/01/14 8,420 3,801,462
Toll Rd. Rev. Aaa Zero 1/01/25 10,000 2,497,500
San Luis Obispo Ctfs. of part., Vista Hosp. Sys., Inc. NR 8.375 7/01/29 4,000 4,381,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Santa Margarita/Dana Point Auth., Impvt. Dist.,
Ser. A, M.B.I.A. Aaa 7.25% 8/01/13 $ 1,990(i) $ 2,468,515
Ser. B, M.B.I.A. Aaa 7.25 8/01/12 3,000(i) 3,692,280
So. California Pub. Pwr. Auth. Trans., Cap. Apprec. Aa3 Zero 7/01/14 8,500 3,619,640
So. San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375 2,579,345
So. Tahoe Joint Pwrs. Fin. NR 8.00 10/01/01 5,795 5,883,548
Turlock Irrigation Dist. Rev., Ser. A, M.B.I.A. Aaa 6.25 1/01/12 5,000 5,639,700
Victor Valley Union H.S. Dist.,+
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/12 3,605 1,729,391
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/14 4,740 2,016,775
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/16 3,990 1,504,629
--------------
116,621,593
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--3.0%
Denver Urban Ren. Auth. Tax,
Inc. Rev. NR 7.50 9/01/04 3,000 3,201,600
Inc. Rev. NR 7.75 9/01/16 4,000 4,423,080
Eagle Cnty. Co., Lake Creek Affordable Hsg., Ser. A NR 8.00 12/01/23 11,395 11,947,886
San Miguel Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 3,200(c) 3,691,923
Superior Met. Dist. No. 1, Wtr. & Swr.,
Rev. NR 7.50 12/01/98 855 867,158
Rev. NR 8.50 12/01/13 8,900 9,951,357
--------------
34,083,004
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.0%
Connecticut St. Dev. Auth. Mystic Marinelife Aquarium
Proj. Rev. NR 7.00 12/01/27 1,500 1,593,825
Connecticut St. Dev. Auth. Swr., Netco Waterbury Ltd. NR 9.375 6/01/16 8,000 9,350,720
--------------
10,944,545
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.6%
Dist. of Columbia Rev., Nat'l. Public Radio NR 7.625 1/01/18 8,800 9,610,832
Dist. of Columbia, Ser. A Ba1 5.25 6/01/27 9,000 8,463,960
--------------
18,074,792
- ------------------------------------------------------------------------------------------------------------------------------
Florida--4.2%
Crossings At Fleming Island Cmnty. Dev. Dist., Clay City NR 8.25 5/01/16 7,860 8,649,301
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Ref., Ser. A BBB+(b) 8.60 10/01/02 3,375 3,499,031
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifam.
Mtge. Rev. NR 10.00 1/01/20 9,448(e) 7,464,403
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Florida (cont'd.)
No. Springs Impvt. Dist. Wtr. Mgt.,
Ser. A NR 8.20% 5/01/24 $ 1,960 $ 2,159,704
Ser. A NR 8.30 5/01/24 1,720 1,904,900
Northern Palm Beach Cnty. Impt. Ref., Wtr. Ctl. & Impt.
Unit Dev. NR 6.00 8/01/10 3,250 3,216,363
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa2 6.75 10/01/17 2,000 2,398,060
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts. NR 7.75 3/01/23 4,470 4,812,044
Sarasota Hlth. Facs., Kobernick Hsg. Meadow Park Proj. Aaa 10.00 7/01/22 6,855(c) 8,335,132
Seminole Cnty. Ind. Dev. Auth. Rev., Fern Park NR 9.25 4/01/12 4,335 4,361,487
--------------
46,800,425
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--3.2%
Atlanta Arpt. Facs. Rev., M.B.I.A. Aaa Zero 1/01/10 2,000 1,061,840
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj. NR 9.25 6/01/10 4,440(c) 4,947,758
Effingham Cnty. Dev. Auth., Ft. Howard Corp. Baa3 7.90 10/01/05 10,000 10,676,900
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 6,000(i) 6,874,260
Henry Cnty. Wtr. & Swg. Auth. Rev., A.M.B.A.C. Aaa 6.15 2/01/20 3,000 3,393,330
Rockdale Cnty. Dev. Auth., Solid Wste. Disp. Rev. NR 7.50 1/01/26 8,100 8,769,951
--------------
35,724,039
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--1.1%
Hawaii Cnty. Impvt. Dist. No. 17 NR 9.50 8/01/11 6,565 7,093,614
Hawaii St. Dept. Trans. Spl. Fac. Rev., Continental
Airlines, Inc. Ba2 5.625 11/15/27 5,225 5,127,449
--------------
12,221,063
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--9.3%
Chicago Brd. Edl., Lease Ctfs., Ser. A, M.B.I.A. Aaa 6.00 1/01/20 10,000 11,045,600
Chicago O'Hare Int'l. Arpt.,
Amer. Airlines Proj., Ser. B Baa2 8.20 12/01/24 1,000 1,204,930
United Airlines, Ser. B Baa2 8.45 5/01/07 6,000 6,519,000
United Airlines, Ser. B Baa2 8.50 5/01/18 6,500 7,059,260
United Airlines, Ser. B Baa2 8.85 5/01/18 2,700 3,026,943
United Airlines, Ser. B Baa2 8.95 5/01/18 2,320 2,603,388
Chicago Pub. Bldg. Comm. Rev., Ser. A, M.B.I.A. Aaa 7.00 1/01/20 6,530(i) 8,115,484
Hennepin Ind. Dev. Rev., Exolon-Esk Co. Proj. NR 8.875 1/01/18 8,000 8,996,400
Illinois Reg'l. Trans. Auth. Ref., F.G.I.C. Aaa 6.00 6/01/14 3,530 3,892,037
Illinois St. Hlth. Facs. Auth. Rev.,
Adventist Living Ctr. NR 11.00 12/01/15 2,245(e) 202,009
Beacon Hill Proj., Ser. A NR 9.00 8/15/19 7,135 7,531,064
Midwest Physician Group Ltd. Proj. BBB-(b) 8.10 11/15/14 3,075 3,726,531
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Illinois (cont'd.)
Midwest Physician Group Ltd. Proj. BBB-(b) 5.50% 11/15/19 $ 2,000 $ 1,924,060
Midwest Physician Group Ltd. Proj. BBB-(b) 8.125 11/15/19 3,285 3,985,625
Illinois, Ser. K, A.M.B.A.C. Aaa 6.25 1/01/13 6,825 7,688,636
Kane And De Kalb Cntys. Sch.,
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/11 3,360 1,666,157
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/13 4,065 1,777,055
Vlge. of Robbins, Cook Cnty. Robbins Res. Rec. NR 8.375 10/15/16 18,000 18,670,500
Winnebago Cnty. Hsg. Auth., Park Tower Assoc., Sec. 8 NR 8.125 1/01/11 3,954 4,202,656
--------------
103,837,335
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--2.1%
Bluffton Econ. Dev. Rev., Kroger Co. Proj. Baa3 7.85 8/01/15 7,500 8,483,700
Indianapolis Int'l. Arpt. Auth. Rev., Federal Express
Corp. Proj. Baa2 7.10 1/15/17 6,000 6,708,660
Wabash Econ. Dev. Rev. Bonds, Connell Ltd. NR 8.50 11/24/17 7,250 8,032,130
--------------
23,224,490
- ------------------------------------------------------------------------------------------------------------------------------
Iowa--2.6%
City of Cedar Rapids Rev.,
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/18 9,375 11,076,469
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/25 4,435 5,239,908
Iowa St. Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives Proj. NR 9.25 7/01/25 10,000 13,348,100
--------------
29,664,477
- ------------------------------------------------------------------------------------------------------------------------------
Kentucky--0.8%
Kentucky St. Tpke. Auth. Rev., F.G.I.C. Aaa Zero 1/01/10 8,250 4,646,895
Owensboro Elec. Lt. & Pwr. Rev.,
Ser. B, A.M.B.A.C. Aaa Zero 1/01/14 5,000(i) 2,209,650
Ser. B, A.M.B.A.C. Aaa Zero 1/01/16 6,650(i) 2,620,699
--------------
9,477,244
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.1%
Hodge Util. Rev., Stone Container Corp. NR 9.00 3/01/10 7,000 7,560,350
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
Ser. A, G.N.M.A. Aaa 8.60 12/01/19 1,670(f) 1,721,970
New Orleans Ind. Dev. Rev. BBB(b) 8.75 10/01/19 3,600 4,224,276
New Orleans, Gen Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/18 3,090 1,051,836
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana (cont'd.)
St. Charles Parish Poll. Ctrl. Rev.,
Pwr. & Lt. Co. Baa3 8.25% 6/01/14 $ 10,000 $ 10,659,000
Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 3,500 3,774,015
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util.
Co. Proj. NR 9.00 5/01/15 5,250 5,802,038
--------------
34,793,485
- ------------------------------------------------------------------------------------------------------------------------------
Maryland--1.8%
Anne Arundel Cnty. 1st Mtge. Rev., Pleasant Living Conv. NR 8.50 7/01/13 3,230 3,503,807
Northeast Wste. Disp. Auth.,
Sludge Comp. Fac. NR 7.25 7/01/07 4,059 4,459,095
Sludge Comp. Fac. NR 8.50 7/01/07 3,095 3,378,100
Washington Sub. San. Dist.
Ref., Gen. Const. Aa1 6.00 6/01/18 3,705 4,115,885
Ref., Gen. Const. Aa1 6.00 6/01/19 3,940 4,372,927
--------------
19,829,814
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--4.7%
Boston Ind. Dev. Fin. Auth. Ind. Rev., 1st Mtge.
Springhouse Proj. NR 9.25 7/01/15 8,000 9,962,560
Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A,
F.G.I.C. Aaa 7.00 3/01/21 7,500(i) 9,303,150
Mass. St. Coll. Bldg. Proj. and Ref. Bonds A1 7.50 5/01/14 1,750(i) 2,216,795
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp. NR 8.875 7/01/18 7,500 7,967,250
St. Josephs Hosp., Ser. C NR 9.50 10/01/20 5,640(c) 6,176,815
Mass. St. Ind. Fin. Agcy. Cont. Res., Ser. A NR 9.50 2/01/00 1,100 1,133,616
Massachusetts St. Indl. Fin. Agcy. Rev.,
Ref., Chestnut Knoll Proj. A NR 5.50 2/15/18 1,250 1,224,650
Ref., Chestnut Knoll Proj. A NR 5.625 2/15/25 1,250 1,219,488
Glenmeadow Proj. NR 7.00 2/15/06 3,700 3,700,000
Massachusetts St. Wtr. Res. Auth., Ser. A, F.S.A. Aaa 5.50 8/01/14 3,250 3,417,960
Randolph Hsg. Auth., Multifam. Hsg., Liberty Place Proj.
A, Ser. A NR 9.00 12/01/21 5,885 5,965,448
--------------
52,287,732
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--4.6%
Grand Rapids Dev. Auth.
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/10 3,000 1,647,690
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/11 3,160 1,628,601
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/12 3,000 1,449,720
Gratiot Cnty. Econ. Dev. Corp., Danley Die Proj. Connell
L.P. NR 7.625 4/01/07 3,200 3,480,160
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan (cont'd.)
Holland Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 5/01/17 $ 2,950 $ 1,069,729
Lowell Area Sch., F.G.I.C. Aaa Zero 5/01/14 5,000 2,154,700
Michigan St. Hosp. Fin. Auth. Rev.,
Genesys Regl. Hosp. Baa2 5.50% 10/01/27 3,250 3,171,187
Saratoga Cmnty. Hosp. NR 8.75 6/01/10 6,345(c) 7,313,945
Michigan Strategic Fund, Great Lakes Pulp & Fiber Proj. NR 8.00 12/01/27 12,291 11,861,008
Michigan Strategic Fund, Solid Wste. Disp., Gennese Pwr.
Station NR 7.50 1/01/21 10,000 10,824,600
Wayne Cnty. Bldg. Auth., Ser. A Baa2 8.00 3/01/17 3,500(c) 3,994,830
West Ottawa Sch. Dist.,
F.G.I.C. Aaa Zero 5/01/15 4,825 1,956,489
F.G.I.C. Aaa Zero 5/01/18 3,000 1,029,300
--------------
51,581,959
- ------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.4%
Minneapolis St. Paul Hsg. Fin. Brd., Multifam. Mtge.
Rev., Riverside Plaza, G.N.M.A. AAA(b) 8.25 12/20/30 4,000(i) 4,132,440
- ------------------------------------------------------------------------------------------------------------------------------
Mississipi--1.6%
Claiborne Cnty. Poll. Ctrl. Rev.,
Mid. So. Engy. Sys. Ba1 9.875 12/01/14 6,100 6,448,066
Mid. So. Engy. Sys., Ser. A Ba1 9.50 12/01/13 10,350 10,918,422
--------------
17,366,488
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--2.0%
Sikeston Elec. Rev. Ref., M.B.I.A. Aaa 6.00 6/01/15 9,250 10,258,712
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Soemm Proj. NR 10.25 7/01/08 1,560 1,565,257
Soemm Proj. NR 10.25 7/01/08 590 591,989
St. Louis Cnty. Reg. Conv. & Sports Comp., Ser. C Aaa 7.90 8/15/21 8,820(c) 10,262,335
--------------
22,678,293
- ------------------------------------------------------------------------------------------------------------------------------
Nebraska--0.1%
Nebraska Invest. Fin. Auth., G.N.M.A., Sngl. Fam. Mtge.
Rev.,
Ser. I, M.B.I.A. Aaa 8.125 8/15/38 1,615(i) 1,656,942
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.7%
New Hampshire Higher Edl. & Hlth. Facs. Auth. Rev.,
Antioch College NR 7.875% 12/01/22 $ 5,335 $ 5,942,817
Havenwood/Heritage Heights NR 9.75 12/01/19 7,495(c) 8,372,964
New Hampshire St. Bus. Pollutn. Ref., Pub. Svc. Co. Ba3 6.00 5/01/21 5,000 5,004,700
--------------
19,320,481
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.5%
New Jersey Econ. Dev. Corp. Rev., Ref. Newark Arpt.
Marriot Hotel NR 7.00 10/01/14 3,800 4,171,298
New Jersey Hlthcare Facs., Fin. Auth. Rev. NR 8.00 7/01/27 5,000 5,486,650
New Jersey St. Econ. Dev. Auth. Rev., 1st Mtge.,
Fellowship Vlge., Proj. A Aaa 9.25 1/01/25 11,500(c) 14,690,790
Leisure Park Proj., Ser. A NR 5.875 12/01/27 4,000 4,031,520
New Jersey St. Edl. Facs. Auth. Rev., Felician College
Of Lodi,
Ser. D NR 7.375 11/01/22 4,000 4,109,840
New Jersey St. Ref., Ser. E Aa1 6.00 7/15/10 10,000(i) 11,157,000
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000(i) 12,757,360
New Jersey St. Trans. Trust Fund Auth., Trans. Sys.,
M.B.I.A. Aaa 6.50 6/15/11 14,500(i) 16,786,650
--------------
73,191,108
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.5%
Farmington Pollutn. Ctrl. Rev.,
Ref., Pub. Svc. Co., Ser. C Ba1 5.80 4/01/22 1,000 1,004,430
Ref., Pub. Svc. Co., Ser. A Ba1 5.80 4/01/22 1,500 1,527,090
Ref., Pub. Svc. Co., Ser. B Ba1 5.80 4/01/22 3,000 3,054,180
--------------
5,585,700
- ------------------------------------------------------------------------------------------------------------------------------
New York--4.1%
Met. Trans. Auth. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 8,340(i) 3,827,977
New York City Ind. Dev. Agcy.,
Amer. Airlines Inc. Baa2 8.00 7/01/20 3,320 3,463,424
Bklyn. Navy Yard Cogen Partners Baa3 6.20 10/01/22 6,925 7,503,099
Bklyn. Navy Yard Cogen Partners Baa3 5.75 10/01/36 5,000 4,977,450
Mesorah Pub. Ltd. NR 10.25 3/01/19 1,861 1,974,837
Visy Paper Inc. Proj. NR 7.95 1/01/28 6,500 7,532,850
New York City, Ser. I A3 6.25 4/15/27 3,000 3,208,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
New York St. Dorm. Auth. Rev.,
Colgate Univ., M.B.I.A. Aaa 6.00% 7/01/21 $ 3,350 $ 3,717,863
Memorial Sloan Kettering Cancer Ctr., M.B.I.A. Aaa 5.75 7/01/20 5,000 5,365,850
Port Auth. of New York & New Jersey, USAir, LaGuardia
Arpt. B3 9.125 12/01/15 4,000 4,480,480
--------------
46,052,630
- ------------------------------------------------------------------------------------------------------------------------------
North Carolina--0.1%
North Carolina Med. Care Comm. Hosp. Rev., Ref. Annie
Penn Mem. Hosp. Baa3 5.375 1/01/22 1,000 973,160
- ------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.1%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C Aaa 7.20 6/30/13 10,000(i) 12,115,000
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--4.4%
Cleveland Arpt. Spl. Rev., Ref. Continental Airlines,
Inc. Ba2 5.70 12/01/19 4,850(h) 4,740,778
Cleveland Pub. Pwr. Sys. Rev.,
1st Mtge., M.B.I.A. Aaa Zero 11/15/12 1,000 472,010
1st Mtge., M.B.I.A. Aaa Zero 11/15/13 1,500 667,320
1st Mtge., Ser. A, M.B.I.A. Aaa Zero 11/15/09 3,000 1,710,030
Dayton Spl. Facs. Rev., Ref. Emery Air Freight, Ser. A BBB(b) 5.625 2/01/18 3,500(h) 3,498,355
Mahoning Valley San. Dist. Wtr. Rev. NR 7.75 5/15/19 8,000 8,851,040
Montgomery Cnty. Hlthcare. Facs. Rev., Friendship Vlge.
Dayton, Proj. B NR 9.25 2/01/16 4,500(c) 4,965,660
Ohio St. Air Quality Dev. Auth. Ref., Amt. Coll. Poll.
Ctrl., Ser. A Ba1 6.10 8/01/20 3,000 3,103,380
Ohio St. Solid Wste. Rev.,
Cscltd. Proj. NR 8.50 8/01/22 5,000 5,267,600
Rep. Eng. Steels Inc. NR 9.00 6/01/21 2,250 2,408,287
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mtge.,
Toledo Edison Ba1 8.00 10/01/23 5,500 6,286,775
Stark Cnty. Hlthcare. Facs. Rev., Rose Lane Inc. Proj. NR 9.00 12/01/23 6,135 6,985,925
--------------
48,957,160
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.5%
Grand River Dam Auth. Rev., A.M.B.A.C. Aaa 6.25 6/01/11 12,000(i) 13,588,080
Tulsa Ind. Dev. Auth., Univ. Tulsa, Ser. A, M.B.I.A. Aaa 6.00 10/01/16 3,250(f) 3,567,817
--------------
17,155,897
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--5.0%
Allegheny Cnty. Hosp. Rev., West Penn. Hosp. Hlth. Ctr. NR 8.50% 1/01/20 $ 2,800 $ 3,007,508
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj. NR 11.00 12/01/15 367(e) 33,072
Alvernia Coll. Proj. NR 7.75 11/15/16 5,240 5,848,154
Dauphin Cnty. Gen. Auth. Hosp. Rev., NW Med. Ctr. Proj. BBB-(b) 8.625 10/15/13 6,570 7,854,961
Lancaster Cnty. Solid Wste. Mgmt., Res. Rec. Auth. Sys.
Rev., Ser. A Baa2 8.50 12/15/10 5,965(c) 6,116,272
Philadelphia Auth., Ind. Dev. Rev. NR 7.75 12/01/17 5,000 5,617,650
Philadelphia Hosps. & Higher Ed. Facs. Auth. Rev.,
Grad. Hlth. Sys. B2 7.00 7/01/05 2,500 2,619,175
Grad. Hlth. Sys. B2 7.25 7/01/18 2,710 2,869,185
Grad. Hlth. Sys., Ser. A B2 6.25 7/01/13 2,500 2,515,500
Philadelphia Wtr. & Wstewtr. Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/10 2,500 2,807,925
M.B.I.A. Aaa 6.25 8/01/12 3,000(i) 3,375,450
Somerset Cnty. Hosp. Auth. Rev.,
Hlthcare 1st Mtge. NR 8.40 6/01/09 2,305 2,587,316
Hlthcare 1st Mtge. NR 8.50 6/01/24 8,805 9,894,091
Wilkes Barre Gen. Mun. Auth. Coll. Rev., Misericordia
Coll., Ser. A NR 7.75 12/01/12 1,245 1,361,657
--------------
56,507,916
- ------------------------------------------------------------------------------------------------------------------------------
Rhode Island--1.0%
Rhode Island Redev. Agcy., Ser. A NR 8.00 9/01/24 10,560 11,584,742
- ------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.4%
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge. Aa2 7.75 7/01/22 4,345(i) 4,573,982
- ------------------------------------------------------------------------------------------------------------------------------
South Dakota--0.8%
Education Loans Inc. Student Loan Rev. A2 5.60 6/01/20 3,300 3,226,641
So. Dakota Econ. Dev. Fin. Auth., Dakota Park NR 10.25 1/01/19 4,930 5,258,387
--------------
8,485,028
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.4%
Knox Cnty. Hlth. & Edl. Facs. Rev., Baptist Hlth. Hosp. Aaa 8.50 4/15/04 5,225(c) 5,549,890
Met. Gov't. Nashville & Davidson Cnty. H&E Facs. Brd.
Rev., Ref.
Blakeford Green Hills NR 5.65 7/01/24 1,500 1,464,825
Rutherford Cnty. Hlth. & Edl. Facs., Brd. 1st Mtge. Rev. NR 9.50 12/01/19 7,300 8,525,451
--------------
15,540,166
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<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--3.4%
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev. A1 9.20% 3/01/12 $ 1,380 $ 1,545,434
Houston Arpt. Sys. Rev. Ba2 6.125 7/15/27 3,200 3,333,280
Houston Wtr. & Swr. Sys. Rev., Ser. C, A.M.B.A.C. Aaa Zero 12/01/10 5,000 2,659,250
Keller Ind. Sch. Dist., Cap. Apprec. Ref., Ser. A,
P.S.F.G. Aaa Zero 8/15/17 4,075 1,441,491
New Braunfels Ind. Sch. Dist.,
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/08 2,365 1,472,189
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/09 2,365 1,392,086
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/12 2,365 1,154,948
Nueces Riv. Auth., Ref. Asarco Inc. Proj. Baa2 5.60 1/01/27 2,500 2,499,775
Round Rock Ind. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,385 2,222,099
San Antonio Elec. & Gas Rev.,
F.G.I.C. Aaa Zero 2/01/09 5,000 2,943,100
F.G.I.C., Ser. B Aaa Zero 2/01/12 7,500 3,662,625
Tarrant Cnty. Hlth. Facs. Dev. Corp. Rev., Foundation
Proj. NR 10.25 9/01/19 5,000 5,319,550
Texas Mun. Pwr. Agcy. Rev., M.B.I.A. Aaa Zero 9/01/15 16,300 6,438,989
Tyler Tex. Hlth. Facs. Dev. Corp., Mother Frances Hosp.,
Ser. A Baa2 5.625 7/01/13 1,680 1,682,318
--------------
37,767,134
- ------------------------------------------------------------------------------------------------------------------------------
Utah--0.5%
Carbon Cnty. Solid Wste. Disp. Rev. Ref., Laidlaw
Environmental, Ser. A NR 7.45 7/01/17 1,500 1,642,950
Tooele Cnty Poll. Ctrl. Rev. Ref., Laidlaw
Environmental, Ser. A NR 7.55 7/01/27 4,000 4,404,360
--------------
6,047,310
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--1.6%
Loudoun Cnty. Ind. Dev. Auth., Rev. NR 7.125 9/01/15 2,000 2,209,680
Norfolk Redev. & Hsg. Auth., Multifam. Rental Hsg. Fac.
Rev. NR 8.00 9/01/26 6,000 6,126,840
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade NR 7.55 1/01/19 9,000 9,902,340
--------------
18,238,860
- ------------------------------------------------------------------------------------------------------------------------------
Washington--2.5%
Bellevue Conv. Ctr. Auth.,
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/10 870 482,467
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/11 1,200 625,092
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/12 1,300 634,855
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/14 1,385 600,135
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River
Rock, Hydro Elec. Sys. Rev., M.B.I.A. Aaa Zero 6/01/15 7,585 3,036,655
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 16
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Washington (cont'd.)
Thurston Cnty. Sch. Dist. 333,
F.G.I.C. Aaa Zero 12/01/12 $ 6,830 $ 3,193,640
F.G.I.C., Ser. B Aaa Zero 12/01/11 6,415 3,202,175
Washington St. Ref., Ser. R, 97A Aa1 Zero 7/01/16 7,000 2,639,770
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. B Aa1 7.25% 7/01/09 5,000(i) 5,897,400
Nuclear Proj. No. 3, M.B.I.A. Aaa Zero 7/01/17 5,000 1,747,450
Nuclear Proj. No. 3, Ser. B, M.B.I.A. Aaa 7.125 7/01/16 5,000 6,074,800
--------------
28,134,439
- ------------------------------------------------------------------------------------------------------------------------------
West Virginia--1.0%
So. Charleston Ind. Dev. Rev., Union Carbide Chem. &
Plastics Co. Baa2 8.00 8/01/20 2,450 2,635,930
Weirton Poll. Ctrl. Rev., Weirton Steel Proj. B2 8.625 11/01/14 4,000 4,230,120
West Virginia St. Hsg. Dev. Fund Hsg. Fin., Ser. A,
F.H.A. Aaa 7.95 5/01/17 1,160 1,160,128
West Virginia St. Pkwys. Econ. Dev. & Tourism Auth.,
F.G.I.C. Aaa 7.423 5/16/19 3,250(d) 3,542,500
--------------
11,568,678
- ------------------------------------------------------------------------------------------------------------------------------
Wisconsin--0.4%
Oconto Falls Cmnty. Dev. Auth. Dev. Rev., Oconto Falls
Tissue, Inc. Proj. NR 7.75 12/01/22 4,000 4,149,840
--------------
Total long-term investments (cost $1,016,977,321) 1,098,749,890
--------------
SHORT-TERM INVESTMENTS--0.7%
- ------------------------------------------------------------------------------------------------------------------------------
Florida
St. Lucie Cnty. Solid Wst. Disp. Rev., Ser. 93,
F.R.D.D., A.M.T. VMIG1 4.40 5/01/98 100 100,000
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.2%
Plaquemines Parish Environmental Rev. Adj., Ref. BP.
Exploration & Oil, Ser. 95, F.R.D.D., A.M.T. P-1 4.40 5/01/98 1,500 1,500,000
West Baton Rouge Parish Ind. Dist. Pound3 Rev., Dow
Chemical Co. Proj., Ser. 95, F.R.D.D., A.M.T. P-1 4.40 5/01/98 700 700,000
--------------
2,200,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--0.3%
Brazos River Harbor Nav. Dist. Rev., Dow Chemical Co.,
Ser. A, F.R.D.D., A.M.T. P-1 4.40 5/01/98 2,600 2,600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 17
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<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.)
Brazos River Harbor Nav. Dist., Dow Chemical Co. Proj.,
Ser. 96, F.R.D.D., A.M.T. P-1 4.40% 5/01/98 $ 400 $ 400,000
Gulf Coast Ind. Dev. Auth. Solid Wste. Rev., Citgo
Petroleum, Ser. 95, F.R.D.D., A.M.T. VMIG1 4.40 5/01/98 400 400,000
--------------
3,400,000
- ------------------------------------------------------------------------------------------------------------------------------
Virginia
King George Cnty. Ind. Dev. Auth. Expt. Fac. Rev.,
F.R.D.D. A1+(b) 4.40 5/01/98 600 600,000
- ------------------------------------------------------------------------------------------------------------------------------
Washington--0.2%
Washington St. Hsg. Fin. Comm. Nonprofit Hsg. Rev.,
Emerald Height Proj., Ser. 90, F.R.D.D. A-1(b) 4.25 5/01/98 2,000 2,000,000
Ref. Panorama Cty. Proj., Ser. 97, F.R.D.D. VMIG1 4.25 5/01/98 200 200,000
--------------
2,200,000
--------------
Total short-term investments (cost $8,500,000) 8,500,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments--98.7%
(cost $1,025,477,321; Note 4) 1,107,249,890
Other assets in excess of liabilities--1.3% 13,980,703
--------------
Net Assets--100% $1,121,230,593
--------------
--------------
</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
F.G.I.C.--Financial Guaranty Insurance Company
F.H.A.--Federal Housing Administration
F.R.D.D.--Floating Rate (Daily) Demand Note (g)
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Issuer in default of interest payment. Non-income producing security.
(f) All or partial principal amount pledged as initial margin on financial
futures contracts.
(g) The maturity date shown is 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.
(h) When-issued security.
(i) All or partial amount of principal segregated as collateral for financial
futures contracts and when-issued security.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $1,025,477,321)................................................................. $1,107,249,890
Cash........................................................................................................ 532,945
Interest receivable......................................................................................... 20,820,891
Receivable for investments sold............................................................................. 7,493,133
Receivable for Series shares sold........................................................................... 3,114,900
Due from broker - variation margin.......................................................................... 35,062
Other assets................................................................................................ 16,732
--------------
Total assets............................................................................................. 1,139,263,553
--------------
Liabilities
Payable for investments purchased........................................................................... 13,292,139
Payable for Series shares reacquired........................................................................ 2,008,464
Dividends payable........................................................................................... 1,788,096
Management fee payable...................................................................................... 410,722
Distribution fee payable.................................................................................... 323,222
Accrued expenses............................................................................................ 210,317
--------------
Total liabilities........................................................................................ 18,032,960
--------------
Net Assets.................................................................................................. $1,121,230,593
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 991,547
Paid-in capital in excess of par......................................................................... 1,063,404,578
--------------
1,064,396,125
Accumulated net realized loss on investments............................................................. (24,938,101)
Net unrealized appreciation of investments............................................................... 81,772,569
--------------
Net assets, April 30, 1998.................................................................................. $1,121,230,593
--------------
--------------
Class A:
Net asset value and redemption price per share
($421,515,355 / 37,273,437 shares of beneficial interest issued and outstanding)...................... $11.31
Maximum sales charge (3% of offering price).............................................................. .35
--------------
Maximum offering price to public......................................................................... $11.66
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($669,241,615 / 59,185,536 shares of beneficial interest issued and outstanding)...................... $11.31
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($20,554,428 / 1,817,829 shares of beneficial interest issued and outstanding)........................ $11.31
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($9,919,195 / 877,903 shares of beneficial interest issued and outstanding)........................... $11.30
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 19
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $ 71,328,838
--------------
Expenses
Management fee............................ 5,323,382
Distribution fee--Class A................. 381,735
Distribution fee--Class B................. 3,345,658
Distribution fee--Class C................. 111,993
Transfer agent's fees and expenses........ 450,000
Custodian's fees and expenses............. 152,000
Reports to shareholders................... 81,000
Registration fees......................... 64,000
Insurance expense......................... 29,000
Legal fees and expenses................... 18,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Miscellaneous............................. 8,437
--------------
Total expenses......................... 9,993,205
Less: Management fee waiver............... (535,931)
Custodian fee credit................... (4,478)
--------------
Net expenses........................... 9,452,796
--------------
Net investment income........................ 61,876,042
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... (5,710,322)
Financial futures contract transactions... (740,523)
--------------
(6,450,845)
--------------
Net change in unrealized appreciation of:
Investments............................... 50,351,593
--------------
Net gain on investments...................... 43,900,748
--------------
Net Increase in Net Assets
Resulting from Operations.................... $105,776,790
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 61,876,042 $ 63,368,111
Net realized loss on
investment
transactions............. (6,450,845) (4,271,817)
Net change in unrealized
appreciation of
investments.............. 50,351,593 18,105,192
-------------- --------------
Net increase in net assets
resulting from
operations............... 105,776,790 77,201,486
-------------- --------------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A.................. (23,016,599) (18,998,681)
Class B.................. (37,682,645) (43,873,295)
Class C.................. (804,495) (467,478)
Class Z.................. (372,303) (28,657)
-------------- --------------
(61,876,042) (63,368,111)
-------------- --------------
Distributions in excess of
net investment income
Class A.................. -- (39,610)
Class B.................. -- (82,405)
Class C.................. -- (965)
Class Z.................. -- (28)
-------------- --------------
-- (123,008)
-------------- --------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed............... 194,658,081 116,459,010
Net asset value of shares
issued in reinvestment of
dividends................ 27,600,737 28,109,609
Cost of shares reacquired... (156,797,816) (175,001,590)
-------------- --------------
Net increase (decrease) in
net assets from Series
share transactions....... 65,461,002 (30,432,971)
-------------- --------------
Total increase (decrease)...... 109,361,750 (16,722,604)
Net Assets
Beginning of year.............. 1,011,868,843 1,028,591,447
-------------- --------------
End of year.................... $1,121,230,593 $1,011,868,843
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 20
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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--98.3%
- ------------------------------------------------------------------------------------------------------------------------------
Alabama--0.7%
Huntsville Solid Wste. Disp. Auth., F.G.I.C. Aaa 7.00% 10/01/08 $ 2,000 $ 2,147,080
Jefferson Cnty. Swr. Rev. Wste., Ser. D, F.G.I.C. Aaa 5.75 2/01/22 1,200 1,249,716
------------
3,396,796
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--2.4%
Alaska St. Engy. Auth. Pwr. Rev., Bradley Lake Hydro, 1st
Ser., A.M.B.A.C. Aaa 7.25 7/01/16 2,000(g) 2,106,600
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C. Aaa 7.125 10/01/05 5,000 5,512,450
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/06 5,000 3,375,300
------------
10,994,350
- ------------------------------------------------------------------------------------------------------------------------------
Arizona--1.9%
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.00 12/01/00 1,755 1,827,569
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,045(c) 1,149,155
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,205 1,315,294
Maricopa Cnty. Unified Sch. Dist. No. 69, Paradise
Valley, Ser. E, F.G.I.C. Aaa 6.80 7/01/12 3,700 4,390,013
------------
8,682,031
- ------------------------------------------------------------------------------------------------------------------------------
California--6.3%
California St. Pub. Wks. Brd.,
Comm. Coll. Proj., Ser. A, A.M.B.A.C. Aaa 5.625 3/01/16 2,000 2,078,700
Dept. of Corrections, A.M.B.A.C. Aaa 5.75 1/01/12 2,000 2,127,940
Contra Costa Wtr. Dist. Wtr. Rev., Ser. E, A.M.B.A.C. Aaa 6.25 10/01/12 1,455 1,648,253
Inland Empire Solid Wste. Fin. Auth., Landfill Impvt.
Fin., Proj. B, F.S.A. Aaa 6.00 8/01/16 2,000 2,117,580
Roseville Joint Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 8/01/13 2,015 915,455
San Diego Cnty. Wtr. Auth. Wtr. Rev., Ctfs. of Part.,
F.G.I.C Aaa 7.037 4/26/06 5,800(d) 6,590,250
San Francisco City & Cnty. Arpt. Comm. Int'l. Arpt. Rev.,
Ser. 2, F.S.A. Aaa 4.75 5/01/29 5,755 5,243,265
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C Aaa 8.00 8/15/08 2,000(g) 2,537,220
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 2,725(g) 3,151,136
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 21
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Victor Valley Element. Sch. Dist.,
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/17 $ 3,550 $ 1,279,207
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/18 3,700 1,258,925
------------
28,947,931
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--1.2%
Denver City & Cnty. Arpt. Rev., Ser. C, M.B.I.A. Aaa 5.60% 11/15/11 5,000 5,199,300
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A. Aaa 8.875 10/01/13 435 464,141
------------
5,663,441
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.1%
Connecticut St. Res. Rec. Auth., Mid. Connecticut. Sys.,
Ser. A, M.B.I.A. Aaa 5.25 11/15/08 5,000 5,209,200
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--8.5%
Dist. of Columbia Hosp. Rev. Medlantic Hlthcare Grp.,
M.B.I.A. Aaa 5.875 8/15/19 3,500 3,652,110
M.B.I.A. Aaa 5.75 8/15/26 3,000(g) 3,093,750
Dist. of Columbia Met. Area Trans. Auth.,
Gross Rev., F.G.I.C. Aaa 6.00 7/01/09 2,400 2,655,336
Gross Rev., F.G.I.C. Aaa 6.00 7/01/10 1,500 1,659,960
Dist. of Columbia Ref.,
Ser. B, F.S.A. Aaa 5.50 6/01/10 7,565(g) 7,890,673
Ser. B, M.B.I.A. Aaa 6.00 6/01/18 4,460 4,866,083
Ser. B, M.B.I.A. Aaa 6.00 6/01/19 3,965 4,319,987
Dist. of Columbia,
Assoc. American Med. Colleges, A.M.B.A.C Aaa 5.375 2/15/27 4,500 4,483,260
Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000(g) 6,797,040
------------
39,418,199
- ------------------------------------------------------------------------------------------------------------------------------
Florida--4.2%
Brevard Hlth. Facs. Auth. Rev., Holmes Reg'l. Med. Ctr.,
M.B.I.A. Aaa 5.60 10/01/10 6,000(g) 6,349,800
Dade Cnty. Edl. Facs. Auth. Rev. Ref., Ser. A, M.B.I.A. Aaa 5.625 4/01/06 3,000 3,200,010
Dade Cnty. Res. Rec., Facs. Rev. Ref., A.M.B.A.C. Aaa 5.10 10/01/04 3,355 3,458,468
Orange Cnty. Hlth. Facs. Auth. Rev. Hosp., Orlando Reg'l.
Hlthcare, Ser. A, M.B.I.A. Aaa 6.25 10/01/07 3,160 3,536,862
Palm Beach Cnty. Solid Wste. Auth. Rev. Ref., Ser. A,
A.M.B.A.C. Aaa 6.00 10/01/09 2,500 2,770,550
------------
19,315,690
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 22
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 Arpt. Facs. Rev., A.M.B.A.C. Aaa 6.50% 1/01/10 $ 2,000 $ 2,295,120
Georgia Mun. Elec. Auth.,
Proj. No. 1, A.M.B.A.C. Aaa 6.00 1/01/06 5,570 6,050,022
Pwr. Rev., M.B.I.A. Aaa 6.20 1/01/10 3,495(e) 3,891,613
------------
12,236,755
- ------------------------------------------------------------------------------------------------------------------------------
Hawaii--3.3%
Hawaii St. Dept. Bud. & Fin. Spec. Purpose Rev., Hawaiian
Elec. Co. Inc., Ser. A, M.B.I.A. Aaa 5.65 10/01/27 15,000 15,199,950
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--11.7%
Arlington Hts. Park Dist. Cap. Apprec., Ser. E, F.G.I.C. Aaa Zero 12/01/13 4,175 1,825,143
Chicago Bd. Edl.
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/11 5,000 2,479,400
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/12 6,000 2,785,680
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/13 3,500 1,530,060
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/14 7,195 2,958,728
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/15 3,245 1,254,030
Chicago Bd. Edl. Sch. Ref., A.M.B.A.C. Aaa 5.75 12/01/27 10,000 10,394,200
Chicago Midway Arpt. Rev., Ser. B, M.B.I.A. Aaa 5.75 1/01/22 6,835 7,009,771
Chicago O'Hare Int'l. Arpt. Rev., Pass. Facs. Chrg., Ser.
A, A.M.B.A.C. Aaa 5.625 1/01/15 2,000 2,057,660
Chicago Park Dist., A.M.B.A.C. Aaa 5.30 1/01/15 3,000 3,008,760
Chicago Skyway Toll Brdg. Rev., M.B.I.A. Aaa 5.50 1/01/23 650 657,794
Chicago Wstewtr. Trans. Rev.
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/20 7,275 2,221,494
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/21 13,655 3,947,524
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/24 13,695 3,349,386
Chicago Wtr. Rev. Cap. Apprec., F.G.I.C. Aaa Zero 11/01/16 3,055 1,121,490
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A. Aaa 7.00 7/01/12 1,575 1,673,579
Ser. A, M.B.I.A. Aaa 7.05 7/01/27 5,400 5,741,658
------------
54,016,357
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--2.0%
Marion Cnty. Hosp. Auth. Facs. Rev., A.M.B.A.C. Aaa 8.625 10/01/12 8,500(c)(g) 9,211,705
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 23
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.5%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 $ 4,000 $ 2,313,200
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--1.3%
Massachusetts Bay Trans. Auth. Gen. Sys., Ser. A,
M.B.I.A. Aaa 4.50% 3/01/26 4,000 3,474,000
Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Baystate
Med. Ctr., Ser. E, F.S.A. Aaa 6.00 7/01/26 2,475 2,617,610
------------
6,091,610
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--4.1%
Detroit Dwntwn. Dev., Ser. A, A.M.B.A.C. Aaa 5.75 7/15/15 1,820 1,903,702
Detroit Swr. Disp. Rev., Ser. 1993A, F.G.I.C. Aaa 7.263 7/01/23 6,500(d)(g) 6,833,125
Michigan St. Hosp. Fin. Auth. Rev., Mid. Michigan Oblig.,
M.B.I.A. Aaa 7.50 6/01/15 2,350(c) 2,550,126
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., Proj.
1, Ser. I, A.M.B.A.C. Aaa 7.30 9/01/19 3,250 3,461,542
Saginaw Hosp. Fin. Auth., St. Luke's Hosp., Ser. C,
M.B.I.A. Aaa 6.50 7/01/11 4,000 4,278,440
------------
19,026,935
- ------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.6%
Harrison Cnty. Wste. Wtr. Mgmt. Dist. Rev., Wste. Wtr.
Treatmt., Facs. Auth., F.G.I.C. Aaa 6.50 2/01/06 2,400 2,576,832
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--0.3%
Missouri St. Hlth. & Edl. Facs. Rev.,
SSM Hlthcare, Ser. AA, M.B.I.A. NR 6.25 6/01/16 285(c) 309,806
SSM Hlthcare, Unref., Ser. AA, M.B.I.A. Aaa 6.25 6/01/16 1,215 1,304,315
------------
1,614,121
- ------------------------------------------------------------------------------------------------------------------------------
Montana--0.5%
Forsyth Poll. Ctrl. Rev., Puget Sound Pwr. & Lt. Co., 1st
Mtge., Ser. A, A.M.B.A.C. Aaa 7.05 8/01/21 2,000 2,171,280
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.3%
East Orange Bd. Edl. Ctfs. Part.
Cap. Apprec., F.S.A. Aaa Zero 2/01/15 1,425 595,180
Cap. Apprec., F.S.A. Aaa Zero 2/01/16 1,000 395,770
Cap. Apprec., F.S.A. Aaa Zero 2/01/17 1,425 533,335
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 24
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey (cont'd.)
East Orange Bd. Edl. Ctfs. Part.
Cap. Apprec., F.S.A. Aaa Zero 2/01/18 $ 2,845 $ 1,008,496
Cap. Apprec., F.S.A. Aaa Zero 8/01/18 1,425 492,038
Cap. Apprec., F.S.A. Aaa Zero 2/01/20 1,845 585,086
Cap. Apprec., F.S.A. Aaa Zero 8/01/21 2,845 834,837
Cap. Apprec., F.S.A. Aaa Zero 8/01/23 1,400 368,606
Jersey City Swr. Auth.,
A.M.B.A.C. Aaa 6.00% 1/01/10 2,585 2,854,615
A.M.B.A.C. Aaa 6.25 1/01/14 4,255 4,817,809
New Jersey Econ. Dev. Auth.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.875 7/01/11 5,900 6,270,756
Mkt. Trans. Facs. Rev., Sr. Lien, M.B.I.A. Aaa 5.80 7/01/09 3,340 3,567,454
Natural Gas Facs. Rev., M.B.I.A. Aaa 5.70 6/01/32 5,000 5,148,900
New Jersey Impvt. Auth. Rev., Util. Sys., M.B.I.A. Aaa 5.75 7/01/27 1,500 1,559,595
------------
29,032,477
- ------------------------------------------------------------------------------------------------------------------------------
New York--11.5%
Erie Cnty. Wtr. Auth. Rev., A.M.B.A.C. Aaa Zero 12/01/17 770 189,682
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,750 2,095,887
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 5,000 5,291,600
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys.
Rev., M.B.I.A. Aaa 5.75 6/15/26 5,000 5,182,750
New York City,
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/07 4,000 2,604,800
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/08 3,325 2,030,212
Ser. D, M.B.I.A. Aaa 5.25 8/01/21 2,500 2,466,750
Ser. G, M.B.I.A. Aaa 5.75 2/01/14 3,000 3,134,040
New York St. Dorm. Auth. Rev., Montefiore Med. Ctr.,
A.M.B.A.C. Aaa 6.00 8/01/08 3,400 3,738,606
New York St. Envir. Facs. Corp.,
Poll. Ctrl. Rev. Aaa 5.70 7/15/12 3,375 3,567,442
Poll. Ctrl. Rev. Aaa 5.75 7/15/13 1,060 1,132,239
Poll. Ctrl. Rev. Aaa 5.80 7/15/14 3,755 3,998,362
New York St. Thrwy. Auth. Gen. Rev.,
Ser. D Aa3 5.40 1/01/11 5,370 5,570,730
Ser. D Aa3 5.50 1/01/12 3,865 4,016,508
Port Auth. New York & New Jersey Cons., Ser. 99, F.G.I.C. Aaa 5.90 11/01/11 7,665 8,114,246
------------
53,133,854
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 25
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--3.9%
Cleveland City Sch. Dist.,
Rev. Antic. Nts., A.M.B.A.C. Aaa 5.50% 6/01/06 $ 6,465 $ 6,836,026
Rev. Antic. Nts., A.M.B.A.C. Aaa 5.75 6/01/07 5,870 6,325,806
Kent City Sch. Dist., F.G.I.C. Aaa 5.75 12/01/21 1,000 1,043,820
Lorain Cnty. Hosp. Rev., Catholic Hlthcare Partners,
M.B.I.A. Aaa 5.50 9/01/27 4,000 4,046,800
------------
18,252,452
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.5%
Norman Reg'l. Hosp. Auth., Rev. Ref., Ser. A, M.B.I.A. Aaa 5.50 9/01/11 4,110 4,267,290
Oklahoma City Arpt. Trust, Jr. Lien, Ser. 24, A.M.B.A.C. Aaa 5.75 2/01/18 2,620 2,690,399
------------
6,957,689
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--1.3%
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser.
A, M.B.I.A. Aaa 6.90 11/15/03 3,000 3,299,010
Philadelphia, Sch. Dist., Ser. B, A.M.B.A.C. Aaa 5.375 4/01/27 2,500 2,504,275
------------
5,803,285
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.1%
Puerto Rico Comm., M.B.I.A. Aaa 4.875 7/01/23 3,000 2,823,690
Puerto Rico Gen. Oblig., M.B.I.A. Aaa 6.25 7/01/13 1,250 1,421,825
Puerto Rico Pub. Bldgs. Auth. Rev., Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 7/01/13 1,700 1,933,682
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.667 1/25/07 4,100(d) 4,407,500
Ser. I, M.B.I.A. Aaa 6.915 1/16/15 3,800(d) 3,952,000
------------
14,538,697
- ------------------------------------------------------------------------------------------------------------------------------
South Dakota--2.8%
So. Dakota Hsg. Dev. Auth., Homeownership Mtge., Ser. F Aa1 5.80 5/01/28 12,620 12,960,866
- ------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.2%
Metro. Gov't. Nashville & Davidson Cnty. Wtr. & Swr.
Rev., A.M.B.A.C. Aaa 8.216 1/01/22 5,000(d) 5,731,250
- ------------------------------------------------------------------------------------------------------------------------------
Texas--5.4%
Austin Util. Sys. Rev. Comb., Ser. A, M.B.I.A. Aaa 4.875 11/15/10 5,500 5,466,725
Austin Util. Sys. Rev., M.B.I.A. Aaa Zero 5/15/03 8,000 6,354,480
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 26
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<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.)
Brazos Rvr. Auth. Rev., Houston Lt. & Pwr., Ser. B, 1st
Mtge., F.G.I.C. Aaa 7.20% 12/01/18 $ 1,000 $ 1,061,030
Houston Arpt. Sys. Rev. Aaa 7.20 7/01/13 3,900 4,600,323
Houston Arpt. Sys. Rev., Spec. Facs. People Mover, Ser.
A, F.S.A. Aaa 6.00 7/15/05 3,255 3,508,857
Keller Ind. Sch. Dist., P.S.F.G. Aaa Zero 8/15/15 4,945 1,958,072
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C. Aaa 7.50 8/15/13 1,985 2,067,298
------------
25,016,785
- ------------------------------------------------------------------------------------------------------------------------------
Virginia--3.7%
Chesapeake Bay Brdg. & Tunn. Comm., Dist. Rev., F.G.I.C. Aaa 5.875 7/01/10 5,000 5,386,850
Richmond Met. Auth. Expwy. Rev. Ref., F.G.I.C. Aaa 5.25 7/15/22 4,265 4,299,675
Virginia Beach Hosp. Facs. Rev.,
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/10 1,220 1,352,882
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/13 1,455 1,608,925
Virginia Coll. Bldg. Auth. Edl. Facs. Rev., M.B.I.A. Aaa 5.25 1/01/26 4,275 4,324,718
------------
16,973,050
- ------------------------------------------------------------------------------------------------------------------------------
Washington--4.4%
Washington St. Hlthcare Facs. Auth. Rev., Yakima Valley
Memorial Hosp. Assoc. AAA(b) 5.25 12/01/20 2,500 2,435,375
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 1, Ser. A, M.B.I.A. Aaa 5.75 7/01/10 7,000 7,436,940
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/11 5,210 2,622,818
Nuclear Proj. No. 2, Ser. B, F.G.I.C. Aaa 7.25 7/01/03 3,000(c) 3,245,040
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa 7.00 7/01/05 2,000(c) 2,130,900
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/08 4,500 2,717,955
------------
20,589,028
------------
Total long-term investments (cost $434,670,225) 455,075,816
------------
SHORT-TERM INVESTMENTS--0.9%
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--0.1%
Dist. of Columbia, Gen. Oblig., Ser. 92A-4, F.R.D.D. VMIG1 4.35 5/01/98 500 500,000
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--0.0%
Will County Solid Wste. Disp. Rev., Daily BASF Corp.
Proj.,
Ser. 97, F.R.D.D., A.M.T. P-1 4.25 5/01/98 100 100,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 27
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.6%
Hurley Cnty., Poll. Ctrl. Rev., Ser. 85, F.R.D.D. P-1 4.25% 5/01/98 $ 2,800 $ 2,800,000
- ------------------------------------------------------------------------------------------------------------------------------
Texas--0.2%
Gulf Coast Wste. Disp. Auth., Poll. Ctrl. Rev., Ser. 94,
F.R.D.D., A.M.T. VMIG1 4.35 5/01/98 600 600,000
------------
Total short-term investments (cost $4,000,000) 4,000,000
------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments--99.2%
(cost $438,670,225; Note 4) 459,075,816
Other assets in excess of liabilities--0.8% 3,629,791
------------
Net Assets--100% $462,705,607
------------
------------
</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
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Demand Note (f)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Principal amount pledged as initial margin on financial futures contracts.
(f) The maturity date shown is 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.
(g) All or partial amount of principal segregated as collateral for financial
futures contracts.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 28
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $438,670,225)................................................................... $459,075,816
Cash........................................................................................................ 27,338
Interest receivable......................................................................................... 6,179,023
Receivable for Series shares sold........................................................................... 73,218
Other assets................................................................................................ 9,084
--------------
Total assets............................................................................................. 465,364,479
--------------
Liabilities
Payable for Series shares reacquired........................................................................ 1,103,751
Dividends payable........................................................................................... 599,998
Due to broker-variation margin.............................................................................. 405,337
Accrued expenses............................................................................................ 233,850
Management fee payable...................................................................................... 200,112
Distribution fee payable.................................................................................... 115,824
--------------
Total liabilities........................................................................................ 2,658,872
--------------
Net Assets.................................................................................................. $462,705,607
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 418,602
Paid-in capital in excess of par......................................................................... 439,345,140
--------------
439,763,742
Accumulated net realized gain on investments............................................................. 2,430,211
Net unrealized appreciation of investments............................................................... 20,511,654
--------------
Net assets, April 30, 1998.................................................................................. $462,705,607
--------------
--------------
Class A:
Net asset value and redemption price per share
($224,409,371 / 20,312,259 shares of beneficial interest issued and outstanding)...................... $11.05
Maximum sales charge (3.0% of offering price)............................................................ .34
--------------
Maximum offering price to public......................................................................... $11.39
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($236,369,629 / 21,373,644 shares of beneficial interest issued and outstanding)...................... $11.06
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($1,508,667 / 136,421 shares of beneficial interest issued and outstanding)........................... $11.06
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($417,940 / 37,833 shares of beneficial interest issued and outstanding).............................. $11.05
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 29
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $ 26,886,125
--------------
Expenses
Management fee............................ 2,469,913
Distribution fee--Class A................. 222,115
Distribution fee--Class B................. 1,352,766
Distribution fee--Class C................. 8,567
Transfer agent's fees and expenses........ 301,000
Custodian's fees and expenses............. 97,000
Reports to shareholders................... 50,000
Registration fees......................... 41,000
Insurance expense......................... 16,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Legal fees and expenses................... 11,000
Miscellaneous............................. 5,599
--------------
Total expenses......................... 4,602,960
Less: Management fee waiver............... (85,444)
Custodian fee credit................... (5,707)
--------------
Net expenses........................... 4,511,809
--------------
Net investment income........................ 22,374,316
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 10,397,180
Financial futures contract transactions... (2,978,111)
--------------
7,419,069
--------------
Net change in unrealized
appreciation on:
Investments............................... 10,580,044
Financial futures contracts............... 297,750
--------------
10,877,794
--------------
Net gain on investments...................... 18,296,863
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 40,671,179
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........ $ 22,374,316 $ 25,911,892
Net realized gain on
investment transactions... 7,419,069 12,131,022
Net change in unrealized
appreciation
(depreciation) of
investments............... 10,877,794 (7,713,454)
------------- -------------
Net increase in net assets
resulting from
operations................ 40,671,179 30,329,460
------------- -------------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A................... (10,553,524) (9,267,489)
Class B................... (11,765,355) (16,602,381)
Class C................... (46,954) (41,775)
Class Z................... (8,483) (247)
------------- -------------
(22,374,316) (25,911,892)
------------- -------------
Dividends in excess of net
investment income
Class A................... (80,333) (117,523)
Class B................... (90,260) (180,111)
Class C................... (469) (467)
Class Z................... (60) --
------------- -------------
(171,122) (298,101)
------------- -------------
Distributions from net
capital gains
Class A................... (4,980,680) (2,135,002)
Class B................... (5,596,092) (3,272,015)
Class C................... (29,102) (8,473)
Class Z................... (3,703) (2)
------------- -------------
(10,609,577) (5,415,492)
------------- -------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
subscribed................ 17,849,201 201,450,948
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 19,222,401 17,841,830
Cost of shares reacquired.... (89,200,577) (294,754,828)
------------- -------------
Net decrease in net assets
from Series share
transactions.............. (52,128,975) (75,462,050)
------------- -------------
Total decrease.................. (44,612,811) (76,758,075)
Net Assets
Beginning of year............... 507,318,418 584,076,493
------------- -------------
End of year..................... $ 462,705,607 $ 507,318,418
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 30
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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--97.7%
- ------------------------------------------------------------------------------------------------------------------------------
Alaska--4.8%
Alaska Ind. Dev. & Expt. Auth., Revolving Loan Fund A2 5.40% 4/01/01 $ 945 $ 967,992
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/07 1,430 915,886
------------
1,883,878
- ------------------------------------------------------------------------------------------------------------------------------
Colorado--2.6%
Eaglebend Affordable Hsg. Corp., Multifam. Rev. NR 5.75 7/01/07 1,000 1,019,170
- ------------------------------------------------------------------------------------------------------------------------------
Connecticut--5.4%
Conn. Spec. Tax Oblig. Rev., Ser. A AA-(b) 7.00 6/01/03 1,000(c) 1,086,790
Conn. St. Hlth. & Edl. Facs. Auth. Rev. Baa2 5.125 7/01/07 1,000 992,350
------------
2,079,140
- ------------------------------------------------------------------------------------------------------------------------------
District of Columbia--6.6%
Dist. Columbia Hsg. Fin. Agcy. Mtge. Rev.
Amt. Sngl. Fam., Ser. B AAA(b) 5.25 12/01/08 440 447,128
Amt. Sngl. Fam., Ser. B AAA(b) 5.30 12/01/09 315 319,309
Dist. of Columbia Ref., Ser. B, M.B.I.A. Aaa 6.00 6/01/13 1,000 1,090,550
Dist. of Columbia Rev., America Geophysical Union, Ser.
199 BBB-(b) 5.50 9/01/03 700 709,912
------------
2,566,899
- ------------------------------------------------------------------------------------------------------------------------------
Florida--1.3%
Palm Beach Cnty. Hlth. Facs. Auth. Rev., Abbey Delray So.
Proj. BBB(b) 5.30 10/01/07 500 501,865
- ------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Co., M.B.I.A. Aaa 7.50 1/01/03 862 927,305
- ------------------------------------------------------------------------------------------------------------------------------
Illinois--1.2%
Illinois Hlth. Facs. Auth. Rev., Edward Hosp., Ser. A A2 5.75 2/15/09 450 466,524
- ------------------------------------------------------------------------------------------------------------------------------
Indiana--2.7%
Univ. Southern Indiana Rev. Student Fee., Ser. F, F.G.I.C. Aaa 5.50 10/01/13 1,000 1,045,580
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 31
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Massachusetts--5.1%
Massachusetts Edl. Fing Auth. Ed. Ln. Rev., Iss. G., Ser.
A, M.B.I.A. AAA(b) 5.10% 12/01/13 $ 1,000 $ 970,660
Massachusetts St. Hsg. Fin. Agcy. Hsg. Dev., Ser. A,
M.B.I.A Aaa 5.15 6/01/11 1,000 996,190
------------
1,966,850
- ------------------------------------------------------------------------------------------------------------------------------
Michigan--1.4%
Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj., M.B.I.A. Aaa 7.40 12/01/02 500 547,675
- ------------------------------------------------------------------------------------------------------------------------------
Missouri--1.3%
Clayton Sch. Dist., Cap. Apprec., Ser. A, F.S.A. Aaa Zero 2/01/07 750 494,325
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey--18.4%
Brick Twnshp., Mun. Util. Auth. Rev., F.G.I.C. Aaa 5.50 12/01/03 1,295 1,362,858
New Jersey Econ. Dev. Auth. Rev.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.75 7/01/06 950 1,018,144
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.80 7/01/07 1,000 1,071,480
Performing Arts Ctr., A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,553,862
So. Reg'l. High Sch. Dist., M.B.I.A. Aaa 5.50 9/01/06 1,010 1,074,438
West Windsor Plainsboro Sch., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,046,400
------------
7,127,182
- ------------------------------------------------------------------------------------------------------------------------------
New York--8.0%
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 675 714,366
New York, N.Y., Ser. F A3 5.50 8/01/07 1,000 1,040,350
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,362,957
------------
3,117,673
- ------------------------------------------------------------------------------------------------------------------------------
Ohio--1.4%
Ohio St. Bldg. Auth., Admin. Bldg. Fund Proj., M.B.I.A. Aaa 5.60 10/01/06 500 534,555
- ------------------------------------------------------------------------------------------------------------------------------
Oklahoma--6.0%
Oklahoma St. Ind. Auth. Rev. Hosp., Deaconess Hlthcare.,
Ser. A Baa2 5.50 10/01/12 1,250 1,242,562
Oklahoma St. Ind. Auth. Rev. Hlth. Sys., Integris Bapt.,
A.M.B.A.C. Aaa 6.00 8/15/09 1,000 1,094,810
------------
2,337,372
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 32
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--10.4%
Clarion Cnty. Hosp. Auth. Rev., Ref. Clarion Hosp. Proj. BBB-(b) 5.60% 7/01/10 $ 685 $ 694,597
Montgomery Cnty. Redev. Auth., Multifam. Hsg. Rev., Ser. A NR 5.75 7/01/99 780 788,011
Pennsylvania St. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.25 11/01/06 600 645,768
Pennsylvania St. Higher Edl. Facs. Auth., Hlth. Svs. Rev.,
M.B.I.A. Aaa 5.70 11/15/11 755 812,697
Philadelphia Hosp. Auth. & Higher Edl. Auth., Childrens
Seashore House, Ser. A A-(b) 7.00 8/15/03 1,000 1,088,010
------------
4,029,083
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--2.1%
Puerto Rico Comnwlth., Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 750 806,310
- ------------------------------------------------------------------------------------------------------------------------------
Rhode Island--2.8%
Rhode Island St., Ref. Cons. Cap. Dev. Loan, M.B.I.A. Aaa 6.00 8/01/06 1,000 1,092,290
- ------------------------------------------------------------------------------------------------------------------------------
Texas--4.5%
San Antonio Elec. & Gas Rev., Ser. A, F.G.I.C. Aaa Zero 2/01/05 1,000 727,370
Tyler Tex. Hlth. Facs. Dev. Corp., Mother Francis Hosp.,
Ser. A Baa2 5.50 7/01/09 1,000 1,004,350
------------
1,731,720
- ------------------------------------------------------------------------------------------------------------------------------
Utah--2.7%
Utah St. Brd. of Regents, Student Loan Rev., Ser. F,
A.M.B.A.C. Aaa 7.00 11/01/01 1,000 1,064,200
- ------------------------------------------------------------------------------------------------------------------------------
Washington--2.7%
Wash. St. Pub. Pwr. Supp. Sys., Nuclear Proj. No. 3, Ser.
B Aa1 7.00 7/01/99 1,000 1,034,100
- ------------------------------------------------------------------------------------------------------------------------------
Wyoming--3.9%
Wyoming Cmnty. Dev. Auth. Hsg. Rev. Amt., Ser. 5 Aa2 5.60 12/01/06 1,450 1,526,401
------------
Total long-term investments (cost $36,635,565) 37,900,097
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 33
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.6%
- ------------------------------------------------------------------------------------------------------------------------------
Texas--1.6%
Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec.
Co., Ser. 95C, F.R.D.D., A.M.T. (cost $600,000) VMIG1 4.40% 5/01/98 $ 600 $ 600,000
------------
Total Investments--99.3% (cost $37,235,565; Note 4 ) 38,500,097
Other assets in excess of liabilities--0.7% 286,268
------------
Net Assets--100% $ 38,786,365
------------
------------
</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
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Demand Note (d)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S.
guaranteed obligations.
(d) The maturity date shown is 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 Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 34
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $37,235,565).................................................................... $ 38,500,097
Interest receivable......................................................................................... 602,522
Receivable for Series shares sold........................................................................... 17,063
Other assets................................................................................................ 852
--------------
Total assets............................................................................................. 39,120,534
--------------
Liabilities
Bank overdraft.............................................................................................. 23,529
Accrued expenses............................................................................................ 127,453
Payable for Series shares reacquired........................................................................ 115,603
Dividends payable........................................................................................... 40,096
Management fee payable...................................................................................... 15,692
Distribution fee payable.................................................................................... 11,796
--------------
Total liabilities........................................................................................ 334,169
--------------
Net Assets.................................................................................................. $ 38,786,365
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 35,867
Paid-in capital in excess of par......................................................................... 37,195,390
--------------
37,231,257
Accumulated net realized gain on investments............................................................. 290,576
Net unrealized appreciation on investments............................................................... 1,264,532
--------------
Net assets, April 30, 1998.................................................................................. $ 38,786,365
--------------
--------------
Class A:
Net asset value and redemption price per share
($13,125,685 / 1,213,932 shares of beneficial interest issued and outstanding)........................ $10.81
Maximum sales charge (3% of offering price).............................................................. .33
--------------
Maximum offering price to public......................................................................... $11.14
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($24,017,088 / 2,220,773 shares of beneficial interest issued and outstanding)........................ $10.81
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($449,061 / 41,523 shares of beneficial interest issued and outstanding).............................. $10.81
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($1,194,531 / 110,471 shares of beneficial interest issued and outstanding)........................... $10.81
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 35
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $2,205,779
--------------
Expenses
Management fee............................ 207,968
Distribution fee--Class A................. 13,591
Distribution fee--Class B................. 135,876
Distribution fee--Class C................. 2,856
Reports to shareholders................... 87,000
Custodian's fees and expenses............. 72,000
Registration fees......................... 62,000
Transfer agent's fees and expenses........ 38,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Legal fees and expenses................... 10,500
Miscellaneous............................. 6,554
--------------
Total expenses......................... 664,345
Less: Management fee waiver............... (7,346)
Custodian fee credit................... (185)
--------------
Net expenses........................... 656,814
--------------
Net investment income........................ 1,548,965
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 535,746
Financial futures contract transactions... (196,033)
--------------
339,713
--------------
Net change in unrealized appreciation/depreciation on:
Investments............................... 829,293
Financial futures contracts............... (12,906)
--------------
816,387
--------------
Net gain on investments...................... 1,156,100
--------------
Net Increase in Net Assets
Resulting from Operations.................... $2,705,065
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........... $ 1,548,965 $ 1,958,229
Net realized gain on investment
transactions................. 339,713 478,036
Net change in unrealized
appreciation
(depreciation) of
investments.................. 816,387 (699,669)
----------- ------------
Net increase in net assets
resulting from operations.... 2,705,065 1,736,596
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A...................... (542,230) (579,475)
Class B...................... (975,783) (1,371,478)
Class C...................... (12,672) (5,456)
Class Z...................... (18,280) (1,820)
----------- ------------
(1,548,965) (1,958,229)
----------- ------------
Distributions in excess of net
investment income
Class A...................... -- (9,615)
Class B...................... -- (22,423)
Class C...................... -- (75)
Class Z...................... -- (3)
----------- ------------
-- (32,116)
----------- ------------
Distributions from net capital
gains
Class A...................... (66,647) --
Class B...................... (130,950) --
Class C...................... (2,322) --
Class Z...................... (1,731) --
----------- ------------
(201,650) --
----------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed................... 3,202,633 5,261,896
Net asset value of shares issued
in reinvestment of
dividends.................... 1,116,810 1,242,265
Cost of shares reacquired....... (10,710,780) (15,354,228)
----------- ------------
Net decrease in net assets from
Series share transactions.... (6,391,337) (8,850,067)
----------- ------------
Total decrease..................... (5,436,887) (9,103,816)
Net Assets
Beginning of year.................. 44,223,252 53,327,068
----------- ------------
End of year........................ $38,786,365 $ 44,223,252
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 36
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Prudential Municipal Bond Fund (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
November 3, 1986 and consists of three series: the High Yield Series, the
Insured Series and the Intermediate Series. Investment operations for Class A,
Class B, Class C and Class Z shares of each series commenced on January 22,
1990, September 17, 1987, August 1, 1994 and September 16, 1996, respectively.
The investment objectives of the series are as follows: (i) the objective of the
High Yield Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes, (ii) the objective of the Insured and
Intermediate Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic and political developments in a
specific state, region or industry.
- ------------------------------------------------------------
Note 1. Accounting Policies
Securities Valuation: Municipal securities (including commitments to purchase
such securities on a 'when-issued' basis) are valued on the basis of prices
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the 'initial margin.' Subsequent payments, known as 'variation
margin,' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost basis of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities may be sold (called) or purchased (put). As a result, the Fund bears
the market risk of an unfavorable change in the price of the security underlying
the written option. The Fund, as purchaser of an option, bears the risk of the
potential inability of the counterparties to meet the terms of their contracts.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and accretes original issue discount
on portfolio securities as adjustments to interest income. Net investment
income, other than distribution fees, and realized and unrealized 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. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
- --------------------------------------------------------------------------------
37
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate tax paying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all net income to 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.
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. For
the fiscal year ended April 30, 1998, the effect of applying this statement was
to increase undistributed net investment income and decrease accumulated net
realized gain by $171,122 for the Insured Series.
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.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'), doing business as Prudential Investments ('PI,'
the Subadviser or the investment adviser); PIC furnishes investment advisory
services in connection with the management of the Fund. PIFM 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 PIFM is computed daily and payable monthly at an annual
rate of .50 of 1% of the average daily net assets of each series up to $1
billion and .45 of 1% of the average daily net assets of each series in excess
of $1 billion. PIFM has agreed to voluntarily waive a portion of each series'
management fee, which amounted to $535,931, $85,444 and $7,346 for the High
Yield Series, Insured Series and Intermediate Series, respectively. Such amounts
represented .05 of 1% of the average daily net assets or $.005 per share for the
High Yield Series and .02 of 1% of the average daily net assets or $.002 per
share for the Insured Series and Intermediate Series. Effective September 1,
1997, PIFM eliminated its management fee waiver for the Insured Series and
Intermediate Series.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z 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 PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund. Effective July 1, 1998, Prudential Investment Management
Services LLC will become the distributor of the Fund and will serve the Fund
under the same terms and conditions as under the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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 April 30, 1998.
PSI has advised the Fund that it received approximately $529,300 ($493,600-High
Yield Series; $30,400-Insured Series; $5,300-Intermediate Series) in front-end
sales charges resulting from sales of Class A shares during the year ended April
30, 1998. From these fees, PSI paid such sales charges to affiliated
broker-dealers which in turn paid commissions to salespersons and incurred other
distribution costs.
PSI has advised the Fund that for the year ended April 30, 1998, it received
approximately $1,320,700 ($866,900-High Yield Series; $388,200-Insured Series;
$65,600-Intermediate Series) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PSI, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative
- --------------------------------------------------------------------------------
38
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
source of funding for capital share redemptions. The Fund has not borrowed any
amounts pursuant to the Agreement during the year ended April 30, 1998. 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. The Agreement expired on December 30, 1997 and has
been extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended April 30, 1998, the
Fund incurred fees of approximately $609,100 ($361,000-High Yield Series;
$221,700-Insured Series; $26,400-Intermediate Series) for the services of PMFS.
As of April 30, 1998, approximately $51,600 ($31,100-High Yield Series;
$18,300-Insured Series; $2,200-Intermediate Series) of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out of pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended April 30, 1998, were as follows:
<TABLE>
<CAPTION>
Series Purchases Sales
- -------------------------------- ------------ ------------
<S> <C> <C>
High Yield...................... $208,053,727 $139,078,918
Insured......................... 404,690,101 456,797,559
Intermediate.................... 21,888,177 28,523,204
</TABLE>
At April 30, 1998, the High Yield Series and the Insured Series sold 100,000 and
284,000 financial futures contracts, respectively of U.S. Treasury Bonds
expiring in June 1998.
The values of these financial futures contracts at April 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Financial Futures
Contracts Sold
--------------------------
High Yield Insured
Series Series
----------- -----------
<S> <C> <C>
Value at disposition.............. $12,003,625 $34,421,156
Value at April 30, 1998........... 12,003,625 34,315,093
----------- -----------
Unrealized gain................... $ 0 $ 106,063
----------- -----------
----------- -----------
</TABLE>
The federal income tax basis of the Fund's investments, at April 30, 1998 was
$1,026,195,791-High Yield Series; $438,671,525-Insured Series; and
$37,235,565-Intermediate Series and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Gross Gross
Net unrealized unrealized unrealized
Series appreciation appreciation depreciation
- --------------------- -------------- ----------- ----------
<S> <C> <C> <C>
High Yield........... $ 81,054,099 $90,185,030 $9,130,931
Insured.............. 20,404,291 21,977,695 1,573,404
Intermediate......... 1,264,532 1,334,659 70,127
</TABLE>
The High Yield Series has a net capital loss carryforward as of April 30, 1998
of approximately $17,547,000, of which $2,024,000 expires in 2002, $5,361,000
expires in 2003, $6,383,000 expires in 2004, $3,225,000 expires in 2005, and
$554,000 expires in 2006. No capital gains distribution is expected to be paid
to shareholders until net gains have been realized in excess of the aggregate of
such amounts. In addition, the High Yield Series elected to treat net realized
capital losses of approximately $6,709,700 incurred in the six-month period
ended April 30, 1998, as having been incurred in the following year.
- ------------------------------------------------------------
Note 5. Capital
Each series offers Class A, Class B, Class C and Class Z 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
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. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
- --------------------------------------------------------------------------------
39
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class A Class A Class A
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 5,097,999 $ 57,395,615 569,674 $ 6,395,067 51,122 $ 558,941
Shares issued in reinvestment of
dividends and distributions.... 962,597 10,829,429 785,872 8,843,968 36,144 393,414
Shares reacquired................. (6,025,736) (67,587,666) (3,276,382) (36,775,017) (331,385) (3,600,677)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding before
conversion..................... 34,860 637,378 (1,920,836) (21,535,982) (244,119) (2,648,322)
Shares issued upon conversion from
Class B........................ 6,417,324 71,773,373 3,118,260 35,134,908 160,123 1,739,629
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding.................... 6,452,184 $ 72,410,751 1,197,424 $ 13,598,926 (83,996) $ (908,693)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 2,690,433 $ 29,194,209 17,268,103 $ 190,281,225 146,988 $ 1,570,573
Shares issued in reinvestment of
dividends and distributions.... 816,257 8,853,738 562,530 6,209,882 33,834 360,674
Shares reacquired................. (5,951,712) (64,552,270) (20,358,917) (224,259,104) (505,221) (5,381,606)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares outstanding
before
conversion..................... (2,445,022) (26,504,323) (2,528,284) (27,767,997) (324,399) (3,450,359)
Shares issued upon conversion from
Class B........................ 12,411,968 133,842,041 8,887,896 97,509,503 443,554 4,710,903
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 9,966,946 $ 107,337,718 6,359,612 $ 69,741,506 119,155 $ 1,260,544
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class B Class B Class B
---------------------------- ---------------------------- ------------------------
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 10,261,223 $ 115,317,304 894,372 $ 10,051,980 113,994 $ 1,243,792
Shares issued in reinvestment of
dividends and distributions.... 1,416,916 15,920,018 915,681 10,310,964 63,393 689,975
Shares reacquired................. (7,485,320) (84,004,151) (4,626,069) (51,987,346) (627,441) (6,818,594)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding before
conversion..................... 4,192,819 47,233,171 (2,816,016) (31,624,402) (450,054) (4,884,827)
Shares issued upon conversion from
Class A........................ (6,418,319) (71,773,373) (3,114,481) (35,134,908) (160,109) (1,739,629)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares
outstanding.................... (2,225,500) $ (24,540,202) (5,930,497) $ (66,759,310) (610,163) $ (6,624,456)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 7,261,475 $ 78,657,488 991,206 $ 10,920,454 293,960 $ 3,134,459
Shares issued in reinvestment of
dividends and distributions.... 1,747,161 18,927,857 1,049,549 11,593,012 82,134 875,459
Shares reacquired................. (9,901,712) (107,242,000) (6,341,050) (69,974,266) (909,089) (9,694,638)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares outstanding
before conversion.............. (893,076) (9,656,655) (4,300,295) (47,460,800) (532,995) (5,684,720)
Shares reacquired upon conversion
into Class A................... (12,411,968) (133,842,041) (8,879,800) (97,509,503) (443,243) (4,710,903)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares
outstanding.................... (13,305,044) $(143,498,696) (13,180,095) $(144,970,303) (976,238) $(10,395,623)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class C Class C Class C
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 1,210,837 $ 13,633,168 75,353 $ 851,857 31,683 $ 345,224
Shares issued in reinvestment of
dividends and distributions.... 45,608 514,159 4,949 55,759 1,355 14,774
Shares reacquired................. (321,058) (3,613,378) (25,249) (284,339) (15,800) (171,265)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 935,387 $ 10,533,949 55,053 $ 623,277 17,238 $ 188,733
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 505,330 $ 5,472,765 21,265 $ 234,063 28,931 $ 311,189
Shares issued in reinvestment of
dividends and distributions.... 28,059 304,264 3,510 38,759 436 4,639
Shares reacquired................. (256,031) (2,781,902) (47,234) (521,343) (26,221) (277,703)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding.................... 277,358 $ 2,995,127 (22,459) $ (248,521) 3,146 $ 38,125
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class Z Class Z Class Z
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 737,972 $ 8,311,994 49,053 $ 550,297 96,575 $ 1,054,676
Shares issued in reinvestment of
dividends and distributions.... 29,882 337,131 1,039 11,710 1,711 18,647
Shares reacquired................. (141,036) (1,592,621) (13,642) (153,875) (11,026) (120,244)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 626,818 $ 7,056,504 36,450 $ 408,132 87,260 $ 953,079
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
September 16, 1996(a) Through
April 30, 1997
- ----------------------------------
Shares issued..................... 287,958 $ 3,134,548 1,377 $ 15,206 23,097 $ 245,675
Shares issued in reinvestment of
dividends and distributions.... 2,192 23,750 16 177 140 1,493
Shares reacquired................. (39,065) (425,418) (10) (115) (27) (281)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 251,085 $ 2,732,880 1,383 $ 15,268 23,210 $ 246,887
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 6. Subsequent Event
On June 23, 1998 the Trustees of the Fund approved a change in the name of the
High Yield Series to the High Income Series effective July 1, 1998.
- --------------------------------------------------------------------------------
41
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Years Ended April 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- -------- -------
Income from investment operations
Net investment income............................... .67(b) .70(b) .72(b) .72(b) .72
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .14 (.02) (.02) (.39)
-------- -------- -------- -------- -------
Total from investment operations................. 1.14 .84 .70 .70 .33
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment income................ (.67) (.70) (.72) (.72) (.72)
Distributions from capital gains.................... -- -- -- -- (.01)
-------- -------- -------- -------- -------
Total distributions.............................. (.67) (.70) (.72) (.72) (.73)
-------- -------- -------- -------- -------
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(a):.................................... 10.80% 8.03% 6.55% 6.90% 2.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $421,504 $334,062 $223,073 $115,501 $54,491
Average net assets (000)............................ $381,735 $294,940 $162,329 $ 65,207 $52,982
Ratios to average net assets:
Expenses, including distribution fees............ .62%(b) 0.64%(b) 0.64%(b) 0.69%(b) 0.69%
Expenses, excluding distribution fees............ .52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.59%
Net investment income............................ 6.03%(b) 6.44%(b) 6.58%(b) 6.83%(b) 6.42%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 13% 26% 35% 39% 36%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 42
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------
Years Ended April 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- ---------- ----------
Income from investment operations
Net investment income............................... .63(b) .66(b) .68(b) .68(b) .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .15 (.03) (.02) (.39)
-------- -------- -------- ---------- ----------
Total from investment operations................. 1.10 .81 .65 .66 .29
-------- -------- -------- ---------- ----------
Less distributions
Dividends from net investment income................ (.63) (.66) (.68) (.68) (.68)
Distributions from capital gains.................... -- -- -- -- (.01)
-------- -------- -------- ---------- ----------
Total distributions.............................. (.63) (.66) (.68) (.68) (.69)
-------- -------- -------- ---------- ----------
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
TOTAL RETURN(a):.................................... 10.36% 7.71% 6.12% 6.37% 2.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $669,223 $665,525 $799,048 $ 934,725 $1,099,640
Average net assets (000)............................ $669,132 $725,305 $900,115 $1,024,132 $1,132,653
Ratios to average net assets:
Expenses, including distribution fees............ 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09%
Expenses, excluding distribution fees............ .52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58%
Net investment income............................ 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 43
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.69 $ 10.72 $10.79 $10.83
--------- --------- --------- ----- -----
Income from investment operations
Net investment income (b)........................... .61 .63 .65 .49 .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .15 (.03) (.07) .47
--------- --------- --------- ----- -----
Total from investment operations................. 1.08 .78 .62 .42 1.15
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.61) (.63) (.65) (.49) (.68)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.69 $10.72 $11.30
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 10.09% 7.44% 5.86% 3.91% 10.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $20,554 $ 9,563 $ 6,471 $3,208 $9,919
Average net assets (000)............................ $14,932 $ 8,060 $ 5,608 $1,385 $6,064
Ratios to average net assets:
Expenses, including distribution fees (b)........ 1.27% 1.29% 1.29% 1.34%(e) .52%
Expenses, excluding distribution fees (b)........ .52% 0.54% 0.54% 0.59%(e) .52%
Net investment income (b)........................ 5.39% 5.80% 5.93% 6.34%(e) 6.14%
<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.79
-----
Income from investment operations
Net investment income (b)........................... .45
Net realized and unrealized gain (loss) on
investment transactions.......................... .04
-----
Total from investment operations................. .49
-----
Less distributions
Dividends from net investment income................ (.45)
-----
Net asset value, end of year........................ $ 10.83
-----
-----
TOTAL RETURN(a):.................................... 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 2,719
Average net assets (000)............................ $ 704
Ratios to average net assets:
Expenses, including distribution fees (b)........ 0.54%(e)
Expenses, excluding distribution fees (b)........ 0.54%(e)
Net investment income (b)........................ 6.55%(e)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 44
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Years Ended April 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44
-------- -------- -------- ------- -------
Income from investment operations
Net investment income............................... .53(b) .55(b) .58(b) .58(b) .58
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .12 (.43)
-------- -------- -------- ------- -------
Total from investment operations................. .93 .63 .69 .70 .15
-------- -------- -------- ------- -------
Less distributions
Dividends from net investment income................ (.53) (.55) (.58) (.58) (.58)
Distributions in excess of net investment income.... --(c) (.01) -- -- --
Distributions from capital gains.................... (.25) (.11) -- -- (.30)
-------- -------- -------- ------- -------
Total distributions.............................. (.78) (.67) (.58) (.58) (.88)
-------- -------- -------- ------- -------
Net asset value, end of year........................ $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):.................................... 8.67% 5.74% 6.47% 6.73% 1.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $224,409 $208,411 $139,548 $75,800 $30,669
Average net assets (000)............................ $222,115 $187,371 $102,456 $39,471 $32,309
Ratios to average net assets:
Expenses, including distribution fees............ 0.69%(b) 0.68%(b) 0.68%(b) 0.74%(b) 0.71%
Expenses, excluding distribution fees............ 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income............................ 4.75%(b) 4.95%(b) 5.20%(b) 5.45%(b) 5.09%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 85% 110% 68% 64% 105%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 45
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Years Ended April 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------
Income from investment operations
Net investment income............................... .49(b) .50(b) .54(b) .54(b) .54
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .13 (.43)
-------- -------- -------- -------- --------
Total from investment operations................. .89 .58 .65 .67 .11
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.49) (.50) (.54) (.54) (.54)
Distributions in excess of net investment income.... --(c) (.01) -- -- --
Distributions from capital gains.................... (.25) (.11) -- -- (.30)
-------- -------- -------- -------- --------
Total distributions.............................. (.74) (.62) (.54) (.54) (.84)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.................................... 8.23% 5.32% 6.04% 6.40% 0.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $236,370 $298,005 $443,391 $567,648 $740,447
Average net assets (000)............................ $270,553 $365,891 $524,452 $660,237 $807,794
Ratios to average net assets:
Expenses, including distribution fees............ 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11%
Expenses, excluding distribution fees............ 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income............................ 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69%
</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. 46
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.91 $ 10.95 $ 10.84 $10.79 $10.91
--------- --------- --------- ----- -----
Income from investment operations
Net investment income(b)............................ .46 .48 .51 .39 .54
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .05 .39
--------- --------- --------- ----- -----
Total from investment operations................. .86 .56 .62 .44 .93
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.46) (.48) (.51) (.39) (.54)
Distributions in excess of net investment income.... --(f) (.01) -- -- --(f)
Distributions from capital gains.................... (.25) (.11) -- -- (.25)
--------- --------- --------- ----- -----
Total distributions.............................. (.71) (.60) (.51) (.39) (.79)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 11.06 $ 10.91 $ 10.95 $10.84 $11.05
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 7.96% 5.06% 5.78% 4.03% 8.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 1,509 $ 888 $ 1,137 $ 525 $ 418
Average net assets (000)............................ $ 1,142 $ 973 $ 827 $ 224 $ 173
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.34% 1.33% 1.33% 1.39%(e) 0.60%
Expenses, excluding distribution fees(b)......... 0.59% 0.58% 0.58% 0.64%(e) 0.60%
Net investment income(b)......................... 4.11% 4.29% 4.56% 4.92%(e) 4.92%
<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.05
-----
Income from investment operations
Net investment income(b)............................ .36
Net realized and unrealized gain (loss) on
investment transactions.......................... (.02)
-----
Total from investment operations................. .34
-----
Less distributions
Dividends from net investment income................ (.36)
Distributions in excess of net investment income.... (.01)
Distributions from capital gains.................... (.11)
-----
Total distributions.............................. (.48)
-----
Net asset value, end of year........................ $ 10.91
-----
-----
TOTAL RETURN(a):.................................... 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 15
Average net assets (000)............................ $ 10
Ratios to average net assets:
Expenses, including distribution fees(b)......... 0.58%(e)
Expenses, excluding distribution fees(b)......... 0.58%(e)
Net investment income(b)......................... 4.18%(e)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 47
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Years Ended April 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $ 10.67 $11.08
------- ------- ------- ------- ------
Income from investment operations
Net investment income............................... .43(b) .46(b) .47(b) .51(b) .53
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.03) (.19)
------- ------- ------- ------- ------
Total from investment operations................. .71 .41 .67 .48 .34
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income................ (.43) (.46) (.47) (.51) (.53)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- (.18) (.22)
------- ------- ------- ------- ------
Total distributions.............................. (.49) (.47) (.47) (.70) (.75)
------- ------- ------- ------- ------
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $ 10.45 $10.67
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(a):.................................... 6.76% 3.86% 6.48% 4.52% 2.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $13,126 $13,740 $12,552 $10,507 $5,810
Average net assets (000)............................ $13,591 $13,487 $12,604 $ 7,742 $4,981
Ratios to average net assets:
Expenses, including distribution fees............ 1.31%(b) 1.15%(b) 1.16%(b) 1.05%(b) 1.00%
Expenses, excluding distribution fees............ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income............................ 3.99%(b) 4.30%(b) 4.36%(b) 4.75%(b) 4.63%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 54% 46% 35% 30% 55%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 48
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Years Ended April 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .39(b) .42(b) .43(b) .45(b) .48
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.04) (.19)
------- ------- ------- ------- -------
Total from investment operations................. .67 .37 .63 .41 .29
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.39) (.42) (.43) (.45) (.48)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- (.18) (.22)
------- ------- ------- ------- -------
Total distributions.............................. (.45) (.43) (.43) (.64) (.70)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $ 10.45 $ 10.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a):.................................... 6.33% 3.44% 6.05% 3.99% 2.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $24,017 $29,980 $40,550 $51,039 $65,215
Average net assets (000)............................ $27,175 $35,221 $46,127 $60,174 $59,811
Ratios to average net assets:
Expenses, including distribution fees............ 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40%
Expenses, excluding distribution fees............ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income............................ 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 49
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $10.54 $10.59
--------- --------- --------- ----- -----
Income from investment operations
Net investment income(b)............................ .36 .39 .40 .35 .44
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.08) .28
--------- --------- --------- ----- -----
Total from investment operations................. .64 .34 .60 .27 .72
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.36) (.39) (.40) (.35) (.44)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- -- (.06)
--------- --------- --------- ----- -----
Total distributions.............................. (.42) (.40) (.40) (.36) (.50)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $10.45 $10.81
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 6.07% 3.17% 5.79% 2.14% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 449 $ 257 $ 225 $ 167 $1,194
Average net assets (000)............................ $ 381 $ 149 $ 197 $ 28 $ 447
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.96% 1.80% 1.81% 1.81%(e) 1.21%
Expenses, excluding distribution fees(b)......... 1.21% 1.05% 1.06% 1.06%(e) 1.21%
Net investment income(b)......................... 3.33% 3.65% 3.71% 4.34%(e) 4.09%
<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.63
-----
Income from investment operations
Net investment income(b)............................ .31
Net realized and unrealized gain (loss) on
investment transactions.......................... (.03)
-----
Total from investment operations................. .28
-----
Less distributions
Dividends from net investment income................ (.31)
Distributions in excess of net investment income.... (.01)
Distributions from capital gains.................... --
-----
Total distributions.............................. (.32)
-----
Net asset value, end of year........................ $ 10.59
-----
-----
TOTAL RETURN(a):.................................... 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 246
Average net assets (000)............................ $ 63
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.05%(e)
Expenses, excluding distribution fees(b)......... 1.05%(e)
Net investment income(b)......................... 4.65%(e)
</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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 50
<PAGE>
Report of Independent Accountants PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Municipal Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios 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 High Yield Series, Insured Series
and Intermediate Series (constituting Prudential Municipal Bond Fund, hereafter
referred to as the 'Fund') at April 30, 1998, the results of each of their
operations for the year then ended and the changes in each of their net assets
and the financial highlights for each of the two 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 April 30, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the three years in the period ended April 30, 1996 were
audited by other independent accountants, whose opinion dated June 13, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
June 18, 1998
Tax Information (Unaudited) PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
As required by the Internal Revenue Code, we wish to advise you as to the
federal tax status of dividends and distributions paid by the Fund during its
fiscal year ended April 30, 1998.
During its fiscal year ended April 30, 1998, the Fund paid aggregate dividends
from net investment income, all of which were federally tax-exempt interest
dividends, as follows:
<TABLE>
<CAPTION>
Dividends per Share
----------------------------------------------
Series Class A Class B Class C Class Z
------------------------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
High Yield Series............. $ .67 $ .63 $ .61 $ .68
Insured Series................ $ .53 $ .49 $ .46 $ .54
Intermediate Series........... $ .43 $ .39 $ .36 $ .44
</TABLE>
In addition to the above, the Insured Series paid dividends and distributions
totalling $.252 per share, comprised of $.004 ordinary income and $.064
short-term capital gains which are taxable as ordinary income and $.184
long-term capital gains of which $.131 is taxable as 28% rate gains and $.053 is
taxable as 20% rate gains to Class A, B, C and Z shareholders.
The Intermediate Series paid $.0550 long-term capital gains, all of which is
taxable as 28% rate gains to Class A, B, C and Z shareholders.
Shortly after the close of the calendar year ending December 31, 1998, you will
be advised again as to the federal tax status of the dividends and distributions
received in calendar 1998. In addition, you will be advised at that time as to
the portion of your dividends which may be subject to the Alternative Minimum
Tax (AMT) as well as information with respect to state taxability.
- --------------------------------------------------------------------------------
51
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Article VII of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibit 7 to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant maintains an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 6(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 6(b) to the
Registration Statement) limit the liability of Prudential Investment Fund
Management, LLC. (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 16. EXHIBITS.
1. Restated Articles of Incorporation. Incorporated by reference to Exhibit 1
to Post-Effective Amendment No. 23 to Registration Statement on Form N-1A
filed via EDGAR on February 28, 1995 (File No. 2-66407).
2. Amended and restated By-Laws. Incorporated by reference to Exhibit 2 to
Post-Effective Amendment No. 20 to the Registration Statement filed on Form
N-1A via EDGAR filed on March 1, 1994 (File No. 2-66407).
4. Plans of Reorganization filed herewith as Appendix B to the Prospectus and
Proxy Statement.*
5. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibits Nos. 1 and 2 above.
6. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc. Incorporated by reference to Exhibit 5(a) to Post-Effective
Amendment No. 25 to Registration Statement on Form N-1A filed via EDGAR on
March 5, 1997 (File No. 2-66407).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation. Incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 25 to Registration Statement on
Form N-1A filed via EDGAR on March 5, 1997 (File No. 2-66407).
7. (a) Form of Selected Dealer Agreement.*
(b) Distribution Agreement.*
C-1
<PAGE>
9. Custodian Agreement between the Registrant and State Street Bank and Trust
Company. Incorporated by reference to Exhibit 8 to Post-Effective Amendment
No. 25 to Registration Statement on Form N-1A filed via EDGAR on March 5,
1997 (File No. 2-66407).
10. (a) Distribution and Service Plan for Class A shares.*
(b) Distribution and Service Plan for Class B shares.*
(c) Distribution and Service Plan for Class C shares.*
11. Opinions and Consents of Counsel.**
12. Tax Opinion of Counsel.**
14. (a) Consent of Independent Accountants to Prudential National Municipals
Fund, Inc.**
(b) Consent of Independent Accountants to Prudential Municipal Series
Fund.**
(c) Consent of Independent Accountants to Prudential Municipal Bond Fund.**
17. (a) Proxy.*
(b) Prospectus of the Registrant dated March 4, 1998, as supplemented on
July 1, 1998 and September 1, 1998.*
(c) Prospectus of Prudential Municipal Series Fund (Maryland and Michigan
Series) dated October , 1998.**
(d)Prospectus of Prudential Municipal Bond Fund (Intermediate Series) dated
July 1, 1998, as supplemented August 27, 1998 and September 1, 1998.*
(e) President's Letter.*
- ------------------------
*Filed herewith.
**To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newark, and State of New
Jersey, on the 23rd day of September, 1998.
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
/s/ Richard A. Redeker
------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- ------------------
<S> <C> <C>
/s/ Edward D. Beach Director September 23, 1998
- ------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director September 23, 1998
- ------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Director September 23, 1998
- ------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Director September 23, 1998
- ------------------------------
ROBERT F. GUNIA
/s/ Harry A. Jacobs, Jr. Director September 23, 1998
- ------------------------------
HARRY A. JACOBS, JR.
/s/ Mendel A. Melzer Director September 23, 1998
- ------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director September 23, 1998
- ------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director September 23, 1998
- ------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker President and Director September 23, 1998
- ------------------------------
RICHARD A. REDEKER
/s/ Nancy Hays Teeters Director September 23, 1998
- ------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weil, III Director September 23, 1998
- ------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Principal Financial and September 23, 1998
- ------------------------------ Accounting Officer
GRACE C. TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE NO.
NUMBER
1. Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR on February 28, 1995 (File No.
2-66407).
2. Amended and restated By-Laws. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 20 to the Registration Statement
filed on Form N-1A via EDGAR filed on March 1, 1994 (File No.
2-66407).
4. Plans of Reorganization filed herewith as Appendix B to the
Prospectus and Proxy Statement.*
5. Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits Nos. 1 and 2 above.
6. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 25 to Registration Statement on
Form N-1A filed via EDGAR on March 5, 1997 (File No. 2-66407).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A filed via EDGAR on March 5, 1997
(File No. 2-66407).
7. (a) Form of Selected Dealer Agreement.*
(b) Distribution Agreement.*
9. Custodian Agreement between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 25 to Registration Statement on Form
N-1A filed via EDGAR on March 5, 1997 (File No. 2-66407).
10. (a) Distribution and Service Plan for Class A shares.*
(b) Distribution and Service Plan for Class B shares.*
(c) Distribution and Service Plan for Class C shares.*
11. Opinions and Consents of Counsel.**
12. Tax Opinion of Counsel.**
14. (a) Consent of Independent Accountants to Prudential National
Municipals Fund, Inc.**
(b) Consent of Independent Accountants to Prudential Municipal
Series Fund.**
(c) Consent of Independent Accountants to Prudential Municipal Bond
Fund.**
17. (a) Proxy.*
(b) Prospectus of the Registrant dated March 4, 1998, as
supplemented on July 1, 1998 and September 1, 1998.*
(c) Prospectus of Prudential Municipal Series Fund (Maryland and
Michigan Series) dated October , 1998.**
(d) Prospectus of Prudential Municipal Bond Fund (Intermediate
Series) dated July 1, 1998, as supplemented August 27, 1998 and
September 1, 1998.*
(e) President's Letter.*
----------------------
*Filed herewith.
**To be filed by amendment.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (Agreement) made as of the day of
October, 1998, by and between Prudential Municipal Bond Fund (Municipal Bond
Fund)--Intermediate Series and Prudential National Municipals Fund, Inc.
(National Municipals Fund) (collectively, with Intermediate Series and Municipal
Bond Fund, the Funds and each individually, a Fund). Municipal Bond Fund is a
business trust organized under the laws of the Commonwealth of Massachusetts and
the National Municipals Fund is a corporation organized under the laws of the
State of Maryland. Each Fund maintains its principal place of business at
Gateway Center Three, Newark, New Jersey 07102. Shares of National Municipals
Fund are divided into three classes, designated Class A, Class B and Class C.
Shares of Intermediate Series are divided into four classes, designated Class A,
Class B, Class C and Class Z. Municipal Bond Fund consists of three series, one
of which is Intermediate Series.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Upon receipt of such representations
from each of the Funds as Swidler Berlin Shereff Friedman, LLP may require,
Swidler Berlin Shereff Friedman, LLP will deliver the opinion referenced in
paragraph 8.6 herein. The reorganization will comprise the transfer of the
assets of Intermediate Series in exchange for shares of common stock of National
Municipals Fund, and National Municipals Fund's assumption of such Series'
liabilities, if any, and the constructive distribution, after the Closing Date
hereinafter referred to, of such shares of National Municipals Fund to the
shareholders of Intermediate Series, and the termination of Intermediate Series
as provided herein, all upon the terms and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF INTERMEDIATE SERIES IN EXCHANGE FOR SHARES OF NATIONAL
MUNICIPALS FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF
INTERMEDIATE SERIES
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Municipal Bond Fund on
behalf of Intermediate Series agrees to sell, assign, transfer and deliver the
assets of Intermediate Series, as set forth in paragraph 1.2, to National
Municipals Fund, and National Municipals Fund agrees (a) to issue and deliver to
Intermediate Series in exchange therefor the number of shares of Class A, Class
B and Class C shares of Common Stock in National Municipals Fund determined by
dividing the net asset value of the Intermediate Series allocable to Class A,
Class B and Class C shares of beneficial interest (computed in the manner and as
of the time and date set forth in paragraph 2.1) by the net asset value
allocable to a share of National Municipals Fund Class A, Class B and Class C
shares of Common Stock (computed in the manner and as of the time and date set
forth in paragraph 2.2); to issue and deliver to Intermediate Series in exchange
therefor the number of shares of Class A shares of Common Stock in National
Municipals Fund determined by dividing the net asset value of the Intermediate
Series allocable to Class Z shares of beneficial interest (computed in the
manner and as of the time and date set forth in paragraph 2.1) by the net asset
value allocable to a share of National Municipals Fund Class A shares of Common
Stock (computed in the manner and as of the time and date set forth in paragraph
2.2), and (c) to assume all of Intermediate Series' liabilities, if any, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3 (Closing).
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1.2 The assets of Intermediate Series to be acquired by National Municipals
Fund shall include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by such Series and any deferred or prepaid expenses shown as
assets on the books of such Series on the closing date provided in paragraph 3
(Closing Date). National Municipals Fund has no plan or intent to sell or
otherwise dispose of any assets of Intermediate Series, other than in the
ordinary course of business.
1.3 Except as otherwise provided herein, National Municipals Fund will assume
all debts, liabilities, obligations and duties of Intermediate Series of
whatever kind or nature, whether absolute, accrued, contingent or otherwise,
whether or not determinable as of the Closing Date and whether or not
specifically referred to in this Agreement; provided, however, that Intermediate
Series agrees to utilize its best efforts to cause such Series to discharge all
of the known debts, liabilities, obligations and duties of such Series prior to
the Closing Date.
1.4 On or immediately prior to the Closing Date, Intermediate Series will
declare and pay to its shareholders of record dividends and/or other
distributions so that it will have distributed substantially all (and in any
event not less than ninety-eight percent) of each of such Series' investment
company taxable income (computed without regard to any deduction for dividends
paid), net tax-exempt interest income, if any, and realized net capital gains,
if any, for all taxable years through its termination.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable, but in any event within 30 days of the Closing Date
Intermediate Series will distribute PRO RATA to its Class A, Class B and Class C
shareholders of record, determined as of the close of business on the Closing
Date, the Class A, Class B and Class C shares of National Municipals Fund and to
its Class Z shareholders of record, determined as of the close of business on
the Closing Date. The Class Z shares of National Municipals Fund received by
Intermediate Series pursuant to paragraph 1.1 in exchange for their interest in
such Series, and Municipal Bond Fund will file with the Secretary of State of
The Commonwealth of Massachusetts a Certificate of Termination terminating
Intermediate Series. Such distribution will be accomplished by opening accounts
on the books of National Municipals Fund in the names of Intermediate Series'
shareholders and transferring thereto the shares credited to the account of
Intermediate Series on the books of National Municipals Fund. Each account
opened shall be credited with the respective PRO RATA number of National
Municipals Fund Class A, Class B and Class C shares due such Series' Class A,
Class B and Class C shareholders, respectively. Fractional shares of National
Municipals Fund shall be rounded to the third decimal place.
1.6 National Municipals Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Intermediate Series
shareholder holding Intermediate Series receipts for shares of beneficial
interest as of the Closing Date, until National Municipals Fund is notified by
Municipal Bond Fund's transfer agent that such shareholder has surrendered his
or her outstanding Series receipts for shares of beneficial interest or, in the
event of lost, stolen or destroyed receipts for shares of beneficial interest,
posted adequate bond or submitted a lost certificate form, as the case may be,
National Municipals Fund will not permit such shareholder to (1) receive
dividends or other distributions on National Municipals Fund shares in cash
(although such dividends and distributions shall be credited to the account of
such shareholder established on National Municipals Fund's books pursuant to
paragraph 1.5, as provided in the next sentence), (2) exchange National
Municipals Fund shares credited to such shareholder's account for shares of
other Prudential Mutual Funds, or (3) pledge or redeem such shares. In the event
that a shareholder is not permitted to receive dividends or other distributions
on National Municipals Fund shares in cash as provided in the preceding
sentence, National Municipals Fund shall pay such dividends or other
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distributions in additional National Municipals Fund shares, notwithstanding any
election such shareholder shall have made previously with respect to the payment
of dividends or other distributions on shares of Intermediate Series.
Intermediate Series will, at its expense, request its shareholders to surrender
their outstanding Intermediate Series receipts for shares of beneficial
interest, post adequate bond or submit a lost certificate form, as the case may
be.
1.7 Ownership of National Municipals Fund shares will be shown on the books of
the National Municipals Fund's transfer agent. Shares of National Municipals
Fund will be issued in the manner described in National Municipals Fund's
then-current prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of National Municipals
Fund in exchange for shares of Intermediate Series in a name other than that of
the registered holder of the shares being exchanged on the books of Intermediate
Series as of that time shall be paid by the person to whom such shares are to be
issued as a condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission
(SEC) or any state securities commission of Municipal Bond Fund with respect to
Intermediate Series is and shall remain the responsibility of Intermediate
Series up to and including the Termination Date.
1.10 All books and records of Intermediate Series, including all books and
records required to be maintained under the Investment Company Act of 1940
(Investment Company Act) and the rules and regulations thereunder, shall be
available to National Municipals Fund from and after the Closing Date and shall
be turned over to National Municipals Fund on or prior to the Termination Date.
2. VALUATION
2.1 The value of Intermediate Series' assets and liabilities to be acquired and
assumed, respectively, by National Municipals Fund shall be the net asset value
computed as of 4:15 p.m., New York time, on the Closing Date (such time and date
being hereinafter called the Valuation Time), using the valuation procedures set
forth in Intermediate Series' then-current prospectus and Municipal Bond Fund's
statement of additional information.
2.2 The net asset value of a share of National Municipals Fund shall be the net
asset value per such share computed on a class-by-class basis as of the
Valuation Time, using the valuation procedures set forth in National Municipals
Fund's then-current prospectus and statement of additional information.
2.3 The number of National Municipals Fund shares to be issued (including
fractional shares, if any) in exchange for Intermediate Series' net assets shall
be calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Investments Fund Management LLC (PIFM) in accordance with its
regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be December 4, 1998 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of National
Municipals Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
Intermediate Series, shall deliver to National Municipals Fund at the Closing a
certificate of an authorized officer of State Street stating that
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(a) Intermediate Series' portfolio securities, cash and any other assets have
been transferred in proper form to National Municipals Fund on the Closing Date
and (b) all necessary taxes, if any, have been paid, or provision for payment
has been made, in conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of Intermediate Series and of the net asset value
per share of National Municipals Fund is impracticable, the Closing Date shall
be postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
3.4 Municipal Bond Fund shall deliver to National Municipals Fund on or prior
to the Termination Date the names and addresses of each of the shareholders of
Intermediate Series and the number of outstanding shares owned by each such
shareholder, all as of the close of business on the Closing Date, certified by
the Secretary or Assistant Secretary of Municipal Bond Fund. National Municipals
Fund shall issue and deliver to Municipal Bond Fund at the Closing a
confirmation or other evidence satisfactory to Municipal Bond Fund that shares
of National Municipals Fund have been or will be credited to Intermediate
Series' account on the books of National Municipals Fund. At the Closing each
party shall deliver to the other such bills of sale, checks, assignments, share
certificates, receipts and other documents as such other party or its counsel
may reasonably request to effect the transactions contemplated by this
Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Municipal Bond Fund represents and warrants as follows:
4.1.1 Municipal Bond Fund is a business trust duly organized and validly
existing under the laws of The Commonwealth of Massachusetts and
Intermediate Series has been duly established in accordance with the terms
of Series Fund's Declaration of Trust as a separate series of Municipal Bond
Fund;
4.1.2 Municipal Bond Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is
in full force and effect;
4.1.3 Municipal Bond Fund is not, and the execution, delivery and
performance of this Agreement will not, result in violation of any provision
of the Declaration of Trust or By-Laws of Municipal Bond Fund or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which Intermediate Series is a party or by which Intermediate
Series is bound;
4.1.4 All material contracts or other commitments to which Intermediate
Series, or the properties or assets of Intermediate Series, is subject, or
by which Intermediate Series is bound except this Agreement will be
terminated on or prior to the Closing Date without Intermediate Series or
National Municipals Fund incurring any liability or penalty with respect
thereto;
4.1.5 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Series Fund or any of the properties or assets
of Intermediate Series. Municipal Bond Fund knows of no facts that might
form the basis for the institution of such proceedings, and, with respect to
Intermediate Series, Municipal Bond Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body that materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
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4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of Intermediate Series at April 30, 1998 and for the year then
ended (copies of which have been furnished to National Municipals Fund) have
been audited by PricewaterhouseCoopers LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial
statements are prepared in accordance with generally accepted accounting
principles and present fairly, in all material respects, the financial
condition, results of operations, changes in net assets and financial
highlights of Intermediate Series as of and for the period ended on such
date, and there are no material known liabilities of Intermediate Series
(contingent or otherwise) not disclosed therein;
4.1.7 Since April 30, 1998, there has not been any material adverse change
in Intermediate Series' financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by Intermediate Series of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by National Municipals Fund. For the purposes of
this paragraph 4.1.7, a decline in net assets or change in the number of
shares outstanding shall not constitute a material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Intermediate Series required by law to have been
filed on or before such dates shall have been timely filed, and all federal
and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment
thereof, and, to the best of Municipal Bond Fund's knowledge, all federal or
other taxes required to be shown on any such return or report have been
shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations,
Intermediate Series has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and Municipal Bond Fund intends to cause such Series to meet those
requirements for the current taxable year; and, for each past calendar year
since it commenced operations, Intermediate Series has made such
distributions as are necessary to avoid the imposition of federal excise tax
or has paid or provided for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of Intermediate Series are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of Intermediate Series will, at the time of the Closing, be held in
the name of the persons and in the amounts set forth in the list of
shareholders submitted to National Municipals Fund in accordance with the
provisions of paragraph 3.4. Intermediate Series does not have outstanding
any options, warrants or other rights to subscribe for or purchase any
shares, nor is there outstanding any security convertible into any of its
shares of Intermediate Series, except for the Class B shares of Intermediate
Series which have the conversion feature described in Intermediate Series'
Prospectus dated July 1, 1998;
4.1.11 At the Closing Date, the Municipal Bond Fund will have good and
marketable title to the assets of Intermediate Series to be transferred to
National Municipals Fund pursuant to paragraph 1.1, and full right, power
and authority to sell, assign, transfer and deliver such assets hereunder
free of any liens, claims, charges or other encumbrances, and, upon delivery
and payment for such assets, National Municipals Fund will acquire good and
marketable title thereto;
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4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Trustees of the Municipal Bond Fund and by all
necessary action, other than shareholder approval, on the part of
Intermediate Series, and this Agreement constitutes a valid and binding
obligation of Municipal Bond Fund and, subject to shareholder approval, of
Intermediate Series;
4.1.13 The information furnished and to be furnished by Municipal Bond Fund
for use in applications for orders, registration statements, proxy materials
and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.1.14 On the effective date of the registration statement filed with the
SEC by National Municipals Fund on Form N-14 relating to the shares of
National Municipals Fund issuable hereunder, and any supplement or amendment
thereto (Registration Statement), at the time of the meeting of the
shareholders of Intermediate Series and on the Closing Date, the Proxy
Statement of Intermediate Series, the Prospectus of National Municipals
Fund, and the Statement of Additional Information of National Municipals
Fund to be included in the Registration Statement (collectively, Proxy
Statement) (i) will comply in all material respects with the provisions and
regulations of the Securities Act of 1933 (1933 Act), the Securities
Exchange Act of 1934 (1934 Act) and the Investment Company Act, and the
rules and regulations under such Acts and (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein in light of the circumstances under which they were made or
necessary to make the statements therein not misleading; provided, however,
that the representations and warranties in this paragraph 4.1.14 shall not
apply to statements in or omissions from the Proxy Statement and
Registration Statement made in reliance upon and in conformity with
information furnished by National Municipals Fund for use therein.
4.2 National Municipals Fund represents and warrants as follows:
4.2.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 National Municipals Fund is an open-end, management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.2.3 National Municipals Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of National Municipals Fund or
of any material agreement, indenture, instrument, contract, lease or other
undertaking to which National Municipals Fund is a party or by which
National Municipals Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or
threatened against National Municipals Fund or any of its properties or
assets, except as previously disclosed in writing to the Municipal Bond
Fund. Except as previously disclosed in writing to Municipal Bond Fund,
National Municipals Fund knows of no facts that might form the basis for the
institution of such proceedings, and National Municipals Fund is not a party
to or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
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4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of National Municipals Fund at December 31, 1997 and for the
fiscal year then ended (copies of which have been furnished to Series Fund)
have been audited by PricewaterhouseCoopers LLP, independent accountants, in
accordance with generally accepted auditing standards. Such financial
statements are prepared in accordance with generally accepted accounting
principles and present fairly, in all material respects, the financial
condition, results of operations, changes in net assets and financial
highlights of National Municipals Fund as of and for the period ended on
such date, and there are no material known liabilities of National
Municipals Fund (contingent or otherwise) not disclosed therein;
4.2.6 Since December 31, 1997, there has not been any material adverse
change in National Municipals Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course
of business, or any incurrence by National Municipals Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred,
except as otherwise disclosed to and accepted by Municipal Bond Fund. For
the purposes of this paragraph 4.2.6, a decline in net asset value per share
or a decrease in the number of shares outstanding shall not constitute a
material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of National Municipals Fund required by law to have been
filed on or before such dates shall have been filed, and all federal and
other taxes shown as due on said returns and reports shall have been paid
insofar as due, or provision shall have been made for the payment thereof,
and, to the best of National Municipals Fund's knowledge, all federal or
other taxes required to be shown on any such return or report are shown on
such return or report, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations, National
Municipals Fund has met the requirements of Subchapter M of the Internal
Revenue Code for qualification and treatment as a regulated investment
company and intends to meet those requirements for the current taxable year;
and, for each past calendar year since it commenced operations, National
Municipals Fund has made such distributions as are necessary to avoid the
imposition of federal excise tax or has paid or provided for the payment of
any excise tax imposed;
4.2.9 All issued and outstanding shares of National Municipals Fund are,
and at the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by this
Agreement, National Municipals Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares nor
is there outstanding any security convertible into any of its shares, except
for the Class B shares which have the conversion feature described in
National Municipals Fund's Prospectus dated March 4, 1998;
4.2.10 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of National Municipals Fund and by
all necessary corporate action on the part of National Municipals Fund, and
this Agreement constitutes a valid and binding obligation of National
Municipals Fund;
4.2.11 The shares of National Municipals Fund to be issued and delivered to
Municipal Bond Fund for and on behalf of Intermediate Series pursuant to
this Agreement will, at the Closing Date, have been duly authorized and,
when issued and delivered as provided in this Agreement, will be duly and
validly issued and outstanding shares of National Municipals Fund, fully
paid and non-assessable;
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4.2.12 The information furnished and to be furnished by National Municipals
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of
the meeting of the shareholders of Intermediate Series and on the Closing
Date, the Proxy Statement and the Registration Statement (i) will comply in
all material respects with the provisions of the 1933 Act, the 1934 Act and
the Investment Company Act and the rules and regulations under such Acts,
(ii) will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein in the light of the circumstances under which
they were made, not misleading; provided, however, that the representations
and warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information furnished by Intermediate
Series for use therein.
5. COVENANTS OF NATIONAL MUNICIPALS FUND AND MUNICIPAL BOND FUND
5.1 Municipal Bond Fund, with respect to Intermediate Series, and National
Municipals Fund each covenants to operate its respective business in the
ordinary course between the date hereof and the Closing Date, it being
understood that the ordinary course of business will include declaring and
paying customary dividends and other distributions and such changes in
operations as are contemplated by the normal operations of the Funds, except as
may otherwise be required by paragraph 1.4 hereof.
5.2 Municipal Bond Fund covenants to call a meeting of the shareholders of
Intermediate Series to consider and act upon this Agreement and to take all
other action necessary to obtain approval of the transactions contemplated
hereby (including the determinations of its Trustees as set forth in Rule
17a-8(a) under the Investment Company Act).
5.3 Municipal Bond Fund covenants that National Municipals Fund shares to be
received for and on behalf of Intermediate Series in accordance herewith are not
being acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4 Municipal Bond Fund covenants that it will assist National Municipals Fund
in obtaining such information as National Municipals Fund reasonably requests
concerning the beneficial ownership of Intermediate Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Municipal Bond Fund covenants to prepare the Proxy Statement in compliance
with the 1934 Act, the Investment Company Act and the rules and regulations
under each Act.
5.7 Municipal Bond Fund covenants that it will, from time to time, as and when
requested by National Municipals Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
or cause to be taken such further action, as National Municipals Fund may deem
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necessary or desirable in order to vest in and confirm to National Municipals
Fund title to and possession of all the assets of Intermediate Series to be
sold, assigned, transferred and delivered hereunder and otherwise to carry out
the intent and purpose of this Agreement.
5.8 National Municipals Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 National Municipals Fund covenants that it will, from time to time, as and
when requested by Municipal Bond Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
and cause to be taken such further action, as Municipal Series Fund may deem
necessary or desirable in order to (i) vest in and confirm to the Municipal Bond
Fund title to and possession of all the shares of National Municipals Fund to be
transferred to the shareholders of Intermediate Series pursuant to this
Agreement and (ii) assume all of the liabilities of Intermediate Series in
accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF MUNICIPAL BOND FUND
The obligations of Municipal Bond Fund to consummate the transactions
provided for herein shall be subject to the performance by National Municipals
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of National Municipals Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 National Municipals Fund shall have delivered to Municipal Bond Fund on the
Closing Date a certificate executed in its name by the President or a Vice
President of National Municipals Fund, in form and substance satisfactory to
Municipal Bond Fund and dated as of the Closing Date, to the effect that the
representations and warranties of National Municipals Fund in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transaction contemplated by this Agreement, and as to such other matters
as Municipal Bond Fund shall reasonably request.
6.3 Municipal Bond Fund shall have received on the Closing Date a favorable
opinion from Swidler Berlin Shereff Friedman, LLP, counsel to National
Municipals Fund, dated as of the Closing Date, to the effect that:
6.3.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
National Municipals Fund and, assuming due authorization, execution and
delivery of the Agreement by Municipal Bond Fund on behalf of Intermediate
Series, is a valid and binding obligation of National Municipals Fund
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
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6.3.3 The shares of National Municipals Fund to be distributed to the
shareholders of Intermediate Series under this Agreement, assuming their due
authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of National Municipals Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with National Municipals Fund's Articles of Incorporation or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement dated May 2,
1988 between National Municipals Fund and Prudential Investments Fund
Management LLC, as successor to Prudential Mutual Fund Management, Inc., (b)
the Custodian Contract dated July 26, 1990 between National Municipals Fund
and State Street Bank and Trust Company, (c) the Distribution Agreement
dated May 8, 1996 between National Municipals Fund and Prudential Securities
Incorporated and (d) the Transfer Agency and Service Agreement dated January
1, 1988 between National Municipals Fund and Prudential Mutual Fund Services
LLC, as successor to Prudential Mutual Fund Services, Inc.; provided,
however, that such counsel may state that they express no opinion as to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by National Municipals Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the Investment Company Act and such as may be
required under state Blue Sky or securities laws;
6.3.6 National Municipals Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or government proceeding
instituted or threatened against National Municipals Fund that could be
required to be disclosed in its registration statement on Form N-1A and is
not so disclosed.
Such opinion may rely on an opinion of Maryland Counsel to the extent it
addresses Maryland law.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND
The obligations of National Municipals Fund to complete the transactions
provided for herein shall be subject to the performance by Municipal Bond Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
7.1 All representations and warranties of Municipal Bond Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Series Fund shall have delivered to National Municipals Fund on the Closing
Date a statement of the assets and liabilities of Intermediate Series, which
shall be prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of the portfolio securities of
Intermediate Series showing the adjusted tax base of such securities by lot, as
of the Closing Date, certified by the Treasurer of Municipal Bond Fund.
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7.3 Municipal Bond Fund shall have delivered to National Municipals Fund on the
Closing Date a certificate executed in its name by its President or one of its
Vice Presidents, in form and substance satisfactory to National Municipals Fund
and dated as of the Closing Date, to the effect that the representations and
warranties of Municipal Bond Fund made in this Agreement are true and correct at
and as of the Closing Date except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as National
Municipals Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Municipal Bond Fund shall have
declared and paid to the shareholders of record of Intermediate Series one or
more dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of such
Series' investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt interest income, if any, and
realized net capital gain, if any, of Intermediate Series for all completed
taxable years from the inception of such Series through April 30, 1998, and for
the period from and after April 30, 1998 through the Closing Date.
7.5 National Municipals Fund shall have received on the Closing Date a
favorable opinion from Swidler Berlin Shereff Friedman, LLP, special counsel to
Series Fund, dated as of the Closing Date, to the effect that:
7.5.1 Municipal Bond Fund is duly organized and validly existing under the
laws of the Commonwealth of Massachusetts with power under its Declaration
of Trust to own all of its properties and assets and, to the knowledge of
such counsel, to carry on its business as presently conducted and
Intermediate Series has been duly established in accordance with the terms
of the Municipal Bond Fund's Declaration of Trust as a separate series of
Municipal Bond Fund;
7.5.2 This Agreement has been duly authorized, executed and delivered by
Municipal Bond Fund and constitutes a valid and legally binding obligation
of Municipal Bond Fund enforceable against the assets of Intermediate Series
in accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Municipal Bond Fund of its obligations hereunder will not,
(i) violate Municipal Bond Fund's Declaration of Trust or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement, dated June
1, 1995, between Municipal Bond Fund and Prudential Investments Fund
Management LLC, as successor to Prudential Mutual Fund Management, Inc., (b)
the Custodian Contract, dated August 25, 1987, between Municipal Bond Fund
and State Street Bank and Trust Company, (c) the Distribution Agreement
dated May 8, 1996, between Municipal Bond Fund and Prudential Securities
Incorporated and the Transfer Agency and Service Agreement, dated January 1,
1988, between Municipal Bond Fund and Prudential Mutual Fund Services LLC,
as successor to Prudential Mutual Fund Services, Inc.; provided, however,
that such counsel may state that insofar as performance by Municipal Bond
Fund of its obligations under this Agreement is concerned they express no
opinion as to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Municipal Bond Fund under the federal laws of the United States
and the laws of The Commonwealth of Massachusetts for the consummation of
the transactions contemplated by this Agreement have been obtained;
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7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Series Fund, involving Intermediate Series,
that would be required to be disclosed in its Registration Statement on Form
N-1A and is not so disclosed; and
7.5.6 Municipal Bond Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND AND
MUNICIPAL BOND FUND
The obligations of National Municipals Fund and Municipal Bond Fund
hereunder are subject to the further conditions that on or before the Closing
Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Municipal Bond Fund and
the Board of Directors of National Municipals Fund, as to the determinations set
forth in Rule 17a-8(a) under the Investment Company Act, (b) the Board of
Directors of National Municipals Fund as to the assumption by the National
Municipals Fund of the liabilities of Intermediate Series and (c) the holders of
the outstanding shares of Intermediate Series in accordance with the provisions
of the Municipal Bond Fund's Declaration of Trust and By-Laws, and certified
copies of the resolutions evidencing such approvals shall have been delivered to
National Municipals Fund.
8.2 Any proposed change to National Municipals Fund's operations that may be
approved by the Board of Directors of National Municipals Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
National Municipals Fund shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of National Municipals Fund in accordance with
the Investment Company Act and the provisions of the General Corporation Law of
the State of Maryland, and certified copies of the resolution evidencing such
approval shall have been delivered to Municipal Bond Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by National Municipals Fund or Municipal Bond
Fund to permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order or permit would not involve a risk of a material adverse
effect on the assets or properties of National Municipals Fund or Intermediate
Series, provided, that either party hereto may for itself waive any part of this
condition.
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8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 The Funds shall have received on or before the Closing Date opinions of
Swidler Berlin Shereff Friedman, LLP or a ruling from the Internal Revenue
Service with respect to Intermediate Series satisfactory to each of them,
substantially to the effect that for federal income tax purposes:
8.6.1 The acquisition by National Municipals Fund of the assets of
Intermediate Series solely in exchange for voting shares of National
Municipals Fund and the assumption by National Municipals Fund of
Intermediate Series' liabilities, if any, followed by the distribution of
National Municipals Fund's voting shares pro rata to Intermediate Series'
shareholders, pursuant to its termination and constructively in exchange for
Intermediate Series' shares, will constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code, and each Fund
will be "a party to a reorganization" within the meaning of Section 368(b)
of the Internal Revenue Code;
8.6.2 Intermediate Series' shareholders will recognize no gain or loss upon
the constructive exchange of all of their shares of Intermediate Series
solely for shares of National Municipals Fund in complete termination of
such Series;
8.6.3 No gain or loss will be recognized to Intermediate Series upon the
transfer of its assets to National Municipals Fund solely in exchange for
shares of National Municipals Fund and the assumption by National Municipals
Fund of Intermediate Series' liabilities, if any, and the subsequent
distribution of those shares to Intermediate Series' shareholders in
complete termination of Intermediate Series;
8.6.4 No gain or loss will be recognized to National Municipals Fund upon
the acquisition of Intermediate Series' assets solely in exchange for shares
of National Municipals Fund and the assumption of Intermediate Series'
liabilities, if any;
8.6.5 National Municipals Fund's basis for the assets of Intermediate
Series acquired in the Reorganization will be the same as the basis thereof
when held by Intermediate Series immediately before the transfer, and the
holding period of such assets acquired by National Municipals Fund will
include the holding period thereof when held by Intermediate Series;
8.6.6 Intermediate Series shareholders' basis for the shares of National
Municipals Fund to be received by them pursuant to the reorganization will
be the same as their basis for the shares of Intermediate Series to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of National Municipals Fund shares to be received
by Intermediate Series' shareholders will include the period during which
the shares of Intermediate Series to be constructively surrendered in
exchange therefor were held; provided that the Intermediate Series shares
surrendered were held as capital assets by those shareholders on the date of
the exchange.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
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9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to National Municipals
Fund and Intermediate Series pro rata in a fair and equitable manner in
proportion to its assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
National Municipals Fund or Municipal Bond Fund as to Intermediate Series
may at its option terminate this Agreement at or prior to the Closing Date
because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Municipal Bond Fund and National Municipals
Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of National Municipals Fund or any Trustee or officer of Municipal Bond Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Municipal Bond Fund pursuant to paragraph 5.2, no such amendment may have the
effect of changing the provisions for determining the number of shares of
National Municipals Fund to be distributed to Intermediate Series' shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, Newark, New Jersey 07102,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
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14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF MUNICIPAL BOND FUND; AGREEMENT
AN OBLIGATION ONLY OF INTERMEDIATE SERIES, AND ENFORCEABLE ONLY AGAINST ASSETS
OF INTERMEDIATE SERIES.
The name "Prudential Municipal Bond Fund" is the designation of the Trustees
from time to time acting under an Amended and Restated Declaration of Trust
dated August 17, 1994, as the same may be from time to time amended, and the
name "Intermediate Series" is the designation of a portfolio of the assets of
Municipal Bond Fund. National Municipals Fund acknowledges that it must look,
and agrees that it shall look, solely to the assets of Intermediate Series for
the enforcement of any claims arising out of or based on the obligations of
Municipal Bond Fund hereunder, and with respect to obligations relating to
Intermediate Series, only to the assets of Intermediate Series, and in
particular that (i) neither the Trustees, officers, agents or shareholders of
Series Fund assume or shall have any personal liability for obligations of
Municipal Bond Fund hereunder, and (ii) none of the assets of Municipal Bond
Fund other than the portfolio assets of Intermediate Series may be resorted to
for the enforcement of any claim based on the obligations of Municipal Bond Fund
hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential Municipal Bond Fund
By /s/ Richard A. Redeker
----------------------
PRESIDENT
Prudential National Municipals Fund, Inc.
By /s/ Richard A. Redeker
----------------------
PRESIDENT
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AGREEMENT AND PLAN OF REORGANIZATIONS
Agreement and Plan of Reorganizations (Agreement) made as of the day of
October, 1998, by and between Prudential Municipal Series Fund (Series
Fund)--Maryland Series and Michigan Series and Prudential National Municipals
Fund, Inc. (National Municipals Fund and, collectively with Series Fund, the
Funds and each individually, a Fund). The Series Fund is a business trust
organized under the laws of the Commonwealth of Massachusetts and the National
Municipals Fund is a corporation organized under the laws of the State of
Maryland. Each Fund maintains its principal place of business at Gateway Center
Three, Newark, New Jersey 07102. Shares of both Funds are divided into three
classes, designated Class A, Class B and Class C. Series Fund consists of
thirteen series, two of which are the Maryland Series and Michigan Series
(collectively, the Series and each individually, a Series).
This Agreement is intended to be, and is adopted as, a plan of
reorganizations pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganizations will comprise the
transfer of the assets of the Maryland Series and Michigan Series, respectively,
in exchange for shares of common stock of National Municipals Fund, and National
Municipals Fund's assumption of such Series' liabilities, if any, and the
constructive distribution, after the Closing Date hereinafter referred to, of
such shares of National Municipals Fund to the shareholders of the respective
Series, and the termination of the Series as provided herein, all upon the terms
and conditions as hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE SERIES IN EXCHANGE FOR SHARES OF NATIONAL
MUNICIPALS FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF
THE SERIES
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, Series Fund on behalf of
Maryland and Michigan Series agrees to sell, assign, transfer and deliver the
assets of each Series, as set forth in paragraph 1.2, to National Municipals
Fund, and National Municipals Fund agrees (a) to issue and deliver to each
Series in exchange therefor the number of shares of Class A Common Stock in
National Municipals Fund determined by dividing the net asset value of the
respective Series allocable to Class A, Class B and Class C shares of beneficial
interest (computed in the manner and as of the time and date set forth in
paragraph 2.1) by the net asset value allocable to a share of National
Municipals Fund Class A Common Stock (computed in the manner and as of the time
and date set forth in paragraph 2.2) and (b) to assume all of each Series'
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall take
place at the closing provided for in paragraph 3 (Closing).
1.2 The assets of each Series to be acquired by National Municipals Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by such Series and any deferred or prepaid expenses shown as assets on the
books of such Series on the closing date provided in paragraph 3 (Closing Date).
National Municipals Fund has no plan or intent to sell or otherwise dispose of
any assets of the Series, other than in the ordinary course of business.
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1.3 Except as otherwise provided herein, National Municipals Fund will assume
all debts, liabilities, obligations and duties of each Series of whatever kind
or nature, whether absolute, accrued, contingent or otherwise, whether or not
determinable as of the Closing Date and whether or not specifically referred to
in this Agreement; provided, however, that each Series agrees to utilize its
best efforts to cause such Series to discharge all of the known debts,
liabilities, obligations and duties of such Series prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, each Series will declare and
pay to its shareholders of record dividends and/or other distributions so that
it will have distributed substantially all (and in any event not less than
ninety-eight percent) of each of such Series' investment company taxable income
(computed without regard to any deduction for dividends paid), net tax-exempt
interest income, if any, and realized net capital gains, if any, for all taxable
years through its termination.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable, but in any event within 30 days of the Closing Date
each Series will distribute PRO RATA to its Class A, Class B and Class C
shareholders of record, determined as of the close of business on the Closing
Date, the Class A shares of National Municipals Fund received by the Series
pursuant to paragraph 1.1 in exchange for their interest in such Series, and
Municipal Series Fund will file with the Secretary of State of The Commonwealth
of Massachusetts a Certificate of Termination terminating each Series. Such
distribution will be accomplished by opening accounts on the books of National
Municipals Fund in the names of each Series' shareholders and transferring
thereto the shares credited to the account of the respective Series on the books
of National Municipals Fund. Each account opened shall be credited with the
respective PRO RATA number of National Municipals Fund Class A shares due such
Series' Class A, Class B and Class C shareholders, respectively. Fractional
shares of National Municipals Fund shall be rounded to the third decimal place.
1.6 National Municipals Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Series shareholder
holding Series receipts for shares of beneficial interest as of the Closing
Date, until National Municipals Fund is notified by Series Fund's transfer agent
that such shareholder has surrendered his or her outstanding Series receipts for
shares of beneficial interest or, in the event of lost, stolen or destroyed
receipts for shares of beneficial interest, posted adequate bond or submitted a
lost certificate form, as the case may be, National Municipals Fund will not
permit such shareholder to (1) receive dividends or other distributions on
National Municipals Fund shares in cash (although such dividends and
distributions shall be credited to the account of such shareholder established
on National Municipals Fund's books pursuant to paragraph 1.5, as provided in
the next sentence), (2) exchange National Municipals Fund shares credited to
such shareholder's account for shares of other Prudential Mutual Funds, or (3)
pledge or redeem such shares. In the event that a shareholder is not permitted
to receive dividends or other distributions on National Municipals Fund shares
in cash as provided in the preceding sentence, National Municipals Fund shall
pay such dividends or other distributions in additional National Municipals Fund
shares, notwithstanding any election such shareholder shall have made previously
with respect to the payment of dividends or other distributions on shares of the
Series. Each Series will, at its expense, request its shareholders to surrender
their outstanding Series receipts for shares of beneficial interest, post
adequate bond or submit a lost certificate form, as the case may be.
1.7 Ownership of National Municipals Fund shares will be shown on the books of
the National Municipals Fund's transfer agent. Shares of National Municipals
Fund will be issued in the manner described in National Municipals Fund's
then-current prospectus and statement of additional information.
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1.8 Any transfer taxes payable upon issuance of shares of National Municipals
Fund in exchange for shares of the Series in a name other than that of the
registered holder of the shares being exchanged on the books of that Series as
of that time shall be paid by the person to whom such shares are to be issued as
a condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission
(SEC) or any state securities commission of Series Fund with respect to a Series
is and shall remain the responsibility of the Series up to and including the
Termination Date.
1.10 All books and records of Series Fund, including all books and records
required to be maintained under the Investment Company Act of 1940, as amended
(Investment Company Act) and the rules and regulations thereunder, shall be
available to National Municipals Fund from and after the Closing Date and shall
be turned over to National Municipals Fund on or prior to the Termination Date.
2. VALUATION
2.1 The value of each Series' assets and liabilities to be acquired and
assumed, respectively, by National Municipals Fund shall be the net asset value
computed as of 4:15 p.m., New York time, on the Closing Date (such time and date
being hereinafter called the Valuation Time), using the valuation procedures set
forth in such Series' then-current prospectus and Series Fund's statement of
additional information.
2.2 The net asset value of a share of National Municipals Fund shall be the net
asset value per such share computed on a class-by-class basis as of the
Valuation Time, using the valuation procedures set forth in National Municipals
Fund's then-current prospectus and statement of additional information.
2.3 The number of National Municipals Fund shares to be issued (including
fractional shares, if any) in exchange for the Series' net assets shall be
calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Investments Fund Management LLC (PIFM) in accordance with its
regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be , 1998 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of National
Municipals Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for each
Series, shall deliver to National Municipals Fund at the Closing a certificate
of an authorized officer of State Street stating that (a) the applicable Series'
portfolio securities, cash and any other assets have been transferred in proper
form to National Municipals Fund on the Closing Date and (b) all necessary
taxes, if any, have been paid, or provision for payment has been made, in
conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of the Series and of the net asset value per share
of National Municipals Fund is impracticable, the Closing Date shall be
postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
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3.4 Series Fund shall deliver to National Municipals Fund on or prior to the
Termination Date the names and addresses of each of the shareholders of each
Series and the number of outstanding shares owned by each such shareholder, all
as of the close of business on the Closing Date, certified by the Secretary or
Assistant Secretary of Series Fund. National Municipals Fund shall issue and
deliver to Series Fund at the Closing a confirmation or other evidence
satisfactory to Series Fund that shares of National Municipals Fund have been or
will be credited to each Series' account on the books of National Municipals
Fund. At the Closing each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, receipts and other documents as such
other party or its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1 Series Fund represents and warrants as follows:
4.1.1 Series Fund is a business trust duly organized and validly existing under
the laws of The Commonwealth of Massachusetts and each of the Series has been
duly established in accordance with the terms of Series Fund's Declaration of
Trust as a separate series of Series Fund;
4.1.2 Series Fund is an open-end, management investment company duly registered
under the Investment Company Act, and such registration is in full force and
effect;
4.1.3 Series Fund is not, and the execution, delivery and performance of this
Agreement will not, result in violation of any provision of the Declaration of
Trust or By-Laws of Series Fund or of any material agreement, indenture,
instrument, contract, lease or other undertaking to which any Series is a party
or by which any Series is bound;
4.1.4 All material contracts or other commitments to which any Series, or the
properties or assets of any Series, is subject, or by which any Series is bound
except this Agreement will be terminated on or prior to the Closing Date without
such Series or National Municipals Fund incurring any liability or penalty with
respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against Series Fund or any of the properties or assets of
any Series. Series Fund knows of no facts that might form the basis for the
institution of such proceedings, and, with respect to each Series, Series Fund
is not a party to or subject to the provisions of any order, decree or judgment
of any court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of each Series at August 31, 1997 and for the year then ended (copies
of which have been furnished to National Municipals Fund) have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are prepared in
accordance with generally accepted accounting principles and present fairly, in
all material respects, the financial condition, results of operations, changes
in net assets and financial highlights of such Series as of and for the period
ended on such date, and there are no material known liabilities of each such
Series (contingent or otherwise) not disclosed therein;
4.1.7 Since August 31, 1997, there has not been any material adverse change in
any Series' financial condition, assets, liabilities or business other than
changes occurring in the ordinary course of business, or any incurrence by any
Series of indebtedness maturing more than one year from the date such
indebtedness
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was incurred, except as otherwise disclosed to and accepted by National
Municipals Fund. For the purposes of this paragraph 4.1.7, a decline in net
assets or change in the number of shares outstanding shall not constitute a
material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of each Series required by law to have been filed on or
before such dates shall have been timely filed, and all federal and other taxes
shown as due on said returns and reports shall have been paid insofar as due, or
provision shall have been made for the payment thereof, and, to the best of
Series Fund's knowledge, all federal or other taxes required to be shown on any
such return or report have been shown on such return or report, no such return
is currently under audit and no assessment has been asserted with respect to
such returns;
4.1.9 For each past taxable year since it commenced operations, each Series has
met the requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and Series Fund
intends to cause such Series to meet those requirements for the current taxable
year; and, for each past calendar year since it commenced operations, each
Series has made such distributions as are necessary to avoid the imposition of
federal excise tax or has paid or provided for the payment of any excise tax
imposed;
4.1.10 All issued and outstanding shares of the Series are, and at the Closing
Date will be, duly and validly authorized, issued and outstanding, fully paid
and non-assessable. All issued and outstanding shares of each Series will, at
the time of the Closing, be held in the name of the persons and in the amounts
set forth in the list of shareholders submitted to National Municipals Fund in
accordance with the provisions of paragraph 3.4. No Series has outstanding any
options, warrants or other rights to subscribe for or purchase any shares, nor
is there outstanding any security convertible into any of its shares of Series
Fund, except for the Class B shares of each Series which have the conversion
feature described in Series Fund's Prospectus dated October 30, 1997;
4.1.11 At the Closing Date, the Series Fund will have good and marketable title
to the assets of each Series to be transferred to National Municipals Fund
pursuant to paragraph 1.1, and full right, power and authority to sell, assign,
transfer and deliver such assets hereunder free of any liens, claims, charges or
other encumbrances, and, upon delivery and payment for such assets, National
Municipals Fund will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been duly
authorized by the Trustees of the Series Fund and by all necessary action, other
than shareholder approval, on the part of each Series, and this Agreement
constitutes a valid and binding obligation of Series Fund and, subject to
shareholder approval, of each Series;
4.1.13 The information furnished and to be furnished by Series Fund for use in
applications for orders, registration statements, proxy materials and other
documents that may be necessary in connection with the transactions contemplated
hereby is and shall be accurate and complete in all material respects and is in
compliance and shall comply in all material respects with applicable federal
securities and other laws and regulations; and
4.1.14 On the effective date of the registration statement filed with the SEC
by National Municipals Fund on Form N-14 relating to the shares of National
Municipals Fund issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders of such
Series and on the Closing Date, the Proxy Statement of such Series, the
Prospectus of National Municipals Fund, and the Statement of Additional
Information of National Municipals Fund to be included in the Registration
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Statement (collectively, Proxy Statement) (i) will comply in all material
respects with the provisions and regulations of the Securities Act of 1933 (1933
Act), the Securities Exchange Act of 1934 (1934 Act) and the Investment Company
Act, and the rules and regulations under such Acts and (ii) will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein in light of the circumstances under which they were made or
necessary to make the statements therein not misleading; provided, however, that
the representations and warranties in this paragraph 4.1.14 shall not apply to
statements in or omissions from the Proxy Statement and Registration Statement
made in reliance upon and in conformity with information furnished by National
Municipals Fund for use therein.
4.2 National Municipals Fund represents and warrants as follows:
4.2.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 National Municipals Fund is an open-end, management investment company
duly registered under the Investment Company Act, and such registration is in
full force and effect;
4.2.3 National Municipals Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision of
the Articles of Incorporation or By-Laws of National Municipals Fund or of any
material agreement, indenture, instrument, contract, lease or other undertaking
to which National Municipals Fund is a party or by which National Municipals
Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against National Municipals Fund or any of its properties or assets, except as
previously disclosed in writing to the Series Fund. Except as previously
disclosed in writing to Series Fund, National Municipals Fund knows of no facts
that might form the basis for the institution of such proceedings, and National
Municipals Fund is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of National Municipals Fund at December 31, 1997 and for the fiscal
year then ended (copies of which have been furnished to Series Fund) have been
audited by PricewaterhouseCoopers LLP, independent accountants, in accordance
with generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles and present
fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of National
Municipals Fund as of and for the period ended on such date, and there are no
material known liabilities of National Municipals Fund (contingent or otherwise)
not disclosed therein;
4.2.6 Since December 31, 1997, there has not been any material adverse change
in National Municipal Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by National Municipals Fund of indebtedness maturing more than one
year from the date such indebtedness was incurred, except as otherwise disclosed
to and accepted by Series Fund. For the purposes of this paragraph 4.2.6, a
decline in net asset value per share or a decrease in the number of shares
outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of National Municipals Fund required by law to have been
filed on or before such dates shall have been filed, and all federal and other
taxes shown as due on said returns and reports shall have been paid insofar as
due, or
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provision shall have been made for the payment thereof, and, to the best of
National Municipals Fund's knowledge, all federal or other taxes required to be
shown on any such return or report are shown on such return or report, no such
return is currently under audit and no assessment has been asserted with respect
to such returns;
4.2.8 For each past taxable year since it commenced operations, National
Municipals Fund has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment company and
intends to meet those requirements for the current taxable year; and, for each
past calendar year since it commenced operations, National Municipals Fund has
made such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of National Municipals Fund are, and at
the Closing Date will be, duly and validly authorized, issued and outstanding,
fully paid and non-assessable. Except as contemplated by this Agreement,
National Municipals Fund does not have outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares nor is there
outstanding any security convertible into any of its shares, except for the
Class B shares which have the conversion feature described in National
Municipals Fund's Prospectus dated March 4, 1998;
4.2.10 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Directors of National Municipals Fund and by all
necessary corporate action on the part of National Municipals Fund, and this
Agreement constitutes a valid and binding obligation of National Municipals
Fund;
4.2.11 The shares of National Municipals Fund to be issued and delivered to
Series Fund for and on behalf of each Series pursuant to this Agreement will, at
the Closing Date, have been duly authorized and, when issued and delivered as
provided in this Agreement, will be duly and validly issued and outstanding
shares of National Municipals Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by National Municipals
Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in all
material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of the
meeting of the shareholders of each Series and on the Closing Date, the Proxy
Statement and the Registration Statement (i) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the Investment
Company Act and the rules and regulations under such Acts, (ii) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (iii) with respect to the Registration Statement, at the time it
becomes effective, it will not contain an untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein in the
light of the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this paragraph 4.2.13 shall
not apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon and in conformity with information
furnished by the Series for use therein.
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5. COVENANTS OF NATIONAL MUNICIPALS FUND AND MUNICIPAL SERIES FUND
5.1 Series Fund, with respect to each Series, and National Municipals Fund each
covenants to operate its respective business in the ordinary course between the
date hereof and the Closing Date, it being understood that the ordinary course
of business will include declaring and paying customary dividends and other
distributions and such changes in operations as are contemplated by the normal
operations of the Funds, except as may otherwise be required by paragraph 1.4
hereof.
5.2 Series Fund covenants to call a meeting of the shareholders of each Series
to consider and act upon this Agreement and to take all other action necessary
to obtain approval of the transactions contemplated hereby (including the
determinations of its Trustees as set forth in Rule 17a-8(a) under the
Investment Company Act).
5.3 Series Fund covenants that National Municipals Fund shares to be received
for and on behalf of each Series in accordance herewith are not being acquired
for the purpose of making any distribution thereof other than in accordance with
the terms of this Agreement.
5.4 Series Fund covenants that it will assist National Municipals Fund in
obtaining such information as National Municipals Fund reasonably requests
concerning the beneficial ownership of each Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Series Fund covenants to prepare the Proxy Statement in compliance with the
1934 Act, the Investment Company Act and the rules and regulations under each
Act.
5.7 Series Fund covenants that it will, from time to time, as and when
requested by National Municipals Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
or cause to be taken such further action, as National Municipals Fund may deem
necessary or desirable in order to vest in and confirm to National Municipals
Fund title to and possession of all the assets of each Series to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
5.8 National Municipals Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 National Municipals Fund covenants that it will, from time to time, as and
when requested by Series Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take and cause to
be taken such further action, as Municipal Series Fund may deem necessary or
desirable in order to (i) vest in and confirm to the Series Fund title to and
possession of all the shares of National Municipals Fund to be transferred to
the shareholders of each Series pursuant to this Agreement and (ii) assume all
of the liabilities of each Series in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SERIES FUND
The obligations of Series Fund to consummate the transactions provided for
herein shall be subject to the performance by National Municipals Fund of all
the obligations to be performed by it hereunder on or before the Closing Date
and the following further conditions:
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6.1 All representations and warranties of National Municipals Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 National Municipals Fund shall have delivered to Series Fund on the Closing
Date a certificate executed in its name by the President or a Vice President of
National Municipals Fund, in form and substance satisfactory to Series Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of National Municipals Fund in this Agreement are true and correct at
and as of the Closing Date, except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as Series Fund
shall reasonably request.
6.3 Series Fund shall have received on the Closing Date a favorable opinion
from Swidler Berlin Shereff Friedman, LLP, counsel to National Municipals Fund,
dated as of the Closing Date, to the effect that:
6.3.1 National Municipals Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets and, to
the knowledge of such counsel, to carry on its business as presently
conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
National Municipals Fund and, assuming due authorization, execution and
delivery of the Agreement by Municipal Series Fund on behalf of each Series,
is a valid and binding obligation of National Municipals Fund enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
6.3.3 The shares of National Municipals Fund to be distributed to the
shareholders of each Series under this Agreement, assuming their due
authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of National Municipals Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with National Municipals Fund's Articles of Incorporation or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement dated
January 22, 1990 between National Municipals Fund and Prudential Investments
Fund Management LLC, as successor to Prudential Mutual Fund Management,
Inc., (b) the Custodian Contract dated July 26, 1990 between National
Municipals Fund and State Street Bank and Trust Company, (c) the
Distribution Agreement dated June 1, 1998 between National Municipals Fund
and Prudential Investment Management Services LLC and (d) the Transfer
Agency and Service Agreement dated January 1, 1990 between National
Municipals Fund and Prudential Mutual Fund Services LLC, as successor to
Prudential Mutual Fund Services, Inc.; provided, however, that such counsel
may state that they express no opinion as to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation by National Municipals Fund of the
transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the Investment Company Act and such as may be
required under state Blue Sky or securities laws;
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6.3.6 National Municipals Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or government proceeding
instituted or threatened against National Municipals Fund that could be
required to be disclosed in its registration statement on Form N-1A and is
not so disclosed.
Such opinion may rely on an opinion of Maryland Counsel to the extent it
addresses Maryland law.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND
The obligations of National Municipals Fund to complete the transactions
provided for herein shall be subject to the performance by Series Fund of all
the obligations to be performed by it hereunder on or before the Closing Date
and the following further conditions:
7.1 All representations and warranties of Series Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transaction contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Series Fund shall have delivered to National Municipals Fund on the Closing
Date a statement of the assets and liabilities of each Series, which shall be
prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of the portfolio securities of each
Series showing the adjusted tax base of such securities by lot, as of the
Closing Date, certified by the Treasurer of Series Fund.
7.3 Series Fund shall have delivered to National Municipals Fund on the Closing
Date a certificate executed in its name by its President or one of its Vice
Presidents, in form and substance satisfactory to National Municipals Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of Series Fund made in this Agreement are true and correct at and as
of the Closing Date except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as National
Municipals Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Series Fund shall have
declared and paid to the shareholders of record of each Series one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of such
Series' investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt interest income, if any, and
realized net capital gain, if any, of such Series for all completed taxable
years from the inception of such Series through August 31, 1997, and for the
period from and after August 31, 1997 through the Closing Date.
7.5 National Municipals Fund shall have received on the Closing Date a
favorable opinion from Swidler Berlin Shereff Friedman, LLP, special counsel to
Series Fund, dated as of the Closing Date, to the effect that:
7.5.1 Series Fund is duly organized and validly existing under the laws of
the Commonwealth of Massachusetts with power under its Declaration of Trust
to own all of its properties and assets and, to the knowledge of such
counsel, to carry on its business as presently conducted and each Series has
been duly established in accordance with the terms of the Series Fund's
Declaration of Trust as a separate series of Series Fund;
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7.5.2 This Agreement has been duly authorized, executed and delivered by
Series Fund and constitutes a valid and legally binding obligation of Series
Fund enforceable against the assets of each Series in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Series Fund of its obligations hereunder will not, (i)
violate Series Fund's Declaration of Trust or By-Laws or (ii) result in a
default or a breach of (a) the Management Agreement, dated December 30,
1988, between Series Fund and Prudential Investments Fund Management LLC, as
successor to Prudential Mutual Fund Management, Inc., (b) the Custodian
Contract, dated August 1, 1990, between Series Fund and State Street Bank
and Trust Company, (c) the Distribution Agreement dated June 1, 1998,
between Series Fund and Prudential Investment Management Services LLC and
the Transfer Agency and Service Agreement, dated January 1, 1988, between
Series Fund and Prudential Mutual Fund Services LLC, as successor to
Prudential Mutual Fund Services, Inc.; provided, however, that such counsel
may state that insofar as performance by Series Fund of its obligations
under this Agreement is concerned they express no opinion as to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights and to
general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Series Fund under the federal laws of the United States and the
laws of The Commonwealth of Massachusetts for the consummation of the
transactions contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Series Fund, involving any Series, that
would be required to be disclosed in its Registration Statement on Form N-1A
and is not so disclosed; and
7.5.6 Series Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND AND
SERIES FUND
The obligations of National Municipals Fund and Series Fund hereunder are
subject to the further conditions that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Series Fund and the Board
of Directors of National Municipals Fund, as to the determinations set forth in
Rule 17a-8(a) under the Investment Company Act, (b) the Board of Directors of
National Municipals Fund as to the assumption by the National Municipals Fund of
the liabilities of each Series and (c) the holders of the outstanding shares of
each Series in accordance with the provisions of the Series Fund's Declaration
of Trust and By-Laws, and certified copies of the resolutions evidencing such
approvals shall have been delivered to National Municipals Fund.
8.2 Any proposed change to National Municipals Fund's operations that may be
approved by the Board of Directors of National Municipals Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
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National Municipals Fund shareholders is required pursuant to the Investment
Company Act or otherwise, shall have been approved by the requisite vote of the
holders of the outstanding shares of National Municipals Fund in accordance with
the Investment Company Act and the provisions of the General Corporation Law of
the State of Maryland, and certified copies of the resolution evidencing such
approval shall have been delivered to Series Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by National Municipals Fund or Series Fund to
permit consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of National Municipals Fund or any Series, provided,
that either party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 The Funds shall have received on or before the Closing Date opinions of
Swidler Berlin Shereff Friedman, LLP or a ruling from the Internal Revenue
Service with respect to each Series satisfactory to each of them, substantially
to the effect that for federal income tax purposes:
8.6.1 The acquisition by National Municipals Fund of the assets of a Series
solely in exchange for voting shares of National Municipals Fund and the
assumption by National Municipals Fund of such Series' liabilities, if any,
followed by the distribution of National Municipals Fund's voting shares pro
rata to such Series' shareholders, pursuant to its termination and
constructively in exchange for such Series' shares, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code, and each Fund will be "a party to a reorganization" within the
meaning of Section 368(b) of the Internal Revenue Code;
8.6.2 Each Series' shareholders will recognize no gain or loss upon the
constructive exchange of all of their shares of such Series solely for
shares of National Municipals Fund in complete termination of such Series;
8.6.3 No gain or loss will be recognized to any Series upon the transfer of
its assets to National Municipals Fund solely in exchange for shares of
National Municipals Fund and the assumption by National Municipals Fund of
such Series' liabilities, if any, and the subsequent distribution of those
shares to such Series' shareholders in complete termination of such Series;
8.6.4 No gain or loss will be recognized to National Municipals Fund upon
the acquisition of any Series' assets solely in exchange for shares of
National Municipals Fund and the assumption of such Series' liabilities, if
any;
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8.6.5 National Municipals Fund's basis for the assets of each Series
acquired in the reorganizations will be the same as the basis thereof when
held by the respective Series immediately before the transfer, and the
holding period of such assets acquired by National Municipals Fund will
include the holding period thereof when held by such Series;
8.6.6 The Series shareholders' bases for the shares of National Municipals
Fund to be received by them pursuant to the reorganizations will be the same
as their basis for the shares of the respective Series to be constructively
surrendered in exchange therefor; and
8.6.7 The holding period of National Municipals Fund shares to be received
by each Series' shareholders will include the period during which the shares
of such Series to be constructively surrendered in exchange therefor were
held; provided that such Series' shares surrendered were held as capital
assets by those shareholders on the date of the exchange.
9. FINDER'S FEES AND EXPENSES
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to National Municipals
Fund and each Series pro rata in a fair and equitable manner in proportion to
its assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
National Municipals Fund or Series Fund as to any Series may at its option
terminate this Agreement at or prior to the Closing Date because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Series Fund and National Municipals Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of National Municipals Fund or any Trustee or officer of Series Fund.
12. AMENDMENT
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Series Fund pursuant to paragraph 5.2, no such amendment may have the effect
of changing the provisions for determining the number of shares of National
Municipals Fund to be distributed to any Series' shareholders under this
Agreement to the detriment of such shareholders without their further approval.
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13. NOTICES
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, Newark, New Jersey 07102,
Attention: S. Jane Rose.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
14.5 The terms of this Agreement shall apply separately with respect to each of
Maryland and Michigan Series. Nothing herein expressed or implied is intended or
shall be construed to imply that the approval or implementation of the
reorganization with respect to either Series is subject to or contingent upon
approval or implementation of the reorganization with respect to the other
Series.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF MUNICIPAL SERIES FUND;
AGREEMENT AN OBLIGATION ONLY OF THE RESPECTIVE SERIES, AND ENFORCEABLE ONLY
AGAINST ASSETS OF THE RESPECTIVE SERIES.
The name "Prudential Municipal Series Fund" is the designation of the
Trustees from time to time acting under an Amended and Restated Declaration of
Trust dated August 17, 1994, as the same may be from time to time amended, and
the name "Maryland Series" and "Michigan Series" is the designation of a
portfolio of the assets of Series Fund. National Municipals Fund acknowledges
that it must look, and agrees that it shall look, solely to the assets of each
Series for the enforcement of any claims arising out of or based on the
obligations of Series Fund hereunder, and with respect to obligations relating
to any Series, only to the assets of such Series, and in particular that (i)
neither the Trustees, officers, agents or shareholders of Series Fund assume or
shall have any personal liability for obligations of Series Fund hereunder, and
(ii) none of the assets of Series Fund other than the portfolio assets of the
Series may be resorted to for the enforcement of any claim based on the
obligations of Series Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President of each Fund.
Prudential Municipal Bond Fund
By /s/ Richard A. Redeker
----------------------
PRESIDENT
Prudential National Municipals Fund, Inc.
By /s/ Richard A. Redeker
----------------------
PRESIDENT
29
<PAGE>
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii) a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii) licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to
the Conduct Rules of the NASD and such Conduct Rules shall control any provision
to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable
state and federal laws and all rules and regulations promulgated thereunder
generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds (including
those of each of its classes) only at the regular public offering price
applicable to such Shares and in effect at the time of each transaction. The
procedures relating to all orders and the handling of each order (including the
manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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<PAGE>
additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is
not authorized to act as broker or agent for, or employee of, Distributor, any
Fund or any other dealer, and Dealer shall not in any manner represent to any
third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if
the NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or from
Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares only
from Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
2
<PAGE>
the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of
Shares made through Dealer and to furnish Distributor or regulatory authorities
with copies of such records upon request. In that regard, Dealer agrees that,
unless Dealer holds Shares as nominee for its customers or participates in the
NSCC Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor
shall be in Fed Funds, New York clearinghouse or other immediately available
funds and that such funds shall be received by Distributor by the earlier of:
(i) the end of the third (3rd) business day following Dealer's receipt of the
customer's order to purchase such Shares; or (ii) the settlement date
established in accordance with Rule 15c6-1 under the Securities Exchange Act of
1934, as amended. If such payment is not received by Distributor by such date,
Dealer shall forfeit its right to any concession or commission with respect to
such order, and Distributor reserves the right, without notice, forthwith to
cancel the sale, or, at its option, to sell the Shares ordered back to the Fund,
in which case Distributor may hold Dealer responsible for any loss, including
loss of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
3
<PAGE>
h. Dealer agrees that it: (i) shall assume responsibility for any
loss to the Fund caused by a correction to any order placed by Dealer that is
made subsequent to the trade date for the order, provided such order correction
was not based on any negligence on Distributor's part; and (ii) will immediately
pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of
Shares on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by
mail, telephone, or wire, Dealer shall act as agent for the custodian or trustee
of such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees
to indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for
the purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's
blanket bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the total
sales charges and dealer concessions or commissions, if any, payable to Dealer
shall be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must
be notified at the time of the sale that the sale qualifies for the reduced
sales charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
4
<PAGE>
b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the end
of the month of purchase, Distributor shall be entitled to recover any advance
payment attributable to the redeemed Shares by reducing any account payable or
other monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be
based on the value of Shares attributable to Dealer's customers and eligible for
such payment, and shall be calculated on the basis of and at the rates set forth
in the compensation schedule then in effect. Without prior approval by a
majority of the outstanding shares of a Fund, the aggregate annual fees paid to
Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's Prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer
5
<PAGE>
hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions whereby the
Fund, under all ordinary circumstances, will redeem Shares held by shareholders
on demand. Dealer agrees that it will not make any representations to
shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at
a price below that next quoted by the Fund for redemption or repurchase, I.E.,
at the net asset value of such Shares, less any applicable deferred sales
charge, or redemption fee, in accordance with the Fund's Prospectus. Dealer
shall, however, be permitted to sell Shares for the account of the customer or
record owner to the Funds at the repurchase price then currently in effect for
such Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has
made, if instructions in proper form, including any outstanding certificates,
are not received by Distributor within the time customary or the time required
by law, the redemption may be canceled forthwith without any responsibility or
liability on Distributor's part or on the part of any Fund, or Distributor, at
its option, may buy the shares redeemed on behalf of the Fund, in which latter
case Distributor may hold Dealer responsible for any loss, including loss of
profit, suffered by Distributor resulting from Distributor's failure to settle
the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations concerning Shares of any Fund except those contained in the
Fund's then current Prospectus or in materials provided by Distributor.
6
<PAGE>
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising
or sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and Distributor
shall have no obligation or responsibility with respect to Dealer's right to
purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable
or responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in
any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless Distributor
and the Funds and their predecessors, successors, and affiliates, each current
or former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or regulation (including without limitation the securities laws
and regulations of the United States or any state or foreign country) or any
alleged tort or breach of contract, related to the offer or sale by Dealer of
Shares of the Funds pursuant to this Agreement (except to the extent that
Distributor's negligence or failure to follow correct instructions received from
Dealer is the cause of such loss,
7
<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer
and its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of
any claim or complaint or any enforcement action or other proceeding with
respect to Shares offered hereunder against Dealer or its partners, affiliates,
officers, directors, employees or agents, or any person who controls Dealer,
within the meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of
(i) any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions
shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the appointment
of a Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means
shall have no effect upon transactions entered into prior to the effective date
of termination and shall
8
<PAGE>
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and
in good standing under the laws of the state of Delaware and is duly registered
or exempt from registration as a broker-dealer in all states and jurisdictions
in which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize Distributor to
enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
9
<PAGE>
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer to
enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor have
a debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only, are not
a party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement shall be binding upon the parties hereto when signed
by Dealer and accepted by Distributor.
10
<PAGE>
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be
binding upon the parties hereto when signed by Dealer and accepted by
Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
DEALER:
---------------------------------
By:
-------------------------------------
(Signature)
Name:
-----------------------------------
Title:
----------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
Telephone:
------------------------------
NASD CRD #
------------------------------
Prudential Dealer #
(Internal Use Only) --------------------
Date:
-----------------------------------
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<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, Prudential National Municipals
Fund, Inc. (the Fund), and Prudential Investment Management Services LLC, a
Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder. The Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected dealers, as described in Section
6.4 hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to
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the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
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<PAGE>
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as the
Distributor and the Fund may approve of its intention to sell any appropriate
number of its Shares; provided that the Fund shall not be required to amend its
Declaration of Trust or By-Laws to comply with the laws of any state, to
maintain an office in any state, to change the terms of the offering of its
Shares in any state from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any state or to consent to service of
process in any state other than with respect to claims arising out of the
offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
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Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of any
applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD.
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Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
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<PAGE>
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, members or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
member or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of directors or directors who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its
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<PAGE>
directors or officers or such controlling person resulting from such claims or
demands shall arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus or shall arise out of or be
based upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and directors and any such controlling
person as aforesaid, is expressly conditioned upon the Distributor's being
promptly notified of any action brought against the Fund, its officers and
directors or any such controlling person, such notification being given to the
Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (Independent directors), cast
in person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the independent directors or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of the Fund, or by the vote of a majority
of the outstanding voting securities of the applicable class and/or series of
the Fund, and (b) by the vote of a majority of the independent directors cast in
person at a meeting called for the purpose of voting on such amendment.
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<PAGE>
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New Jersey as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New Jersey, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Investment Management Services LLC
By: /s/ Mark R. Fetting
-------------------
Mark R. Fetting
Executive Vice President
Prudential Government Income Fund, Inc.
By: /s/ Richard A. Redeker
----------------------
Richard A. Redeker
President
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Prudential National Municipals Fund, Inc.
Amended and Restated
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential National Municipals Fund, Inc. (the Fund) and by
Prudential Investment Management Services LLC, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority of those Directors/Trustees who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors/Trustees), have determined by votes cast
in person at a meeting called for the purpose of voting on this Plan that there
is a reasonable likelihood that adoption and continuation of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined below) are primarily
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intended to result in the sale of Class A shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
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<PAGE>
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors/Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
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(a) sales commissions and trailer commissions paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A shares of
the Fund, including sales commissions, trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as the Board shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
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<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class A shares of the Fund, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter
for so long as such continuance is specifically approved at least annually by
a majority of the Board of Directors/Trustees of the Fund and a majority of
the Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called
for the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors/Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the
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<PAGE>
vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class A shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: June 1, 1998
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Prudential National Municipals Fund, Inc.
Amended and Restated
Distribution and Service Plan
(Class B Shares)
--------------
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential National Municipals Fund, Inc. (the Fund) and by
Prudential Investment Management Services LLC, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares
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of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
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calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors/Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
5
<PAGE>
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated:June 1, 1998
6
<PAGE>
Prudential National Municipals Fund, Inc.
Distribution and Service Plan
(Class C Shares)
--------------
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential National Municipals Fund, Inc.(the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under
1
<PAGE>
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund
2
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
3
<PAGE>
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors/Trustees of the Fund of
the
4
<PAGE>
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors/Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the
5
<PAGE>
Investment Company Act) of the Class C shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12b-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: June 1, 1998
6
<PAGE>
[LOGO] EXHIBIT 99.17(a)
PROXY
PRUDENTIAL MUNICIPAL SERIES FUND
(MARYLAND SERIES)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints S. Jane Rose, Deborah A. Docs and Grace
Torres as Proxies, each with the power of substitution, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
Prudential Municipal Series Fund (Maryland Series), held of record by the
undersigned on October 15, 1998, at the Special Meeting of Shareholders to be
held on December 3, 1998, or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation.
/ / APPROVE / / DISAPPROVE / / ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(over)
1
<PAGE>
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
Dated , 1998
------------------
-----------------------------
Signature
-----------------------------
Signature if held jointly
<PAGE>
[LOGO] EXHIBIT 99.17(a)
PROXY
PRUDENTIAL MUNICIPAL SERIES FUND
(MICHIGAN SERIES)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints S. Jane Rose, Deborah A. Docs and Grace
Torres as Proxies, each with the power of substitution, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
Prudential Municipal Series Fund (Michigan Series), held of record by the
undersigned on October 15, 1998, at the Special Meeting of Shareholders to be
held on December 3, 1998, or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation.
/ / APPROVE / / DISAPPROVE / / ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(over)
1
<PAGE>
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
Dated , 1998
------------------
-----------------------------
Signature
-----------------------------
Signature if held jointly
<PAGE>
[LOGO] EXHIBIT 99.17(a)
PROXY
PRUDENTIAL MUNICIPAL BOND FUND
(INTERMEDIATE SERIES)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints S. Jane Rose, Deborah A. Docs and Grace
Torres as Proxies, each with the power of substitution, and hereby authorizes
each of them to represent and to vote, as designated below, all the shares of
Prudential Municipal Bond Fund (Intermediate Series), held of record by the
undersigned on October 15, 1998, at the Special Meeting of Shareholders to be
held on December 3, 1998, or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation.
/ / APPROVE / / DISAPPROVE / / ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(over)
1
<PAGE>
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
Dated , 1998
------------------
-----------------------------
Signature
-----------------------------
Signature if held jointly
<PAGE>
Prudential National Municipals Fund, Inc.
- -------------------------------------------------------------------------------
Prospectus dated March 4, 1998
- -------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc. (the Fund), is an open-end,
diversified management investment company whose investment objective is to seek
a high level of current income exempt from federal income taxes. In attempting
to achieve this objective, the Fund intends to invest substantially all of its
total assets in carefully selected long-term Municipal Bonds of medium quality,
i.e., obligations of issuers possessing adequate but not outstanding capacities
to service their debt. Subject to the limits described herein, the Fund may
also buy and sell financial futures for the purpose of hedging its securities
portfolio. There can be no assurance that the Fund's investment objective will
be achieved. See "How the Fund is Managed-Investment Objective and Policies."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077 and its telephone number is (800) 225- 1852.
- -------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America
(http://www.Prudential.com). Additional information about the Fund has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated March 4, 1998, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information, ma
terial incorporated by reference, and other information regarding the Fund.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
What is Prudential National Municipals Fund, Inc.?
Prudential National Municipals Fund, Inc. is a mutual fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
What is the Fund's Investment Objective?
The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, under normal circumstances, the Fund intends to invest substantially
all, and in any event at least 80%, of its total assets in Municipal Bonds and
Municipal Notes. There can be no assurance that the Fund's objective will be
achieved. See "How the Fund Invests-Investment Objective and Policies" at page
8.
What are the Fund's Risk Factors and Special Characteristics?
The Fund's portfolio will consist primarily of carefully selected long-term
Municipal Bonds of medium quality. While the Fund's investment adviser will not
be limited by the ratings assigned by the rating services, the Municipal Bonds
in which the Fund's portfolio will be principally invested will be rated A and
Baa by Moody's Investors Service (Moody's) and A and BBB by Standard & Poor's
Ratings Group (S&P) or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO) or, if not rated, will be, in the
judgment of the investment adviser, of substantially comparable quality. See
"How the Fund Invests-Investment Objective and Policies" at page 8. The Fund
may also engage in various hedging and return enhancement strategies, including
using derivatives, which may be considered speculative and may result in higher
risks and costs to the Fund. See "How the Fund Invests-Hedging and Return
Enhancement Strategies" at page 10. As with an investment in any Mutual Fund,
an investment in this Fund can decrease in value and you can lose money.
Who Manages the Fund?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Fund's average daily net assets up to and including $250
million, .475 of 1% of the next $250 million, .45 of 1% of the next $500
million, .425 of 1% of the next $250 million, .40 of 1% of the next $250
million and .375 of 1% of the Fund's average daily net assets in excess of $1.5
billion. As of January 31, 1998, PIFM served as manager or administrator to 64
investment companies, including 42 mutual funds, with aggregate assets of
approximately $63 billion. The Prudential Investment Corporation (PIC), which
does business under the name of Prudential Investments (PI, the Subadviser or
the investment adviser), furnishes investment advisory services in connection
with the management of the Fund under a Subadvisory Agreement with PIFM. See
"How the Fund is Managed-Manager" at page 18.
Who Distributes the Fund's Shares?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's shares. The Distributor is paid
an annual distribution and service fee which is currently being charged at the
rate of .10 of 1% of the average daily net assets of the Class A shares, at the
rate of .50 of 1% of the average daily net assets of the Class B shares and
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares. See "How the Fund is Managed-Distributor" at
page 19.
2
<PAGE>
What is the Minimum Investment?
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100. There is
no minimum investment requirement for certain employee savings plans or
custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide-How to Buy Shares of the Fund" at
page 26 and "Shareholder Guide-Shareholder Services" at page 36.
How do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its
Shares" at page 22 and "Shareholder Guide-How to Buy Shares of the Fund" at
page 26.
What are My Purchase Alternatives?
The Fund offers three classes of shares:
- - Class A Shares: Sold with an initial sales charge of up to 3% of the offering
price.
- - Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5% to zero of the
lower of the amount invested or the redemption proceeds) which will be
imposed on certain redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-related expenses
than Class A shares, Class B shares will automatically convert to Class A
shares (which are subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
- - Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like Class B shares, Class
C shares are subject to higher ongoing distribution-related expenses than
Class A shares but, unlike Class B Shares, Class C Shares do not convert to
another class.
See "Shareholder Guide-Alternative Purchase Plan" at page 27.
How do I Sell My Shares?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide-How to Sell Your Shares" at page 30.
How are Dividends and Distributions Paid?
The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of net capital gains, if any, at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they
be paid to you in cash. See "Taxes, Dividends and Distributions" at page 23.
3
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
--------- ---------------------------- ---------------------------
<S> <C> <C> <C>
Shareholder Transaction Expenses-
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 3% None None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends.................................... None None None
5% during the first year,
decreasing by 1% annually
Maximum Deferred Sales Load (as a percentage of original to 1% in the fifth and sixth
purchase price or redemption proceeds, whichever is years and 0% the seventh 1% on redemptions made
lower).................................................. None year* within one year of purchase
Redemption Fees......................................... None None None
Exchange Fees........................................... None None None
Annual Fund Operating Expenses**
Class A Class B Class C
(as a percentage of average net assets) Shares Shares Shares
--------- ---------------------------- ---------------------------
Management Fees......................................... .48% .48% .48%
12b-1 Fees (After Reduction)............................ .10%-- .50% .75--
Other Expenses.......................................... .15% .15% .15%
--------- ---------------------------- ---------------------------
Total Fund Operating Expenses (After Reduction)......... .73% 1.13% 1.38%
--------- ---------------------------- ---------------------------
--------- ---------------------------- ---------------------------
Example
<CAPTION>
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
Class A.................................................................................... $37 $53 $69 $118
Class B.................................................................................... $62 $66 $72 $121
Class C.................................................................................... $24 $44 $76 $166
You would pay the following expenses on the same investment assuming no redemption:
Class A.................................................................................... $37 $53 $69 $118
Class B.................................................................................... $12 $36 $62 $121
Class C.................................................................................... $14 $44 $76 $166
</TABLE>
The above example is based on data for the Fund's fiscal year ended December
31, 1997. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund Is Managed." "Other Expenses" include operating expenses of
the Fund, such as directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees.
- ------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide-Conversion Feature-Class
B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee waiver
(.05 of 1%). See "How the Fund is Managed-Manager-Fee Waivers."
- Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of the total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed-Distributor."
- -- Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% per annum and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to Class A and Class C shares of the Fund to no more than .10 of 1%
and .75 of 1% of the average daily net asset value of the Class A and Class
C shares, respectively, for the year ending December 31, 1998. Total
operating expenses (before management fee waiver) and without such
limitations would be .93% and 1.63% for Class A and Class C shares,
respectively. See "How the Fund is Managed-Distributor."
FUND EXPENSES
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(Class A Shares)
The following financial highlights with respect to each of the five years in
the period ended December 31, 1997 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide-Shareholder Services-Reports to Shareholders."
<TABLE>
<CAPTION>
Year Ended January 22,
December 31, 1990(b)
-------------------------------------------------------------------- through
December
31, 1990 1997 1996 1995 1994 1993 1992 1991
- ------------ ------------ ------------ ------------ --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period...... $15.56 $15.98 $14.42 $16.30 $15.94 $16.00 $15.09 $14.98
------------
------------ ------------ --------- -------- ------- ------- ------------
Income from investment operations:
Net investment income..................... .81(d) .82(d) .81(d) .81 .90 .94 .97 .90
Net realized and unrealized gain (loss) on
investment transactions................... .67 (.42) 1.57 (1.78) 1.05 .43 .91 .11
------------
------------ ------------ --------- -------- ------- ------- ------------
Total from investment operations.......... 1.48 .40 2.38 (.97) 1.95 1.37 1.88 1.01
------------
------------ ------------ --------- -------- ------- ------- ------------
Less distributions:
Dividends from net investment income...... (.81) (.82) (.81) (.81) (.90) (.94) (.97) (.90)
Distributions in excess of net investment
income.................................... (.01) -(e) (.01) - - - - -
Distributions from net realized gains..... (.10) - - (.10) (.69) (.49) - -
------------
------------ ------------ --------- -------- ------- ------- ------------
Total distributions....................... (.92) (.82) (.82) (.91) (1.59) (1.43) (.97) (.90)
------------
------------ ------------ --------- -------- ------- ------- ------------
Net asset value, end of period............ $16.12 $15.56 $15.98 $14.42 $16.30 $15.94 $16.00 $15.09
===========
=========== ============ ========= ======== ======= ======= ============
TOTAL RETURN(a)........................... 9.80% 2.66% 16.91% (6.04)% 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $493,178 $502,739 $538,145 $12,721 $14,167 $7,700 $3,819 $1,846
Average net assets (000).................. $491,279 $508,159 $446,350 $14,116 $11,786 $5,401 $2,697 $1,161
Ratios to average net assets:
Expenses, including distribution fees..... .70%(d) .68%(d) .75%(d) .77% .69% .72% .75% .75%(c)
Expenses, excluding distribution fees..... .60%(d) .58%(d) .65%(d) .67% .59% .62% .65% .65%(c)
Net investment income..................... 5.15%(d) 5.31%(d) 5.34%(d) 5.38% 5.49% 5.79% 6.27% 6.43%(c)
Portfolio turnover rate................... 38% 46% 98% 120% 82% 114% 59% 110%
</TABLE>
- ------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Commencement of offering of Class A shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
5
<PAGE>
The following financial highlights with respect to each of the five years in
the period ended December 31, 1997 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the years indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide-Shareholder Services-Reports to Shareholders."
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the years indicated)
(Class B Shares)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year..... $15.60 $16.02 $14.45 $16.33 $15.97 $16.02
--------
-------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income ................. .75(c) .76(c) .76(c) .75 .84 .88
Net realized and unrealized gain
(loss) on investment transactions...... .67 (.42) 1.58 (1.78) 1.05 .44
--------
-------- -------- -------- -------- -------- --------
Total from investment operations....... 1.42 .34 2.34 (1.03) 1.89 1.32
--------
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income................................. (.75) (.76) (.76) (.75) (.84) (.88)
Distributions in excess of net
investment income...................... (.01) -(d) (.01) - - -
Distributions from net realized gains.. (.10) - - (.10) (.69) (.49)
--------
-------- -------- -------- -------- -------- --------
Total distributions.................... (.86) (.76) (.77) (.85) (1.53) (1.37)
--------
-------- -------- -------- -------- -------- --------
Net asset value, end of year........... $16.16 $15.60 $16.02 $14.45 $16.33 $15.97
========
======== ======== ======== ======== ======== ========
TOTAL RETURN(a)........................ 9.35% 2.26% 16.49% (6.39)% 12.15% 8.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ......... $141,528 $168,185 $222,865 $672,272 $848,299 $828,702
Average net assets (000)............... $151,938 $193,312 $252,313 $751,623 $854,919 $829,830
Ratios to average net assets:
Expenses, including distribution
fees................................... 1.10%(c) 1.08%(c) 1.15%(c) 1.17% 1.09% 1.12%
Expenses, excluding distribution
fees................................... .60%(c) .58%(c) .65%(c) .67% .59% .62%
Net investment income.................. 4.75%(c) 4.91%(c) 4.96%(c) 4.96% 5.09% 5.39%
Portfolio turnover rate................ 38% 46% 98% 120% 82% 114%
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1991 1990 1989 1988(b)
-------- --------- ---------- ----------
<C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year..... $15.11 $15.15 $15.04 $14.57
-------- --------- ---------- ----------
Income from investment
operations:
Net investment income ................. .91 .90 .96 1.03
Net realized and unrealized gain
(loss) on investment transactions...... .91 (.04) .11 .47
-------- --------- ---------- ----------
Total from investment operations....... 1.82 .86 1.07 1.50
-------- --------- ---------- ----------
Less distributions:
Dividends from net investment
income................................. (.91) (.90) (.96) (1.03)
Distributions in excess of net
investment income...................... - - - -
Distributions from net realized gains.. - - - -
-------- --------- ---------- ----------
Total distributions.................... (.91) (.90) (.96) (1.03)
-------- --------- ---------- ----------
Net asset value, end of year........... $16.02 $15.11 $15.15 $15.04
======== ========= ========== ==========
TOTAL RETURN(a)........................ 12.42% 5.96% 7.43% 10.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) ......... $874,338 $882,212 $1,033,173 $1,066,159
Average net assets (000)............... $862,249 $940,215 $1,027,726 $1,081,122
Ratios to average net assets:
Expenses, including distribution
fees................................... 1.15% 1.13% 1.01% 1.02%
Expenses, excluding distribution
fees................................... .65% .64% .66% .66%
Net investment income.................. 5.87% 6.03% 6.45% 6.86%
Portfolio turnover rate................ 59% 110% 198% 152%
</TABLE>
- ------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as Manager of the Fund. See "Manager" in the Statement of
Additional Information.
(c) Net of management fee waiver.
(d) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(Class C Shares)
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
<TABLE>
<CAPTION>
August 1,
Year Ended December 31, 1994(b)
------------------------------------------ through
December 31,
1994 1997 1996 1995
- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $15.60 $16.02 $14.44 $15.13
---------
--------- --------------- ------------
Income from investment operations:
Net investment income............................. .71(d) .72(d) .72(d) .29
Net realized and unrealized gain (loss) on
investment transactions........................... .67 (.42) 1.59 (.69)
---------
--------- --------------- ------------
Total from investment operations.................. 1.38 .30 2.31 (.40)
---------
--------- --------------- ------------
Less distributions:
Dividends from net investment income.............. (.71) (.72) (.72) (.29)
Distributions in excess of net investment income.. (.01) - (e) (.01) -
Distributions from net realized gains............. (.10) - - -
---------
--------- --------------- ------------
Total distributions............................... (.82) (.72) (.73) (.29)
---------
--------- --------------- ------------
Net asset value, end of period.................... $16.16 $15.60 $16.02 $14.44
=========
========= =============== ============
TOTAL RETURN(a)................................... 9.08% 2.01% 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $825 $772 $403 $141
Average net assets (000).......................... $758 $674 $247 $103
Ratios to average net assets:
Expenses, including distribution fees............. 1.35%(d) 1.33%(d) 1.40%(d) 1.51%(c)
Expenses, excluding distribution fees............. .60%(d) .58%(d) .65%(d) .76%(c)
Net investment income............................. 4.50%(d) 4.67%(d) 4.66%(d) 4.84%(c)
Portfolio turnover rate........................... 38% 46% 98% 120%
</TABLE>
- ------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Commencement of offering of Class C shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, under normal circumstances the Fund intends to invest substantially
all, and in any event at least 80%, of its total assets in Municipal Bonds and
Municipal Notes. There can be no assurance that such objective will be
achieved. See "Investment Objective and Policies" in the Statement of
Additional Information.
The Fund's investment objective is a fundamental policy and, therefore, may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities as defined in the Investment Company Act of 1940,
as amended (the Investment Company Act). Fund policies that are not fundamental
may be modified by the Board of Directors.
The Municipal Bonds in which the Fund may invest include general obligation
and limited obligation or revenue bonds. General obligation bonds are secured
by the issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest, whereas revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or in some
cases, from the proceeds of a special excise or other specific revenue source.
The Municipal Notes in which the Fund may invest include tax, revenue and bond
anticipation notes which are issued to obtain funds for various public
purposes.
Interest on certain Municipal Bonds and Municipal Notes may be subject to the
federal alternative minimum tax. From time to time the Fund may purchase
Municipal Bonds and Municipal Notes that are private activity bonds (as defined
in the Internal Revenue Code of 1986, as amended (Internal Revenue Code)), the
interest on which is a tax preference subject to the alternative minimum tax.
See "Taxes, Dividends and Distributions".
The Fund's portfolio will consist primarily of carefully selected long-term
Municipal Bonds of medium quality. While the Fund's investment adviser will not
be limited by the ratings assigned by the rating services, the Municipal Bonds
in which the Fund's portfolio will be principally invested will be rated A and
Baa by Moody's Investors Service (Moody's) and A and BBB by Standard & Poor's
Ratings Group (S&P) or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO) or, if not rated, will be, in the
judgment of the investment adviser, of substantially comparable quality. Bonds
rated BBB by S&P normally exhibit adequate payment protection parameters, but
in the event of adverse market conditions are more likely to lead to a weakened
capacity to pay principal and interest than bonds in the A category. Bonds
rated Baa by Moody's are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. A more complete description of these and other
Municipal Bond and Note ratings is contained in Appendix A to the Statement of
Additional Information.
8
<PAGE>
Because issuers of medium quality Municipal Bonds may choose not to have
their obligations rated, it is possible that a substantial portion of the
Fund's portfolio may consist of obligations which are not rated. The market for
rated bonds is usually broader than that for non-rated bonds, which may result
in less flexibility in disposal of such non-rated bonds.
The Fund may also acquire Municipal Bonds which have been rated below medium
quality by the rating services if, in the judgment of the Fund's investment
adviser, the Bonds have the characteristics of medium quality obligations. In
determining whether Municipal Bonds which are not rated or which have been
rated below medium quality by the rating services have the characteristics of
rated Municipal Bonds of medium quality, the investment adviser will rely upon
information from various sources, including, if available, reports by the
rating services, research, analysis and appraisals of brokers and dealers and
the views of the Fund's directors and others regarding economic developments
and the creditworthiness of particular issuers.
Municipal Bonds of medium quality are subject to fluctuation in value as a
result of changing economic circumstances as well as changes in interest rates.
Thus, while medium quality obligations will generally provide a higher yield
than do high quality Municipal Bonds of similar maturities, they are subject to
a greater degree of market fluctuation with less certainty of the issuer's
continuing ability to meet the payments of principal and interest when due and
may have speculative characteristics not present in bonds of higher quality. In
addition, obligations with longer maturities (e.g., 20 years or more) generally
offer both higher yields and greater exposure to market fluctuation from
changes in interest rates than do those with shorter maturities. Consequently,
shares of the Fund may not be suitable for persons who cannot assume the
somewhat greater risks of capital depreciation involved in seeking higher
tax-exempt yields.
In recent years, there has been a narrowing of the yield spreads between
higher and lower quality Municipal Bonds and a reduction in the supply of
medium grade Municipal Bonds. As a result of these changing conditions in the
municipal securities markets, the investment adviser has invested a substantial
portion of the Fund's assets in higher quality Municipal Bonds. The investment
adviser intends to invest in medium grade Municipal Bonds to the extent market
conditions warrant.
The interest rates payable on certain Municipal Bonds and Notes are not fixed
and may fluctuate based upon changes in market rates. Municipal Bonds and Notes
of this type are called variable rate obligations. The interest rate payable on
a variable rate obligation is adjusted either at predesignated intervals or
whenever there is a change in the market rate of interest on which the interest
rate payable is based. Other features may include the right whereby the Fund
may demand prepayment of the principal amount of the obligation prior to its
stated maturity (a demand feature) and the right of the issuer to prepay the
principal amount prior to maturity. The principal 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 NAV and to sell an
obligation prior to maturity at a price approximating the full principal amount
of the obligation. The payment of principal and interest by issuers of certain
Municipal Bonds and Notes purchased by the Fund may be guaranteed by letters of
credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
Municipal Bond or Note meets the Fund's investment quality requirements.
The Fund may also invest in inverse floaters. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect
the residual interest rate paid on the inverse floater, with the result that
the inverse floater's price will be considerably more volatile than that of a
fixed rate bond. The market for inverse floaters is relatively new.
9
<PAGE>
Some municipal securities, such as zero coupon municipal securities, do not
pay current interest but are purchased at a discount from their face values.
The discount approximates the total amount of interest the security will accrue
and compound over the period until maturity or the particular interest payment
date at a rate of interest reflecting the market rate of the security at the
time of issuance. Zero coupon securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than securities that make regular
payments of interest.
The Fund may be able to reduce the risk of fluctuations in asset value caused
by changes in interest rates by hedging its portfolio through the use of
financial futures. During or in anticipation of a decline in interest rates,
the Fund may purchase futures contracts to hedge against subsequent purchases
of long-term bonds at higher prices. During or in anticipation of an increase
in interest rates, the Fund may hedge its portfolio securities by selling
futures contracts for the purpose of limiting the exposure of its portfolio to
the resulting decrease in value. There are risks associated with hedging
transactions and there can be no assurance that hedges will have the intended
result. See "Hedging and Return Enhancement Strategies" below.
Also, the Fund may purchase secondary market insurance on Municipal Bonds and
Notes which it holds or acquires. Although the fee for secondary market
insurance will reduce the yield of the insured Bonds and Notes, such insurance
would be reflected in the market value of the municipal obligation purchased
and may enable the Fund to dispose of a defaulted obligation at a price similar
to that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor.
While insurance coverage for the Municipal Bonds and Notes held by the Fund
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, i.e., the market value, of the municipal obligations caused by changes
in interest rates and other factors, nor in turn against fluctuations in the
NAV of the shares of the Fund.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Fund may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its investments and to attempt to
enhance return, but not for speculation. The Fund, and thus its investors, may
lose money through any unsuccessful use of these strategies. These strategies
currently include the purchase of put or tender options on Municipal Bonds and
Notes and the purchase and sale of financial futures contracts and options
thereon and municipal bond index futures contracts. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objective and Policies" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies. As with an
investment in any mutual fund, an investment in the Fund can decrease in value
and you can lose money.
Puts
The Fund may purchase and exercise puts or tender options on Municipal Bonds
and Notes. Puts or tender options give the Fund the right to sell securities
held in the Fund's portfolio at a specified exercise price on a specified date.
Puts or tender options may be acquired to reduce the volatility of the market
value of
10
<PAGE>
securities subject to puts or tender options compared to the volatility of
similar securities not subject to puts. The acquisition of a put or tender
option may involve an additional cost to the Fund compared to the cost of
securities with similar credit ratings, stated maturities and interest coupons
but without applicable puts. Such increased cost may be paid either by way of
an initial or periodic premium for the put or by way of a higher purchase price
for securities to which the put is attached. In addition, there is a credit
risk associated with the purchase of puts or tender options in that the issuer
of the put or tender option may be unable to meet its obligation to purchase
the underlying security. Accordingly, the Fund will acquire puts or tender
options under the following circumstances: (1) the put or tender option is
written by the issuer of the underlying security and such security is rated
within the 4 highest quality grades as determined by Moody's, S&P or other
NRSRO; (2) the put or tender option is written by a person other than the
issuer of the underlying security and such person has securities outstanding
which are rated within such 4 highest quality grades; or (3) the put or tender
option is backed by a letter of credit or similar financial guarantee issued by
a person having securities outstanding which are rated within the 2 highest
quality grades of such rating services.
The Fund anticipates being as fully invested as practicable in Municipal
Bonds and Notes; however, because the Fund does not intend to invest in taxable
obligations, there may be occasions when, as a result of maturities of
portfolio securities or sales of Fund shares or in order to meet anticipated
redemption requests, the Fund may hold cash which is not earning income. In
addition, there may be occasions when, in order to raise cash to meet
redemptions, the Fund might be required to sell securities at a loss.
Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agent for their customers on securities
exchanges, Municipal Bonds and Notes are customarily purchased from or sold to
dealers who are selling or buying for their own account. There are no
requirements that most Municipal Bonds and Notes be registered with or
qualified for sale by federal or state securities regulators. Since there are
large numbers of Municipal Bond and Note issues of many different issuers, most
issues do not trade on any single day. On the other hand, most issues are
generally marketable, since a major dealer will normally, on request, bid for
any issue, other than obscure ones. Regional municipal securities dealers are
frequently more willing to bid on issues of municipalities in their geographic
area.
Although most Municipal Bonds and Notes are marketable, the structure of the
market introduces its own element of risk; a seller may find, on occasion, that
dealers are unwilling to make bids for certain issues that the seller considers
reasonable. If the seller is forced to sell, he or she may realize a capital
loss that would not have been necessary in different circumstances. Because the
NAV of the Fund's shares reflects the degree of willingness of dealers to bid
for Municipal Bonds and Notes, the price of the Fund's shares may be subject to
greater fluctuation than shares of other investment companies with different
investment policies. See "Net Asset Value" in the Statement of Additional
Information.
The ratings of Moody's, S&P and other NRSROs represent each service's opinion
as to the quality of the Municipal Bonds or Notes rated. It should be
emphasized that ratings are general and are not absolute standards of quality
or guarantees as to the creditworthiness of an issuer. Subsequent to its
purchase by the Fund, an issue of Municipal Bonds or Notes may cease to be
rated, or its ratings may be reduced. Neither event requires the elimination of
that obligation from the Fund's portfolio, but will be a factor in determining
whether the Fund should continue to hold that issue in its portfolio.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds and Notes and for providing
11
<PAGE>
state and local governments with federal credit assistance. Reevaluation of the
Fund's investment objective and structure might be necessary in the future due
to market conditions which may result from future changes in the tax laws.
Futures Contracts and Options Thereon
The Fund may engage in transactions in futures contracts for return
enhancement and risk management purposes as well as to reduce the risk of
fluctuations in the value of its assets caused by interest rate changes by
hedging its portfolio through the use of financial futures and options thereon
traded on a commodities exchange or board of trade.
Futures Contracts
The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures
contracts) in accordance with the Fund's investment objective. A purchase of a
futures contract (or a long futures position) means the assumption of a
contractual obligation to acquire a specified quantity of the securities
underlying the contract at a specified price at a specified future date. A sale
of a futures contract (or a short futures position) means the assumption of a
contractual obligation to deliver a specified quantity of the securities
underlying the contract at a specified price at a specified future date. At the
time a futures contract is purchased or sold, the Fund is required to deposit
cash, or other liquid assets with a futures commission merchant or in a
segregated account representing between approximately 11/2% to 5% of the
contract amount, called initial margin. Thereafter, the futures contract will
be valued daily and the payment in cash of maintenance or variation margin may
be required, resulting in the Fund paying or receiving cash that reflects any
decline or increase in the contract's value, a process known as
marking-to-market.
Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be cash
settled. In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling (to
offset an earlier purchase) an identical futures contract calling for delivery
or acquisition in the same month. The purchase (or sale) of an offsetting
futures contract is referred to as a closing transaction.
Limitations on the Purchase and Sale of Futures Contracts and Related Options
CFTC Limits. In accordance with Commodity Futures Trading Commission (CFTC)
regulations, the Fund is not permitted to purchase or sell interest rate
futures contracts or options thereon for return enhancement or risk management
purposes if immediately thereafter the sum of the amounts of initial margin
deposits on a Fund's existing futures and premiums paid for options on futures
exceed 5% of the liquidation value of such Fund's total assets (the 5% CFTC
limit). This restriction does not apply to the purchase and sale of interest
rate futures contracts and options thereon for bona fide hedging purposes.
Segregation Requirements. To the extent the Fund enters into futures
contracts, it is required by the Commission to maintain a segregated asset
account sufficient to cover the Fund's obligations with respect to such futures
contracts, which will consist of cash or other liquid assets from their
portfolios in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial margin
deposited by the Fund with respect to such futures contracts. Offsetting the
contract by another identical contract eliminates the segregation requirement.
See "Investment Objective and Policies-Segregated Accounts" in the Statement of
Additional Information.
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With respect to options on futures, there are no segregation requirements for
options that are purchased and owned by the Fund. However, written options,
since they involve potential obligations of the Fund, may require segregation
of Fund assets if the options are not covered as described below under "Options
on Futures Contracts." If the Fund writes a call option that is not 'covered,'
it must segregate and maintain for the term of the option cash or other liquid,
unencumbered assets equal to the fluctuating value of the optioned futures. If
a Fund writes a put option that is not covered, the segregated amount would
have to be at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Fund with respect to such option).
Use of Interest Rate Futures Contracts
Interest rate futures contracts will be used for bona fide hedging, risk
management and return enhancement purposes.
Position Hedging. The Fund might sell interest rate futures contracts to
protect the Fund against a rise in interest rates which would be expected to
decrease the value of debt securities which the Fund holds. This would be
considered a bona fide hedge and, therefore, is not subject to the 5% CFTC
limit. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically
have closely correlated or are expected to closely correlate to the values of
the Fund's portfolio securities. Such a sale would have an effect similar to
selling an equivalent value of the Fund's portfolio securities. If interest
rates increase, the value of the Fund's portfolio securities will decline, but
the value of the futures contracts to the Fund will increase at approximately
an equivalent rate thereby keeping the NAV of the Fund from declining as much
as it otherwise would have. The Fund could accomplish similar results by
selling debt securities with longer maturities and investing in debt securities
with shorter maturities when interest rates are expected to increase. However,
since the futures market may be more liquid than the cash market, the use of
futures contracts as a hedging technique would allow the Fund to maintain a
defensive position without having to sell portfolio securities. If in fact
interest rates decline rather than rise, the value of the futures contract will
fall but the value of the bonds should rise and should offset all or part of
the loss. If futures contracts are used to hedge 100% of the bond position and
correlate precisely with the bond positions, there should be no loss or gain
with a rise (or fall) in interest rates. However, if only 50% of the bond
position is hedged with futures, then the value of the remaining 50% of the
bond position would be subject to change because of interest rate fluctuations.
Whether the bond positions and futures contracts correlate is a significant
risk factor.
Anticipatory Position Hedging. Similarly, when it is expected that interest
rates may decline and the Fund intends to acquire debt securities, the Fund
might purchase interest rate futures contracts. The purchase of futures
contracts for this purpose would constitute an anticipatory hedge against
increases in the price of debt securities (caused by declining interest rates)
which the Fund subsequently acquires and would normally qualify as a bona fide
hedge not subject to the 5% CFTC limit. Since fluctuations in the value of
appropriately selected futures contracts should approximate that of the debt
securities that would be purchased, the Fund could take advantage of the
anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.
Risk Management and Return Enhancement. The Fund might sell interest rate
futures contracts covering bonds. This has the same effect as selling bonds in
the portfolio and holding cash and reduces the duration of the portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates.
The longer the duration, the greater the impact of interest rate changes on the
portfolio's price.) This should lessen the risks associated with a rise in
interest rates. In some circumstances, this may serve as a hedge against a loss
of principal, but is usually referred to as an aspect of risk management.
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The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest
rates fall. This is often referred to as risk management rather than hedging
but, if it works as intended, has the effect of increasing principal value. It
if does not work as intended because interest rates rise instead of fall, the
loss will be greater than would otherwise have been the case. Futures contracts
used for these purposes are not considered bona fide hedges and, therefore, are
subject to the 5% CFTC limit.
Options on Futures Contracts
The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (i.e., sell) covered put and
call options on futures contracts that are traded on commodity and futures
exchanges.
If the Fund purchased an option on a futures contract, it has the right but
not the obligation, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call or a short position
if the option is a put) at a specified exercise price at any time during the
option exercise period.
Unlike purchasing an option, which is similar to purchasing insurance to
protect against a possible rise or fall of security prices or currency values,
the writer or seller of an option undertakes an obligation upon exercise of the
option to either buy or sell the underlying futures contract at the exercise
price. A writer of a call option has the obligation upon exercise to assume a
short futures position and a writer of a put option has the obligation to
assume a long futures position. Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the futures
contract. If there is no balance in the writer's margin account, the option is
"out of the money" and will not be exercised. The Fund, as the writer, has
income in the amount it was paid for the option. If there is a margin balance,
the Fund will have a loss in the amount of the amount of the balance less the
premium it was paid for writing the option.
When the Fund writes a put or call option on futures contracts, the option
must either be covered or, to the extent not covered, will be subject to
segregation requirements. The Fund will be considered covered with respect to a
call option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the covered option. A Fund will be considered covered with
respect to a put option it writes on a futures contract if it owns an option to
sell that futures contract having a strike price equal to or greater than the
strike price of the covered option.
To the extent the Fund is not covered as described above with respect to
written options, it will segregate and maintain for the term of the option cash
or liquid assets.
Use of Options on Futures Contracts
Options on interest rate futures contracts would be used for bona fide
hedging, risk management and return enhancement purposes.
Position Hedging. The Fund may purchase put options on interest rate or
currency futures contracts to hedge its portfolio against the risk of a decline
in the value of the debt securities it owns as a result of rising interest
rates.
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Anticipatory Hedging. The Fund may also purchase call options on futures
contracts as a hedge against an increase in the value of securities the Fund
might intend to acquire as a result of declining interest rates.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the Fund
might intend to acquire. If the futures price at expiration of the option is
above the exercise price, the Fund retains the full amount of the option
premium which provides a partial hedge against any increase that may have
occurred in the price of the debt securities the Fund intended to acquire. If
the market price of the underlying futures contract is below the exercise price
when the option is exercised, the Fund would incur a loss, which may be wholly
or partially offset by the decrease in the value of the securities the Fund
might intend to acquire.
Whether options on interest rate futures contracts are subject to or exempt
from the 5% CFTC limit depends on whether the purpose of the options
constitutes a bona fide hedge.
Risk Management and Return Enhancement. Writing a put option that does not
relate to securities the Fund intends to acquire would be a return enhancement
strategy which would result in a loss if interest rates rise.
Similarly, writing a covered call option on a futures contract is also a
return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call option is below the exercise price,
the Fund would retain the full amount of the option premium increasing the
income of the Fund. If the futures price when the option is exercised is above
the exercise price, however, the Fund would sell the underlying securities
which was the cover for the contract and incur a gain or loss depending on the
cost basis for the underlying assets.
Writing a covered call option as in any return enhancement strategy can also
be considered a partial hedge against a decrease in the value of a Fund's
portfolio securities. The amount of the premium received acts as a partial
hedge against any decline that may have occurred in the Fund's debt securities.
Risks Relating to Transactions in Futures Contracts and Options Thereon
The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts would be impacted by the liquidity of these
markets. Although the Fund generally would purchase or sell only those futures
contracts and options thereon for which there appeared to be a liquid market,
there is no assurance that a liquid market on an exchange will exist for any
particular futures contract or option at any particular time. In the event no
liquid market exists for a particular futures contract or option thereon in
which the Fund maintains a position, it would not be possible to effect a
closing transaction in that contract or to do so at a satisfactory price and
the Fund would have to either make or take delivery under the futures contract
or, in the case of a written call option, wait to sell the underlying
securities until the option expired or was exercised, or, in the case of a
purchased option, exercise the option. In the case of a futures contract or an
option on a futures contract which the Fund had written and which the Fund was
unable to close, the Fund would be required to maintain margin deposits on the
futures contract or option and to make variation margin payments until the
contract is closed.
Risks inherent in the use of these strategies include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and markets; (2) imperfect correlation
between the price of futures contracts and options thereon and movement in the
prices of the securities being hedged; (3) the fact that the skills needed to
use these strategies are different from those
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needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; and (5) the
possible inability of the Fund to sell a portfolio security at a time that
otherwise would be favorable for it to do so. In the event it did sell the
security and eliminated its cover, it would have to replace its cover with an
appropriate futures contract or option or segregate securities with the
required value, as described under "Segregation Requirements."
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when the Subadviser's expectations are not met, assuming
proper adherence to the segregation requirement, the volatility of the Fund as
a whole should be no greater than if the same strategy had been pursued in the
cash market.
Exchanges on which futures and related options trade may impose limits on the
positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counterparty
risk depends on the strength of the clearing or settlement corporation
associated with the exchange. Additionally, although the exchanges provide a
means of closing out a position previously established, there can be no
assurance that a liquid market will exist for a particular contract at a
particular time. In the case of options on futures, if such a market does not
exist, the Fund, as the holder of an option on futures contracts, would have to
exercise the option and comply with the margin requirements for the underlying
futures contract to realize any profit, and if the Fund were the writer of the
option, its obligation would not terminate until the option expired or the Fund
was assigned an exercise notice.
There can be no assurance that the Fund's use of futures contracts and
related options will be successful and the Fund may incur losses in connection
with its purchase and sale of future contracts and related options.
OTHER INVESTMENTS AND POLICIES
When-Issued and Delayed Delivery Securities
The Fund may purchase municipal obligations on a when-issued or delayed
delivery basis, in each case without limit. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for such securities take place at a later date. During the period
between purchase and settlement, no interest accrues to the purchaser. In the
case of purchases by the Fund, the price that the Fund is required to pay on
the settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, the Fund intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment
reasons. At the time the Fund makes the commitment to purchase a municipal
obligation on a when-issued basis, it will record the transaction and reflect
the value of the obligation, each day, in determining its NAV. This value may
fluctuate from day to day in the same manner as values of municipal obligations
otherwise held by the Fund. If the seller defaults in the sale, the Fund could
fail to realize the appreciation, if any, that had occurred. The Fund will
establish a segregated account in which it will maintain cash or other liquid
assets equal in value to its commitments for when-issued or delayed delivery
securities.
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Municipal Lease Obligations
The Fund may also invest in municipal lease obligations. A municipal lease
obligation is a municipal security the interest on and principal of which is
payable out of lease payments made by the party leasing the facilities financed
by the issue. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (e.g., schools, dormitories, office buildings or prisons). The
facilities are typically used by the state or municipality pursuant to a lease
with a financing authority. Certain municipal lease obligations may trade
infrequently. Accordingly, the investment adviser will monitor the liquidity of
municipal lease obligations under the supervision of the Board of Directors.
Municipal lease obligations will not be considered illiquid for purposes of the
Fund's 15% limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. See
"Illiquid Securities" below and "Investment Objective and Policies-Illiquid
Securities" in the Statement of Additional Information.
Illiquid Securities
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days
or contractual restrictions on resale and securities that are not readily
marketable. Securities, including municipal lease obligations, that have a
readily available market are not considered illiquid for the purposes of this
limitation. The investment adviser will monitor the liquidity of such
securities under the supervision of the Directors. See "Investment Objectives
and Policies-Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
Investments in Securities of Other Investment Companies
The Fund may invest up to 10% of its total assets in shares of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to
duplicate management and advisory fees.
Borrowing
The Fund may borrow an amount equal to no more than 331/3% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 331/3% of its total assets to secure these borrowings.
However, the Fund will not purchase portfolio securities when borrowings exceed
5% of the value of the Fund's total assets.
PORTFOLIO MANAGEMENT TECHNIQUES
In seeking to achieve the Fund's investment objective, the Fund's investment
adviser will cause the Fund to purchase securities which it believes represent
the best values then currently available in the marketplace. Such values are a
function of yield, maturity, issue classification and quality characteristics,
coupled with expectations regarding the economy, movements in the general level
and term structure of interest rates, political developments and variations in
the supply of funds available for investment in the tax-exempt market relative
to the demand for funds placed upon it. The following are some of the more
important management techniques which will be utilized by the Fund's investment
adviser.
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Adjustment of Maturities
The investment adviser will seek to anticipate movements in interest rates
and will adjust the maturity distribution of the portfolio accordingly. Longer
term securities have ordinarily yielded more than shorter term securities. From
time to time, however, the normal yield relationships between longer and
shorter term securities have been reversed. In addition, longer term securities
have historically been subject to greater and more rapid price fluctuation. The
investment adviser will be free to take advantage of price volatility in order
to attempt to increase the Fund's NAV by making appropriate sales and purchases
of portfolio securities.
Issue and Quality Classification
Securities with the same general quality rating and maturity characteristics,
but which vary according to the purpose for which they were issued, often tend
to trade at different yields. Similarly, securities issued for similar purposes
and with the same general maturity characteristics, but which vary according to
the creditworthiness of their respective issuers, tend to trade at different
yields. These yield differentials tend to fluctuate in response to political
and economic developments as well as temporary imbalances in normal supply and
demand relationships. The investment adviser monitors these fluctuations
closely, and will adjust portfolio positions in various issue and quality
classifications according to the value disparities brought about by these yield
relationship fluctuations.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the Investment Company Act). See "Investment Restrictions"
in the Statement of Additional Information.
HOW THE FUND IS MANAGED
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the year ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were .70%, 1.10%, and 1.35%, respectively. See "Financial Highlights."
MANAGER
Prudential Investments Fund Management LLC (PIFM or the Manager), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Fund's average daily net assets up to and including $250 million, .475
of 1% of the next $250 million, .45 of 1% of the next $500 million, .425 of 1%
of the next $250 million, .40 of 1% of the next $250 million and .375 of 1% of
the Fund's average daily net assets in excess of $1.5 billion. PIFM is
organized in New York as a limited liability company. It is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to PIFM
in September 1996. For the fiscal year ended December 31, 1997, the Fund paid
management fees to PIFM of .48% of the Fund's average daily net assets. See
"Fee Waivers" below and "Manager" in the Statement of Additional Information.
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As of January 31, 1998, PIFM served as the manager to 42 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $63 billion.
Under the Management Agreement with the Fund, PIFM manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PIFM and The Prudential Investment
Corporation (PIC), doing business as Prudential Investments (PI, the Subadviser
or the investment adviser), the Subadviser furnishes investment advisory
services in connection with the management of the Fund and is reimbursed by
PIFM for its reasonable costs and expenses incurred in providing such services.
PIFM continues to have responsibility pursuant to the Management Agreement for
all investment advisory services and supervises the Subadviser's performance of
such services.
The current portfolio manager of the Fund is Peter J. Allegrini, a Managing
Director of Prudential Investments. Mr. Allegrini is responsible for the
day-to-day management of the Fund's portfolio. Mr. Allegrini has managed the
Fund's portfolio since April 1996. Mr. Allegrini has been employed by PI as a
portfolio manager since July 1994 and serves as the portfolio manager of a
number of other portfolios managed by PI. He was employed by Fidelity
Investments from 1982 to 1985 as a senior bond analyst and from 1985 to 1994 as
a portfolio manager, most recently of Fidelity Adviser High Income Municipal
Fund.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or the
Distributor), One Seaport Plaza, New York, New York 10292, is a corporation
organized under the laws of the State of Delaware and serves as the distributor
of the shares of the Fund. It is an indirect, wholly-owned subsidiary of
Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, each a Plan, and collectively, the Plans) adopted by
the Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. These expenses
include commissions and account servicing fees paid to, or on account of,
financial advisers of the Distributor and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements
with the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of the
Distributor and Prusec associated with the sale of Fund shares, including
lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
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Under the Class A Plan, the Fund may pay the Distributor for its
distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily NAV of the Class A shares. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. It is expected that in the case
of Class A shares, proceeds from the distribution fee will be used primarily to
pay account servicing fees to financial advisers. The Distributor has agreed to
limit its distribution-related fees payable under the Class A Plan to .10 of 1%
of the average daily net assets of the Class A shares for the fiscal year
ending December 31, 1998.
Under the Class B and Class C Plans, the Fund may pay the Distributor for its
distribution-related activities with respect to Class B and Class C shares at
an annual rate of up to .50 of 1% and up to 1% of the average daily net assets
of the Class B and Class C shares, respectively. The Class B Plan provides for
the payment to the Distributor of (i) an asset-based sales charge of up to .50
of 1% of the average daily net assets of the Class B shares, and (ii) a service
fee of up to .25 of 1% of the average daily net assets of the Class B shares;
provided that the total distribution-related fee does not exceed .50 of 1%. The
Class C Plan provides for the payment to the Distributor of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. The Distributor has
agreed to limit its distribution-related fees payable under the Class C Plan to
.75 of 1% of the average daily net assets of the Class C shares for the fiscal
year ending December 31, 1998. The Distributor also receives contingent
deferred sales charges from certain redeeming shareholders. See "Shareholder
Guide-How to Sell Your Shares-Contingent Deferred Sales Charge."
For the fiscal year ended December 31, 1997, the Fund paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average net assets of the
Class A, Class B and Class C shares, respectively. The Fund records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each such class based upon the ratio of sales of each such class
to the sales of all shares of the Fund other than expenses allowable to a
particular class. The distribution fee and sales charge of one class will not
be used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not interested persons of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers (including Prudential Securities)
and other persons who distribute shares of the Fund. Such payments may be
calculated by reference to the NAV of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
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FEE WAIVERS
PIFM may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Fund. The Fund is not required to
reimburse PIFM for such management fee waivers. Effective September 1, 1997,
PIFM discontinued its waiver of its management fee of .05% of 1% of the Funds
average daily net assets. See "Fund Expenses."
The Distributor has agreed to limit its distribution fee for the Class A and
Class C shares as described above under "Distributor." Fee waivers will
increase the Fund's yield and total return. See "Performance Information" in
the Statement of Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
The Distributor may also act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company (State Street or the Custodian), One
Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the
Fund's portfolio securities and cash and, in that capacity, maintains certain
financial and accounting books and records pursuant to an agreement with the
Fund. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records
for the Fund. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMFS is a wholly-owned subsidiary of PIFM.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
income, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund. The Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside services, will be adapted
in time for that event.
21
<PAGE>
HOW THE FUND VALUES ITS SHARES
The Fund's NAV is determined by subtracting its liabilities from its assets
and dividing the remainder by the number of outstanding shares. NAV is
calculated separately for each class. The Board of Directors has fixed the
specific time of day for the computation of the Fund's NAV to be as of 4:15
P.M., New York time.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV per share of the three classes will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
From time to time the Fund may advertise its yield, tax equivalent yield, and
total return (including average annual total return and aggregate total return)
in advertisements or sales literature. Yield, tax equivalent yield, and total
return are calculated separately for Class A, Class B and Class C shares. These
figures are based on historical earnings and are not intended to indicate
future performance. The yield refers to the income generated by an investment
in the Fund over a 30-day period. This income is then annualized; that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Fund. The total
return shows what an investment in the Fund would have earned over a specified
period of time (i.e., one, five or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc.,
22
<PAGE>
other industry publications, business periodicals, and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Fund's annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
Taxation of the Fund
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Fund will not be subject to federal income taxes on its net investment income
and net capital and currency gains, if any, that it distributes to its
shareholders. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Gain or loss realized by the Fund from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Fund for the security and the
principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issued price of the security). The market
discount rule does not apply to any security that was acquired by the Fund at
its original issue price.
Taxation of Shareholders
Distributions out of net investment income, to the extent attributable to
interest received on tax-exempt securities, are exempt from federal income tax
when paid to shareholders. Distributions of other net investment income and net
short-term capital gains in excess of net long-term capital losses will be
taxable as ordinary income to the shareholder whether or not reinvested. Any
net capital gains (i.e., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
It is not anticipated that corporate shareholders will be entitled to any
dividends received deduction with respect to distributions from the Fund.
Interest on certain private activity tax-exempt obligations issued on or
after August 8, 1986, is a preference item for purposes of the alternative
minimum tax for both individual and corporate shareholders. In the event that
the Fund invests in such obligations, the portion of an exempt-interest
dividend of the Fund that is allocable to such municipal obligations will be
treated as a preference item to shareholders for purposes of the alternative
minimum tax. In addition, a portion of the exempt-interest dividends received
by corporate shareholders with respect to interest on tax-exempt obligations,
whether or not private activity bonds, will be taken into account in computing
the alternative minimum tax. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
Any gain or loss realized upon a sale of shares of the Fund by a shareholder
who is not a dealer in securities will be treated as capital gain or loss. In
the case of an individual, any such capital gain will be treated as short-
23
<PAGE>
term capital loss if the shares were held for not more than 12 months, capital
gain taxable at the maximum rate of 28% if such shares were held for more than
12, but not more than 18 months, and capital gain, taxable at the maximum rate
of 20% if such shares were held for more than 18 months. In the case of a
corporation, any such capital gain will be treated as long-term capital gain,
taxable at the same rates as ordinary income, if such shares were held for more
than 12 months. Any such capital loss will be treated as long-term capital loss
if the shares have been held for more than one year and otherwise as a
short-term capital loss. Any such loss with respect to shares that are held for
six months or less however, will be disallowed to the extent of any exempt
interest dividends received with respect to such shares, or treated as
long-term capital loss to the extent of any capital gain distributions received
by the shareholder with respect to such shares.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
Class of the Fund's shares for any other Class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Net tax-exempt interest distributed by the Fund to shareholders may not be
exempt from state or local taxation. Shareholders are advised to consult their
own tax advisers regarding specific questions as to federal, state or local
taxes. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
Withholding Taxes
Under the Internal Revenue Code, the Fund is generally required to withhold
and remit to the U.S. Treasury 31% of taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain
noncorporate shareholders who fail to furnish correct tax identification
numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain foreign
shareholders) or, generally, who are otherwise subject to backup withholding.
Dividends from taxable net investment income and net short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
Dividends and Distributions
The Fund expects to declare daily and pay monthly dividends of net investment
income and make distributions of net capital gains, if any, at least annually.
Dividends paid by the Fund with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same
time, on the same day and will be in the same amount except that each class
will bear its own distribution expenses, generally resulting in lower dividends
for Class B and Class C shares in relation to Class A shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
shares. See "How the Fund Values its Shares."
Dividends and distributions will be paid in additional Fund shares based on
the NAV of each class of Fund shares on the payment date or such other date as
the Board of Directors may determine, unless the shareholder elects in writing
not less than five business days prior to the record date to receive such
dividends and distributions in cash. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. The Fund will notify each
shareholder after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis. If you hold shares through the Distributor, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
24
<PAGE>
In determining the amount of capital gains to be distributed, any capital
loss carryovers from prior years will be offset against capital gains. The Fund
intends to invest its assets so that dividends paid from net tax-exempt
interest earned from Municipal Bonds and Notes will qualify as exempt-interest
dividends and be excluded from the shareholder's gross income under the
Internal Revenue Code.
Any dividends or distributions of net capital gains paid shortly after a
purchase by an investor will have the effect of reducing the NAV of the
investor's shares by the per share amount of the distributions. Although in
effect a return of invested principal, capital gain distribution and dividends,
to the extent such distributions are out of taxable net income, are subject to
federal income taxes. Accordingly, prior to purchasing shares of the Fund, an
investor should carefully consider the impact of dividends and distributions
which are expected to be or have been announced.
If you buy shares on or immediately before the record date (the date that
determined who receives the dividend), you will receive a portion of the money
you invested as a taxable dividend. Therefore, you should consider the timing
of dividends when buying shares of the Fund.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on January 9, 1980. The Fund is
authorized to issue 750 million shares of common stock, $.01 par value per
share, divided into three classes, designated Class A, Class B and Class C
common stock, each of which consists of 250 million authorized shares. Each
class of common stock represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees, (ii) each class has
exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class (except that the Fund has agreed with the
Commission in connection with the offering of a conversion feature on Class B
shares to submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv)
only Class B shares have a conversion feature. See "How the Fund is
Managed-Distributor." The Fund has received an order from the Commission
permitting the issuance and sale of multiple classes of common stock.
Currently, the Fund is offering only three classes designated Class A, Class B,
and Class C shares. In accordance with the Fund's Articles of Incorporation,
the Board of Directors may authorize the creation of additional series of
common stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide-How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class of shares
bears the expenses related to the distribution of its shares. Except for the
conversion feature applicable to the Class B
25
<PAGE>
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Directors, so that holders of more than 50 percent of the shares
voting can, if they choose, elect all Directors being selected, while the
holders of the remaining Shares would be unable to elect any Directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% of the
Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the Commission under
the Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the Commission or may be examined, without charge, at
the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through the Distributor, Prusec or
directly from the Fund through its Transfer Agent, Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), Attention: Investment Services, P.O.
Box 15020, New Brunswick, New Jersey 08906-5020. The purchase price is the NAV
next determined following receipt of an order by the Transfer Agent or the
Distributor plus a sales charge which, at your option, may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class
B or Class C shares). See "Alternative Purchase Plan" below. See also, "How the
Fund Values its Shares." Payments may be made by cash, wire, check or through
your brokerage account.
An investment in the Fund may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases through the Automatic Savings Accumulation Plan,
the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, the Distributor or Prusec. If a
stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through the Distributor will not receive stock certificates.
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<PAGE>
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225 -1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential National Municipals Fund, Inc., specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are eligible to invest (Class A, Class B, or Class C
shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential National
Municipals Fund, Inc., Class A, Class B, or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
The Fund offers three classes of shares (Class A, Class B and Class C shares)
which allows you to choose the most beneficial sales charge structure for your
individual circumstances given the amount of the purchase, the length of time
you expect to hold the shares and other relevant circumstances (Alternative
Purchase Plan).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other information
-------------------------------- ------------------------------- ------------------------------
<S> <C> <C>
Initial sales charge waived or
Maximum initial sales charge of .30 of 1% (Currently being reduced for certain
Class A 3% of the public offering price charged at a rate of .10 of 1%) purchases
Maximum CDSC of 5% of the
lesser of the amount invested or Shares convert to Class A
the redemption proceeds; shares approximately seven
Class B declines to zero after six years .50 of 1% years after purchase
Maximum CDSC of 1% of the
lesser of the amount invested or
the redemption proceeds on
redemptions made within one 1% (Currently being charged Shares do not convert to
Class C year of purchase at a rate of .75 of 1%) another class
</TABLE>
27
<PAGE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class is
subject to different sales charges and distribution and/or service fees, which
may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangements and
has separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class (except as
noted under the heading "General Information-Description of Common Stock"),
(iii) each class has a different exchange feature and (iv) only Class B shares
have a conversion feature. See "How to Exchange Your Shares" below. The income
attributable to each class and the dividends payable on the shares of each
class will be reduced by the amount of the distribution fee (if any) of each
class. Class B and Class C shares bear the expenses of a higher distribution
fee which will generally cause them to have higher expense ratios and to pay
lower dividends than Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
In selecting a purchase alternative, you should consider, among other things,
(1) the length of time you expect to hold your investment, (2) the amount of
any applicable sales charge (whether imposed at the time of purchase or
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature-Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for more than 5 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C
shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on Class C
shares to exceed the initial sales charge plus cumulative annual
distribution-related fees on Class A shares. This does not take into account
the time value of money, which further reduces the impact of the higher Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions during
which the CDSC is applicable.
28
<PAGE>
All purchases of $1 million or more, either as part of a single investment or
under Rights of Accumulation or Letters of Intent, must be for Class A shares.
See "Reduction and Waiver of Initial Sales Charges" below.
Class A Shares
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as Dealer Concession
Percentage of Percentage of as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
- ---------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999..... 3.00% 3.09% 3.00%
$100,000 to $249,999.. 2.50% 2.56% 2.50%
$250,000 to $499,999.. 1.50% 1.52% 1.50%
$500,000 to $999,999.. 1.00% 1.01% 1.00%
$1,000,000 and above.. None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
In connection with the sale of Class A shares of NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisors and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV of
shares sold by such person.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the
Statement of Additional Information.
PruArray Savings Plan. Class A shares are also offered at NAV to employees of
companies that enter into a written agreement with Prudential Retirement
Services to participate in the PruArray Savings Program. Under this Program, a
limited number of Prudential Mutual Funds are available for purchase at NAV by
Savings Accumulation Plans of the company's employees. The Program is available
only to employees who open a Savings Accumulation Plan account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.
Special Rules Applicable to Retirement Plans. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at
NAV.
Other Waivers. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) Prudential employees and
special agents of Prudential and its
29
<PAGE>
subsidiaries and all persons who have retired directly from active service with
Prudential or one of its subsidiaries, (e) registered representatives and
employees of dealers who have entered into a selected dealer agreement with
Prudential Securities provided that purchases at NAV are permitted by such
person's employer, (f) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment
firm, provided that (i) the purchase is made within 180 days of the
commencement of the financial adviser's employment at Prudential Securities, or
within one year in the case of Benefit Plans, (ii) the purchase is made with
proceeds of a redemption of shares of any open-end, non-money market fund
sponsored by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (iii) the
financial adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares-Reduction and Waiver of Initial Sales
Charges-Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to dealers, financial advisors and other persons who sell the Class B
shares at the time of sale. This facilitates the ability of the Fund to sell
the Class B shares without an initial sales charge being deducted at the time
of purchase. The Distributor anticipates that it will recoup its advancement of
sale commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed-Distributor." In connection with the sale of Class C
shares, the Distributor will pay, from its own resources, dealers, financial
advisers and other persons which distribute Class C shares a sales commission
of up to 1% of the purchase price at the time of the sale.
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form by the Transfer Agent
or Prudential Securities. See "How the Fund Values its Shares." In certain
cases, however, redemption proceeds from the Class B shares will be reduced by
the amount of any applicable contingent deferred sales charge, as described
below. See "Contingent Deferred Sales Charges" below.
If you hold shares of the Fund through Prudential Securities, you must redeem
your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order for the
redemption request to be processed. If redemption is requested by a
corporation, partnership, trust or fiduciary, written evidence of authority
acceptable to the Transfer Agent must be submitted before such request will be
accepted. All correspondence and documents concerning redemptions should be
sent to the Fund in care of
30
<PAGE>
the Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power, must be
guaranteed by an eligible guarantor institution. An eligible guarantor
institution includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or
written request except as indicated below. If you hold shares through
Prudential Securities, payment for shares presented for redemption will be
credited to your Prudential Securities account, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends
and holidays, (b) when trading on such Exchange is restricted, (c) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (d) during any other
period when the Commission, by order, so permits; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
Payment for redemption of recently purchased shares will be delayed until the
Fund or its Transfer Agent has been advised that the purchase check has been
honored, up to 10 calendar days from the time of receipt of the purchase check
by the Transfer Agent. Such delay may be avoided by purchasing shares by wire
or by certified or cashier's check.
Redemption in Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in regular redemption. See "How the Fund Values its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the NAV of the Fund during any 90-day period for any one shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any involuntary redemption.
90-day Repurchase Privilege. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If
31
<PAGE>
less than a full repurchase is made, the credit will be on a pro rata basis.)
You must notify the Fund's Transfer Agent, either directly or through the
Distributor, at the time the repurchase privilege is exercised to adjust your
account for the CDSC you previously paid. Thereafter, any redemptions will be
subject to the CDSC applicable at the time of the redemption. See "Contingent
Deferred Sales Charges" below. Exercise of the repurchase privilege may not
affect federal tax treatment of any gain realized upon redemption.
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a CDSC declining from 5% to
zero over a six-year period. Class C shares redeemed within one year of
purchase will be subject to a 1% CDSC. The CDSC will be deducted from the
redemption proceeds and reduce the amount paid to you. The CDSC will be imposed
on any redemption by you which reduces the current value of your Class B or
Class C shares to an amount which is lower than the amount of all payments by
you for shares during the preceding six years, in the case of Class B shares,
and one year, in the case of Class C shares. A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The
amount of any CDSC will be paid to and retained by the Distributor. See "How
the Fund is Managed-Distributor" and "Waiver of the Contingent Deferred Sales
Charges-Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares" below. The following table sets forth
the rates of the CDSC applicable to redemptions of Class B shares:
<TABLE>
<CAPTION>
Contingent Deferred Sales
Year Since Charge as a Percentage
Purchase of Dollars Invested or
Payment Made Redemption Proceeds
- ------------ -------------------------
<S> <C>
First....... 5.0%
Second...... 4.0%
Third....... 3.0%
Fourth...... 2.0%
Fifth....... 1.0%
Sixth....... 1.0%
Seventh..... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
shares purchased prior to January 22, 1990); then of amounts representing the
cost of shares held beyond the applicable CDSC period; then of amounts
representing the cost of shares acquired prior to July 1, 1985; and finally, of
amounts representing the cost of shares held for the longest period of time
within the applicable CDSC period.
32
<PAGE>
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the second
year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of Contingent Deferred Sales Charges-Class B shares. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust, following the death or disability of
the grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), at the time of death or initial determination of disability,
provided that the shares were purchased prior to death or disability. In
addition, the CDSC will be waived on redemptions of shares held by a Director
of the Fund.
You must notify the Fund's Transfer Agent either directly or through the
Distributor or Prusec, at the time of redemption, that you are entitled to
waiver of the contingent deferred sales charge and provide the Transfer Agent
with such supporting documentation as it may deem appropriate. The waiver will
be granted subject to confirmation of your entitlement. See "Purchase and
Redemption of Fund Shares-Waiver of the Contingent Deferred Sales Charge-Class
B Shares" in the Statement of Additional Information.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be waived
(or reduced) on redemptions until this threshold 12% is reached.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares-Quantity
Discount-Class B Shares Purchased Prior to August 1, 1994," in the Statement of
Additional Information.
CONVERSION FEATURE-CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative NAV without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following formula:
(i) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (ii) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
33
<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less than
the number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class
B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Fund, you have an exchange privilege with certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject to the minimum investment requirements of such funds. Class A,
Class B and Class C shares may be exchanged for Class A, Class B, and Class C
shares, respectively, of another fund on the basis of the relative NAV. No
sales charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature-Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account-Exchange Privilege" in the
Statement of Additional Information.
34
<PAGE>
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the
Fund at (800) 225 -1852 to execute a telephone exchange of shares, on weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
Neither the Fund nor its agents will be liable for any loss, liability or cost
which results from acting upon instructions reasonably believed to be genuine
under the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The exchange privilege is available only in states where the
exchange may legally be made.
If you hold shares through the Distributor, you must exchange your shares by
contacting your Prudential Securities financial adviser. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be returned in order for the shares to be exchanged. See
"How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
Special Exchange Privileges. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges".
Under this exchange privilege, amounts representing any Class B and Class C
shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares for shareholders who qualify
to purchase Class A shares at NAV on a quarterly basis, unless the shareholder
elects otherwise. Eligibility for this exchange privilege will be calculated on
the business day prior to the date of the exchange. Amounts representing Class
B or Class C shares which are not subject to a CDSC include the following: (1)
amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the NAV above the total amount of payments for the purchase of
Class B or Class C shares and (3) amounts representing Class B or Class C
shares held beyond the applicable CDSC period. Class B and Class C shareholders
must notify the Transfer Agent either directly or through the Distributor or
Prusec that they are eligible for this special exchange privilege.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
Frequent Trading. The Fund and other Prudential Mutual Funds are not intended
to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly
controlled accounts, if, in the Manager's sole judgment, such person, group or
accounts were following a market timing strategy or were otherwise engaging in
excessive trading (Market Timers).
35
<PAGE>
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
~ Automatic Reinvestment of Dividends and/or Distributions Without a Sales
Charge. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
~ Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
~ Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
~ Reports to Shareholders. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
~ Shareholder Inquiries. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
36
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
Equity Funds
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
~ Taxable Money Market Funds
Cash Accumulation Trust
National Money Market Fund
Liquid Assets Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
~ Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
~ Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
~ Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND HIGHLIGHTS............................. 2
What are the Fund's Risk Factors and Special
Characteristics?............................ 2
FUND EXPENSES............................... 4
FINANCIAL HIGHLIGHTS........................ 5
HOW THE FUND INVESTS........................ 8
Investment Objective and Policies........... 8
Hedging and Return Enhancement Strategies... 10
Other Investments and Policies.............. 16
Portfolio Management Techniques............. 17
Investment Restrictions..................... 18
HOW THE FUND IS MANAGED..................... 18
Manager..................................... 18
Distributor................................. 19
Fee Waivers................................. 21
Portfolio Transactions...................... 21
Custodian and Transfer and
Dividend Disbursing Agent................... 21
Year 2000................................... 21
HOW THE FUND VALUES ITS SHARES.............. 22
HOW THE FUND CALCULATES PERFORMANCE......... 22
TAXES, DIVIDENDS AND DISTRIBUTIONS.......... 23
GENERAL INFORMATION......................... 25
Description of Common Stock................. 25
Additional Information...................... 26
SHAREHOLDER GUIDE........................... 26
How to Buy Shares of the Fund............... 26
Alternative Purchase Plan................... 27
How to Sell Your Shares..................... 30
Conversion Feature-Class B Shares........... 33
How to Exchange Your Shares................. 34
Shareholder Services........................ 36
THE PRUDENTIAL MUTUAL FUND FAMILY........... A-1
</TABLE>
- -------------------------------------------------------------------------------
MF104A
CUSIP Nos.:
Class A: 743918 20 3
Class B: 743918 10 4
Class C: 743918 30 2
Prudential
National
Municipals
Fund, Inc.
PROSPECTUS
March 4, 1998
www.prudential.com
<PAGE>
Supplement dated July 1, 1998
THE FOLLOWING INFORMATION SUPPLEMENTS YOUR PROSPECTUS:
Effective July 1, 1998, Prudential Investment Management Services LLC,
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, was
appointed the exclusive Distributor of Fund shares. Shares continue to be
offered through Prudential Securities Incorporated, Pruco Securities
Corporation and other brokers and dealers. Prudential Investment Management
Services is a wholly owned subsidiary of The Prudential Insurance Company of
America and an affiliate of Prudential Securities Incorporated and Pruco
Securities Corporation. All other arrangements with respect to the
distribution of Fund shares described in the Prospectus remain unchanged.
<PAGE>
Supplement dated September 1, 1998
The following information should be added to the cover page of the
Prospectus.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
The following information should be added under the heading "Shareholder
Guide--Shareholder Services".
SHAREHOLDER GUIDE
SHAREHOLDER SERVICES
THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares of
certain Prudential Mutual Funds which are held in an eligible brokerage account.
This insurance protects the value of your mutual fund investment for your
beneficiaries against market downturns. The insurance benefit is based on the
difference at the time of the insured's death between the "protected value" and
the then current market value of the shares. This coverage is not available in
all states and is subject to various restrictions and limitations. For more
complete information about this program, including charges and expenses, please
contact your Prudential representative.
<PAGE>
Prudential Municipal Bond Fund
- --------------------------------
PROSPECTUS DATED JULY 1, 1998
- ----------------------------------------------------------------
Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series (collectively, the Series). The investment objectives of the Series are
as follows: (i) the objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes, (ii) the objective of the Insured Series is to provide the maximum amount
of income that is eligible for exclusion from federal income taxes consistent
with the preservation of capital and (iii) the objective of the Intermediate
Series is to provide a high level of income that is eligible for exclusion from
federal income taxes consistent with the preservation of capital. Although each
Series will seek income that is eligible for exclusion from federal income
taxes, a portion of the dividends and distributions paid by each Series (and, in
particular, the High Income Series) may be treated as a preference item for
purposes of the alternative minimum tax. Each Series seeks to achieve its
objective through the separate investment policies described in this Prospectus.
There can be no assurance that the Series' investment objectives will be
achieved. See "How the Fund Invests--Investment Objectives and Policies."
Subject to the limitations described herein, each Series may utilize
derivatives, including buying and selling futures contracts for the purpose of
hedging its portfolio securities. See "How the Fund Invests--Investment
Objectives and Policies."
THE HIGH INCOME SERIES MAY INVEST IN LOWER RATED BONDS, COMMONLY KNOWN AS JUNK
BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER RISK OF LOSS OF
PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN HIGHER RATED BONDS.
PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS SERIES. See "How the Fund Invests--Investment Objectives and Policies--The
High Income Series--Risk Factors Relating to Investing in High Yield
Securities."
The Insured Series invests at least 70% of its assets in insured obligations
under normal conditions. The insurance relates to the timely payment of
principal and interest on portfolio investments and not to the shares of the
Series.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of the Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated July 1, 1998, which information is incorporated herein by reference (is
legally considered a part of this Prospectus) and is available without charge
upon request to the Fund at the address or telephone number noted above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL BOND FUND?
Prudential Municipal Bond Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified,
management investment company. The Fund is comprised of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series.
WHAT ARE THE SERIES' INVESTMENT OBJECTIVES?
The investment objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes. The investment objective of the Insured Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes consistent with the preservation of capital. The investment objective
of the Intermediate Series is to provide a high level of income that is
eligible for exclusion from federal income taxes consistent with the
preservation of capital. Each Series seeks to achieve its objective through
the separate investment policies described in this Prospectus. There can be
no assurance that the Series' objectives will be achieved. See "How the Fund
Invests--Investment Objectives and Policies" at page 18.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The High Income Series invests in high yield securities, commonly known as
junk bonds, which may be considered speculative and are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations, as well as price volatility. The Insured Series invests
primarily in insured municipal obligations. Although the insurance policies
protect against the failure to make timely payment of principal and interest
on the insured municipal obligations, the price of the municipal obligations
and the stability of the Series' net asset value per share (NAV) are not
insured. The Intermediate Series invests primarily in municipal obligations
with maturities between 3 and 15 years and will have a dollar-weighted
average portfolio maturity of more than 3 and less than 10 years. Generally,
the yield earned on longer-term municipal obligations is greater than that
earned on similar obligations with shorter maturities. However, obligations
with longer maturities are subject to greater market risk due to larger
fluctuations in value given specific changes in the level of interest rates
relative to the value of shorter-term obligations. See "How the Fund
Invests--Investment Objectives and Policies" at page 18. Each Series may
purchase and sell derivatives, including certain financial futures contracts
and options thereon, for hedging purposes. These activities may be
considered speculative and may result in higher risks and costs to the Fund.
See "How the Fund Invests--Hedging Strategies--Risks of Hedging Strategies"
at page 25. As with an investment in any mutual fund, an investment in this
Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the average daily net assets of each Series up to $1 billion
and .45 of 1% of the average daily net assets of each Series in excess of $1
billion. As of May 31, 1998, PIFM served as manager or administrator to 67
investment companies, including 45 mutual funds, with aggregate assets of
approximately $65 billion. The Prudential Investment Corporation (PIC),
doing business as Prudential Investments (the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 29.
WHO DISTRIBUTES THE FUND'S SHARES?
On and after July 1, 1998, Prudential Investment Management Services LLC
(the Distributor), will act as the Distributor of the Fund's Class A, Class
B, Class C and Class Z shares. Before July 1, 1998, Prudential Securities
Incorporated (Prudential Securities) served as Distributor of Fund shares.
Prudential Securities and Prudential Investment Management Services LLC are
each referred to as the Distributor. The Distributor is paid an annual
distribution and service fee which is currently being charged at the rate of
.10 of 1% of the average daily net assets of the Class A shares of each
Series, is paid an annual distribution and service fee which is currently
being charged at the rate of .50 of 1% of the average daily net assets of
the Class B shares of each Series and is paid an annual distribution and
service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares of each Series. The
Distributor incurs the expense of distributing the Fund's Class Z shares
under a distribution agreement with the Fund, none of which is reimbursed or
paid for by the Fund. See "How the Fund is Managed--Distributor" at page 29.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for Class A, Class B and Class C shares. Class Z shares are not
subject to any minimum investment requirements. There is no minimum
investment requirement for certain employee savings plans. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Guide--How to Buy Shares
of the Fund" at page 37 and "Shareholder Guide--Shareholder Services" at
page 46.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers), including Prudential
Securities or Pruco Securities Incorporated (Prusec), or directly from the
Fund through its transfer agent, Prudential Mutual Fund Services LLC (PMFS
or the Transfer Agent). In each case, sales are made at the NAV next
determined after receipt of your purchase order by the Transfer Agent, a
Dealer or the Distributor, plus a sales charge which may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group
of investors at NAV without any sales charge. Dealers may charge their
customers a separate fee for handling purchase transactions. See "How the
Fund Values its Shares" at page 32 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 37.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares through this Prospectus:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Class C shares are subject to higher
ongoing distribution-related expenses than Class A
shares but, unlike Class B shares, do not convert
to another class.
- Class Z Shares: Sold without either an initial sales charge or CDSC
to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution
expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 38.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. Dealers may charge their customers a separate fee for
handling sale transactions. See "Shareholder Guide--How to Sell Your Shares"
at page 41. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information
about selling their Class Z shares.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of a Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 33.
3
<PAGE>
FUND EXPENSES
(FOR EACH SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES (b) CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES (a)
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)...................... 3% None None None
Maximum Sales Load Imposed on
Reinvested Dividends................. None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase price
or redemption proceeds, whichever is
lower)............................... None 5% during the first year, decreasing 1% on redemptions None
by 1% annually to 1% in the fifth and made within one
sixth years and 0% the seventh year year
of purchase
Redemption Fees....................... None None None None
Exchange Fee.......................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (c)
(as a percentage of average net assets)
Management Fees:
High Income Series (Before
Waiver)........................ .50% .50% .50% .50%
Insured Series.................. .50 .50 .50 .50
Intermediate Series............. .50 .50 .50 .50
12b-1 Fees (After Reduction):
High Income Series.............. .10%(d) .50% .75%(d) None
Insured Series.................. .10(d) .50 .75(d) None
Intermediate Series............. .10(d) .50 .75(d) None
Other Expenses:
High Income Series.............. .07% .07% .07% .07%
Insured Series.................. .11 .11 .11 .11
Intermediate Series............. .73 .73 .73 .73
Total Fund Operating Expenses
(Before Waiver and After
Reduction):
High Income Series.............. .67% 1.07% 1.32% .57%
Insured Series.................. .71 1.11 1.36 .61
Intermediate Series............. 1.33 1.73 1.98 1.23
</TABLE>
- ---------------
(a) Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares of
each Series may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on each class of the Series
rather than on a per shareholder basis. Therefore, long-term shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
(b) Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
(c) Based on expenses incurred during the fiscal year ended April 30, 1998,
without taking into account the management fee waiver. At the current level
of management fee waiver (10%) for the High Income Series, Management Fees
for the High Income Series would be .45% for all classes and Total Fund
Operating Expenses for Class A, B, C and Class Z shares would be .62%,
1.02%, 1.27% and .52%, respectively for the High Income Series. The expense
information in the table with respect to the Insured and Intermediate
Series has been restated to reflect current fees. Effective August 31,
1997, PIFM eliminated its management fee waiver (10%) with respect to the
Insured and Intermediate Series. See "How the Fund is Managed--Fee Waivers
and Subsidy."
(d) Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and up to 1% of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor may voluntarily waive all or a portion of the
distribution fees as it may determine from time to time. Any such waivers
may be terminated at any time without prior notice to shareholders. The fee
table reflects the 12b-1 fees that are estimated to be incurred by the Fund
during its current fiscal year. Total Fund Operating Expenses of the Class
A and Class C shares without such waivers would be .87% and 1.57%,
respectively, of the High Income Series, .91% and 1.61%, respectively, of
the Insured Series and 1.53% and 2.23%, respectively, of the Intermediate
Series. See "How the Fund is Managed--Distributor."
4
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- -------------- --------
<S> <C> <C> <C> <C>
EXAMPLE (EACH SERIES)
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
High Income Series
Class A............................. $36 $49 $ 64 $105
Class B............................. $60 $62 $ 66 $108
Class C............................. $23 $40 $ 70 $153
Class Z............................. $ 5 $17 $ 29 $ 70
Insured Series
Class A............................. $37 $51 $ 67 $113
Class B............................. $61 $65 $ 70 $116
Class C............................. $24 $42 $ 73 $161
Class Z............................. $ 6 $19 $ 33 $ 79
Intermediate Series
Class A............................. $43 $70 $100 $183
Class B............................. $67 $84 $103 $186
Class C............................. $30 $62 $106 $229
Class Z............................. $12 $38 $ 66 $151
You would pay the following expenses on
the same investment, assuming no
redemption:
High Income Series
Class A............................. $36 $49 $ 64 $105
Class B............................. $10 $32 $ 56 $108
Class C............................. $13 $40 $ 70 $153
Class Z............................. $ 5 $17 $ 29 $ 70
Insured Series
Class A............................. $37 $51 $ 67 $113
Class B............................. $11 $35 $ 60 $116
Class C............................. $14 $42 $ 73 $161
Class Z............................. $ 6 $19 $ 33 $ 79
Intermediate Series
Class A............................. $43 $70 $100 $183
Class B............................. $17 $54 $ 93 $186
Class C............................. $20 $62 $106 $229
Class Z............................. $12 $38 $ 66 $151
</TABLE>
- ---------------
The above examples are based on data for the Fund's fiscal year ended
April 30, 1998. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS A SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
------------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.33 $10.58
-------- -------- -------- -------- ------- ------- ------- ------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .67(d) .70(d) .72(d) .72(d) .72 .77 .77(d) .79(d) .23(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .47 .14 (.02) (.02) (.39) .46 .23 .12 (.25)
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total from
investment
operations........ 1.14 .84 .70 .70 .33 1.23 1.00 .91 (.02)
-------- -------- -------- -------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.67) (.70) (.72) (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from
capital gains..... -- -- -- -- (.01) -- -- -- --
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total
distributions..... (.67) (.70) (.72) (.72) (.73) (.77) (.77) (.79) (.23)
-------- -------- -------- -------- ------- ------- ------- ------- ------
Net asset value, end
of period......... $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $10.33
-------- -------- -------- -------- ------- ------- ------- ------- ------
-------- -------- -------- -------- ------- ------- ------- ------- ------
TOTAL RETURN (b):... 10.80% 8.03% 6.55% 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $421,503 $334,062 $223,073 $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets
(000)............. $381,735 $294,940 $162,329 $ 65,207 $52,982 $31,658 $19,702 $11,594 $1,914
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.62%(d) 0.64%(d) 0.64%(d) 0.69%(d) 0.69% 0.74% 0.65%(d) 0.60%(d) 0.60%(c)(d)
Expenses,
excluding
distribution
fees............. 0.52%(d) 0.54%(d) 0.54%(d) 0.59%(d) 0.59% 0.64% 0.55%(d) 0.50%(d) 0.50%(c)(d)
Net investment
income........... 6.03%(d) 6.44%(d) 6.58%(d) 6.83%(d) 6.42% 7.04% 7.25%(d) 7.62%(d) 8.17%(c)(d)
Portfolio turnover
rate.............. 13% 26% 35% 39% 36% 27% 34% 29% 44%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS B SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
----------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .63(b) .66(b) .68(b) .68(b) .68
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .15 (.03) (.02) (.39)
---------- ---------- ---------- ---------- ----------
Total from investment operations.................. 1.10 .81 .65 .66 .29
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.63) (.66) (.68) (.68) (.68)
Distributions from capital gains.................. -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Total distributions............................... (.63) (.66) (.68) (.68) (.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.................... $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN (a):................................. 10.36% 7.71% 6.12% 6.37% 2.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 669,223 $ 665,525 $ 799,048 $ 934,725 $1,099,640
Average net assets (000).......................... $ 669,132 $ 725,305 $ 900,115 $1,024,132 $1,132,653
Ratios to average net assets:
Expenses, including distribution fees........... 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09%
Expenses, excluding distribution fees........... 0.52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58%
Net investment income........................... 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02%
Portfolio turnover rate........................... 13% 26% 35% 39% 36%
<CAPTION>
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C><C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.68 $ 10.45 $ 10.34 $ 10.56 $ 10.13
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .73 .73(b) .75(b) .79(b) .86(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .46 .23 .11 (.17) .45
---------- ---------- ---------- ---------- ----------
Total from investment operations.................. 1.19 .96 .86 .62 1.31
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.73) (.73) (.75) (.79) (.86)
Distributions from capital gains.................. -- -- -- (.05) (.02)
---------- ---------- ---------- ---------- ----------
Total distributions............................... (.73) (.73) (.75) (.84) (.88)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.................... $ 11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN (a):................................. 11.47% 9.40% 8.59% 6.04% 13.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,028,480 $ 803,838 $ 701,483 $ 622,970 $ 549,426
Average net assets (000).......................... $ 893,203 $ 759,779 $ 667,751 $ 549,485 $ 185,367
Ratios to average net assets:
Expenses, including distribution fees........... 1.14% 1.05%(b) 1.00%(b) 0.83%(b) 0.27%(b)
Expenses, excluding distribution fees........... .64% 0.55%(b) 0.50%(b) 0.33%(b) 0.12%(b)
Net investment income........................... 6.66% 6.85%(b) 7.22%(b) 7.24%(b) 7.26%(b)
Portfolio turnover rate........................... 27% 34% 29% 44% 17%
</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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS C SHARES)
The following financial highlights for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and for the period from August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
--------------------------------------
CLASS C
--------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH
------------------------- APRIL 30,
1998 1997 1996 1995
------- ------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.84 $ 10.69 $ 10.72 $10.79
------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .61 .63 .65 .49
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .15 (.03) (.07)
------- ------- ------- -----------
Total from investment operations.................. 1.08 .78 .62 .42
------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.61) (.63) (.65) (.49)
------- ------- ------- -----------
Net asset value, end of period.................... $ 11.31 $ 10.84 $ 10.69 $10.72
------- ------- ------- -----------
------- ------- ------- -----------
TOTAL RETURN (b):................................. 10.09% 7.44% 5.86% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $20,554 $ 9,563 $ 6,471 $3,208
Average net assets (000).......................... $14,932 $ 8,060 $ 5,608 $1,385
Ratios to average net assets:
Expenses, including distribution fees (d)....... 1.27% 1.29% 1.29% 1.34%(c)
Expenses, excluding distribution fees (d)....... 0.52% 0.54% 0.54% 0.59%(c)
Net investment income (d)....................... 5.39% 5.80% 5.93% 6.34%(c)
Portfolio turnover rate........................... 13% 26% 35% 39%
</TABLE>
- -------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(HIGH INCOME SERIES - CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period from September 16, 1996 through April
30, 1997 have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain
selected data for a Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information has been determined based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
---------------------------
CLASS Z
---------------------------
SEPTEMBER 16,
YEAR ENDED 1996(a)
APRIL 30, THROUGH
1998 APRIL 30, 1997
---------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.83 $10.79
---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .68 .45
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .04
---------- ------
Total from investment operations.................. 1.15 .49
---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.68) (.45)
---------- ------
Net asset value, end of period.................... $ 11.30 $10.83
---------- ------
---------- ------
TOTAL RETURN(b):.................................. 10.91% 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 9,919 $2,719
Average net assets (000).......................... $ 6,064 $ 704
Ratios to average net assets:
Expenses (d).................................... 0.52% 0.54%(c)
Net investment income (d)....................... 6.14% 6.55%(c)
Portfolio turnover rate........................... 13% 26%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
9
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS A SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
----------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
----------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $ 10.76 $10.25 $ 10.51
-------- -------- -------- ------- ------- ------- ------- ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .53(d) .55(d) .58(d) .58(d) .58 .61 .66(d) .67(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .40 .08 .11 .12 (.43) .73 .24 .54 (.26)
-------- -------- -------- ------- ------- ------- ------- ------ ------
Total from
investment
operations........ .93 .63 .69 .70 .15 1.34 .90 1.21 (.08)
-------- -------- -------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.53) (.55) (.58) (.58) (.58) (.61) (.66) (.67) (.18)
Distributions in
excess of net
investment
income............ --(e) (.01) -- -- -- -- -- -- --
Distributions from
capital gains..... (.25) (.11) -- -- (.30) (.27) (.02) (.03) --
-------- -------- -------- ------- ------- ------- ------- ------ ------
Total
distributions..... (.78) (.67) (.58) (.58) (.88) (.88) (.68) (.70) (.18)
-------- -------- -------- ------- ------- ------- ------- ------ ------
Net asset value, end
of period......... $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $10.76 $ 10.25
-------- -------- -------- ------- ------- ------- ------- ------ ------
-------- -------- -------- ------- ------- ------- ------- ------ ------
TOTAL RETURN (b):... 8.67% 5.74% 6.47% 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $224,409 $208,411 $139,548 $75,800 $30,669 $30,098 $19,177 $7,630 $ 2,700
Average net assets
(000)............. $222,115 $187,371 $102,456 $39,471 $32,309 $24,589 $12,731 $5,164 $ 1,280
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.69%(d) 0.68%(d) 0.68%(d) 0.74%(d) 0.71% 0.72% 0.62%(d) 0.61%(d) 0.62%(c)(d)
Expenses,
excluding
distribution
fees............. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(d) 0.61% 0.62% 0.52%(d) 0.51%(d) 0.52%(c)(d)
Net investment
income........... 4.75%(d) 4.95%(d) 5.20%(d) 5.45%(d) 5.09% 5.46% 6.06%(d) 6.38%(d) 6.64%(c)(d)
Portfolio turnover
rate.............. 85% 110% 68% 64% 105% 85% 56% 51% 82%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
10
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS B SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
------------------------------------------------------------
CLASS B
------------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .49(b) .50(b) .54(b) .54(b) .54
Net realized and unrealized gain (loss) on
investment transactions......................... .40 .08 .11 .13 (.43)
-------- -------- -------- -------- --------
Total from investment operations.................. .89 .58 .65 .67 .11
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.49) (.50) (.54) (.54) (.54)
Distributions in excess of net investment
income.......................................... --(c) (.01) -- -- --
Distributions from capital gains.................. (.25) (.11) -- -- (.30)
-------- -------- -------- -------- --------
Total distributions............................... (.74) (.62) (.54) (.54) (.84)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (a):................................. 8.23% 5.32% 6.04% 6.40% 0.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $236,370 $298,005 $443,391 $567,648 $740,447
Average net assets (000).......................... $270,553 $365,891 $524,452 $660,237 $807,794
Ratios to average net assets:
Expenses, including distribution fees........... 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11%
Expenses, excluding distribution fees........... 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income........................... 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69%
Portfolio turnover rate........................... 85% 110% 68% 64% 105%
<CAPTION>
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.99 $ 10.76 $ 10.25 $ 10.54 $ 10.18
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .56 .62(b) .63(b) .67(b) .76(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .72 .25 .54 (.22) .42
-------- -------- -------- -------- --------
Total from investment operations.................. 1.28 .87 1.17 .45 1.18
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.56) (.62) (.63) (.67) (.76)
Distributions in excess of net investment
income.......................................... -- -- -- -- --
Distributions from capital gains.................. (.27) (.02) (.03) (.07) (.06)
-------- -------- -------- -------- --------
Total distributions............................... (.83) (.64) (.66) (.74) (.82)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (a):................................. 12.14% 8.24% 11.43% 4.36% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $770,060 $638,451 $578,412 $497,139 $447,101
Average net assets (000).......................... $705,846 $609,516 $537,275 $446,904 $160,158
Ratios to average net assets:
Expenses, including distribution fees........... 1.12% 1.02%(b) 1.01%(b) 0.85%(b) 0.22%(b)
Expenses, excluding distribution fees........... 0.62% 0.52%(b) 0.51%(b) 0.35%(b) 0.13%(b)
Net investment income........................... 5.06% 5.66%(b) 5.98%(b) 6.07%(b) 6.52%(b)
Portfolio turnover rate........................... 85% 56% 51% 82% 87%
</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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
(c) Less than $.005 per share.
11
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS C SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and the period August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
----------------------------------------
CLASS C
---------------------------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1, 1994(a)
---------------------------------------- THROUGH APRIL 30,
1998 1997 1996 1995
---------- ---------- ---------- ------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.91 $ 10.95 $ 10.84 $ 10.79
---------- ---------- ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .46(d) .48(d) .51(d) .39(d)
Net realized and unrealized gain (loss)
on investment transactions............ .40 .08 .11 .05
---------- ---------- ---------- ------
Total from investment operations........ .86 .56 .62 .44
---------- ---------- ---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.46) (.48) (.51) (.39)
Distributions in excess of net
investment income..................... --(e) (.01) -- --
Distributions from capital gains........ (.25) (.11) -- --
---------- ---------- ---------- ------
Total distributions..................... (.71) (.60) (.51) (.39)
---------- ---------- ---------- ------
Net asset value, end of period.......... $ 11.06 $ 10.91 $ 10.95 $ 10.84
---------- ---------- ---------- ------
---------- ---------- ---------- ------
TOTAL RETURN (b):....................... 7.96% 5.06% 5.78% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 1,509 $ 888 $ 1,137 $ 525
Average net assets (000)................ $ 1,142 $ 973 $ 827 $ 224
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees................................. 1.34%(d) 1.33%(d) 1.33%(d) 1.39%(c)(d)
Expenses, excluding distribution
fees................................. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(c)(d)
Net investment income................. 4.11%(d) 4.29%(d) 4.56%(d) 4.92%(c)(d)
Portfolio turnover rate................. 85% 110% 68% 64%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
12
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INSURED SERIES - CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period from September 16, 1996 through April
30, 1997 have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain
selected data for a Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information has been determined based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
---------------------------------
CLASS Z
---------------------------------
SEPTEMBER 16,
YEAR ENDED 1996(a)
APRIL 30, THROUGH
1998 APRIL 30, 1997
------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 10.91 $ 11.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................ .54(d) .36(d)
Net realized and unrealized gain (loss) on investment
transactions................................................... .39 (.02)
------ ------
Total from investment operations................................. .93 .34
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income............................. (.54) (.36)
Distributions in excess of net investment income................. --(e) (.01)
Distributions from capital gains................................. (.25) (.11)
------ ------
Total distributions.............................................. (.79) (.48)
------ ------
Net asset value, end of period................................... $ 11.05 $ 10.91
------ ------
------ ------
TOTAL RETURN (b):................................................ 8.68% 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................. $418 $15
Average net assets (000)......................................... $173 $10
Ratios to average net assets:
Expenses....................................................... 0.60%(d) 0.58%(c)(d)
Net investment income.......................................... 4.92%(d) 4.18%(c)(d)
Portfolio turnover rate.......................................... 85% 110%
</TABLE>
- -------------
(a) Commencement of offering of Class Z shares.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
13
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS A SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
----------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 10.59 $ 10.65 $ 10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98 $10.21
------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... .43(d) .46(d) .47(d) .51(d) .53 .54(d) .57(d) .59(d) .18(d)
Net realized and
unrealized gain
(loss) on investment
transactions......... .28 (.05) .20 (.03) (.19) .60 .26 .50 (.23)
------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations........... .71 .41 .67 .48 .34 1.14 .83 1.09 (.05)
------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment income.... (.43) (.46) (.47) (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in excess
of net investment
income............... -- (.01) -- (.01) -- -- -- -- --
Distributions from
capital gains........ (.06) -- -- (.18) (.22) (.11) (.15) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------
Total distributions.... (.49) (.47) (.47) (.70) (.75) (.65) (.72) (.59) (.18)
------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period............... $10.81 $10.59 $10.65 $10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
------- ------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN (b):...... 6.76% 3.86% 6.48% 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)......... $13,126 $13,740 $12,552 $10,507 $5,810 $3,594 $1,424 $397 $164
Average net assets
(000)................ $13,591 $13,487 $12,604 $7,742 $4,981 $1,883 $ 599 $305 $80
Ratios to average net
assets:
Expenses, including
distribution fees... 1.31%(d) 1.15%(d) 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d) 0.63%(c)(d)
Expenses, excluding
distribution fees... 1.21%(d) 1.05%(d) 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d) 0.53%(c)(d)
Net investment
income.............. 3.99%(d) 4.30%(d) 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d) 6.26%(c)(d)
Portfolio turnover
rate................. 54% 46% 35% 30% 55% 22% 78% 128% 91%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
14
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS B SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-------------------------------------------------------
CLASS B
-------------------------------------------------------
YEARS ENDED APRIL 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .39(b) .42(b) .43(b) .45(b) .48
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.04) (.19)
------- ------- ------- ------- -------
Total from investment operations.................. .67 .37 .63 .41 .29
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.39) (.42) (.43) (.45) (.48)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01) --
Distributions from capital gains.................. (.06) -- -- (.18) (.22)
------- ------- ------- ------- -------
Total distributions............................... (.45) (.43) (.43) (.64) (.70)
------- ------- ------- ------- -------
Net asset value, end of period.................... $ 10.81 $ 10.59 $ 10.65 $ 10.45 $ 10.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (a):................................. 6.33% 3.44% 6.05% 3.99% 2.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $24,017 $29,980 $40,550 $51,039 $65,215
Average net assets (000).......................... $27,175 $35,221 $46,127 $60,174 $59,811
Ratios to average net assets:
Expenses, including distribution fees........... 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40%
Expenses, excluding distribution fees........... 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income........................... 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23%
Portfolio turnover rate........................... 54% 46% 35% 30% 55%
<CAPTION>
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
<S> <C><C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.60 $ 10.48 $ 9.98 $ 10.17 $ 10.14
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .50(b) .53(b) .56(b) .62(b) .70(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .60 .27 .50 (.16) .09
------- ------- ------- ------- -------
Total from investment operations.................. 1.10 .80 1.06 .46 .79
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.50) (.53) (.56) (.62) (.70)
Distributions in excess of net investment
income.......................................... -- -- -- -- --
Distributions from capital gains.................. (.11) (.15) -- (.03) (.06)
------- ------- ------- ------- -------
Total distributions............................... (.61) (.68) (.56) (.65) (.76)
------- ------- ------- ------- -------
Net asset value, end of period.................... $ 11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (a):................................. 10.62% 7.68% 10.82% 4.61% 8.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $57,049 $45,401 $45,401 $47,838 $45,362
Average net assets (000).......................... $50,154 $44,439 $46,521 $46,246 $30,515
Ratios to average net assets:
Expenses, including distribution fees........... 1.46%(b) 1.46%(b) 1.32%(b) 0.83%(b) 0.15%(b)
Expenses, excluding distribution fees........... 0.96%(b) 0.96%(b) 0.82%(b) 0.33%(b) 0.05%(b
Net investment income........................... 4.69%(b) 5.01%(b) 5.52%(b) 6.03%(b) 6.59%(b)
Portfolio turnover rate........................... 22% 78% 128% 91% 135%
</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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
15
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS C SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the year
ended April 30, 1996 and the period August 1, 1994 through April 30, 1995. Each
of the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on
such financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1, 1994(a)
---------------------------------------- THROUGH APRIL 30,
1998 1997 1996 1995
---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.59 $ 10.65 $ 10.45 $ 10.54
---------- ---------- ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .36(d) .39(d) .40(d) .35(d)
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.08)
---------- ---------- ---------- ------
Total from investment operations................ .64 .34 .60 .27
---------- ---------- ---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.36) (.39) (.40) (.35)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01)
Distributions from capital gains.................. (.06) -- -- --
---------- ---------- ---------- ------
Total distributions............................... (.42) (.40) (.40) (.36)
---------- ---------- ---------- ------
Net asset value, end of period.................... $ 10.81 $ 10.59 $ 10.65 $ 10.45
---------- ---------- ---------- ------
---------- ---------- ---------- ------
TOTAL RETURN (b):................................. 6.07% 3.17% 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 449 $ 257 $ 225 $ 167
Average net assets (000).......................... $ 381 $ 149 $ 197 $ 28
Ratios to average net assets:
Expenses, including distribution fees........... 1.96%(d) 1.80%(d) 1.81%(d) 1.81%(c)(d)
Expenses, excluding distribution fees........... 1.21%(d) 1.05%(d) 1.06%(d) 1.06%(c)(d)
Net investment income........................... 3.33%(d) 3.65%(d) 3.71%(d) 4.34%(c)(d)
Portfolio turnover rate........................... 54% 46% 35% 30%
</TABLE>
- -----------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
16
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INTERMEDIATE SERIES - CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period September 1996 through April 30, 1997
have been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class Z share of common stock outstanding, total return, ratios to average net
assets and other supplemental data for the period indicated. This information
has been determined based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------
CLASS Z
----------------------------------------
SEPTEMBER 16,
1996(a)
YEAR ENDED THROUGH
APRIL 30, 1998 APRIL 30, 1997
-------------- --------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 10.59 $ 10.63
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income...................................................... .44(d) .31(d)
Net realized and unrealized gain (loss) on investment transactions......... .28 (.03)
------ ------
Total from investment operations........................................... .72 .28
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income....................................... (.44) (.31)
Distributions in excess of net investment income........................... -- (.01)
Distributions from capital gains (.06) --
------ ------
Total distributions........................................................ (.50) (.32)
------ ------
Net asset value, end of period............................................. $ 10.81 $ 10.59
------ ------
------ ------
TOTAL RETURN(b):........................................................... 6.86% 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................................ $ 1,194 $ 246
Average net assets (000)................................................... $ 447 $ 63
Ratios to average net assets:
Expenses................................................................. 1.21%(d) 1.05%(c)(d)
Net investment income.................................................... 4.09%(d) 4.65%(c)(d)
Portfolio turnover rate.................................................... 54% 46%
</TABLE>
- -------------
(a) Commencement of offering of Class Z shares.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
17
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVES AND POLICIES
THE FUND IS COMPRISED OF THREE SEPARATE DIVERSIFIED PORTFOLIOS--THE HIGH
INCOME SERIES, THE INSURED SERIES AND THE INTERMEDIATE SERIES--EACH OF WHICH IS
MANAGED INDEPENDENTLY. THE INVESTMENT OBJECTIVES OF THE SERIES ARE AS FOLLOWS:
(i) THE OBJECTIVE OF THE HIGH INCOME SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF
INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES, (ii) THE
OBJECTIVE OF THE INSURED SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF INCOME THAT
IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND (iii) THE OBJECTIVE OF THE INTERMEDIATE SERIES IS TO
PROVIDE A HIGH LEVEL OF INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL
INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information. Although each Series will
seek income that is eligible for exclusion from federal income taxes, a portion
of the dividends and distributions paid by each Series (and, in particular, the
High Income Series) may be treated as a preference item for purposes of the
alternative minimum tax. See "Taxes, Dividends and Distributions."
As with an investment in any mutual fund, an investment in any Series of this
Fund can decrease in value and you can lose money.
EACH SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING VOTING SECURITIES OF THE SERIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF THE SERIES
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
EACH SERIES PURSUES ITS INVESTMENT OBJECTIVE THROUGH THE SEPARATE INVESTMENT
POLICIES DESCRIBED BELOW. These policies differ with respect to the maturity and
quality of portfolio securities in which a Series may invest and can affect the
yield for each Series and the degree of market risk and credit risk to which
each Series is subject.
EACH SERIES WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING IN A
PORTFOLIO OF OBLIGATIONS ISSUED BY OR ON BEHALF OF STATES, TERRITORIES AND
POSSESSIONS OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA AND THEIR
POLITICAL SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH IS
GENERALLY ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXATION (MUNICIPAL
OBLIGATIONS OR MUNICIPAL SECURITIES). THE PORTFOLIO SECURITIES HELD BY EACH OF
THE SERIES WILL VARY WITH RESPECT TO YIELD, MARKET PRICE VOLATILITY AND QUALITY.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations generally vary inversely with interest rates. In
addition, lower rated municipal obligations typically provide a higher yield
than higher rated municipal obligations of similar maturity. However, lower
rated municipal obligations are also subject to a greater degree of risk with
respect to the ability of the issuer to meet the principal and interest payments
on the obligations (credit risk) and may also be subject to greater price
volatility due to the market perceptions of the creditworthiness of the issuer.
Insurance policies may be obtained to insure against credit risk, but not
against market risk. From time to time, a Series may own the majority of a
municipal obligation. Such majority-owned holdings may present additional market
and credit risks.
Municipal securities include bonds and notes issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is generally
eligible for exclusion from federal income tax. Municipal bonds are typically
issued to obtain funds for various public purposes, including the construction
of
18
<PAGE>
a wide range of public facilities such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets, water and sewer works and gas
and electric utilities. Municipal notes generally are used to finance short-term
capital needs and typically have maturities of one year or less.
DURING NORMAL MARKET CONDITIONS, THE ASSETS OF EACH SERIES WILL BE INVESTED SO
THAT IT WILL HAVE AT LEAST 80% OF ITS NET ASSETS INVESTED IN MUNICIPAL
OBLIGATIONS. However, when the Fund's investment adviser believes that market
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, a Series may hold more than 20% of its net assets in
cash, cash equivalents or investment grade taxable obligations, including
obligations that are generally exempt from state, but not federal, taxation.
Each Series may invest in municipal cash equivalents, such as floating rate
demand notes, municipal commercial paper and general obligation and revenue
notes, or in taxable cash equivalents, such as certificates of deposit, bankers'
acceptances and time deposits or other short-term taxable investments, such as
repurchase agreements. Each Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met.
THE HIGH INCOME SERIES
THE HIGH INCOME SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH
ARE RATED B OR BETTER BY MOODY'S INVESTORS SERVICE (MOODY'S) OR STANDARD &
POOR'S RATINGS GROUP (S&P) OR A SIMILAR NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION (NRSRO) AND WHICH GENERALLY HAVE MATURITIES IN EXCESS OF TEN YEARS
AT THE TIME OF PURCHASE, ALTHOUGH THE SERIES ALSO WILL INVEST IN MUNICIPAL
OBLIGATIONS HAVING MATURITIES RANGING FROM ONE YEAR TO TEN YEARS, PROVIDED THAT
THE WEIGHTED AVERAGE MATURITY OF THE SERIES' INVESTMENT PORTFOLIO REMAINS WITHIN
THE FIFTEEN TO THIRTY YEAR RANGE. Securities rated Baa by Moody's or BBB by S&P,
although considered to be investment grade, lack outstanding investment
characteristics and in fact have speculative characteristics as well. Securities
rated Ba or BB or lower by Moody's or S&P, respectively, are generally
considered to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal and are commonly referred to as junk bonds.
While such securities may have some quality and protective characteristics,
those are outweighed by large uncertainties or major risk exposures to adverse
conditions. See "Risk Factors Relating to Investing in High Yield Securities"
below and "Description of Security Ratings" in the Appendix. Subsequent to its
purchase by the Series, a municipal obligation may be assigned a lower rating or
cease to be rated. Such an event would not require the elimination of the issue
from the portfolio, but the investment adviser will consider such an event in
determining whether the Series should continue to hold the security in its
portfolio.
THE SERIES MAY ALSO INVEST IN MUNICIPAL SECURITIES WHICH ARE NOT RATED IF,
BASED UPON A CREDIT ANALYSIS BY THE FUND'S INVESTMENT ADVISER, THE INVESTMENT
ADVISER BELIEVES THAT SUCH SECURITIES ARE OF COMPARABLE QUALITY TO RATED
MUNICIPAL SECURITIES IN WHICH THE SERIES MAY INVEST. The High Income Series
normally can be expected to offer the highest yields of the three Series, but it
will also be subject to the greatest market and credit risk.
THE SERIES ALSO MAY INVEST IN SHORT-TERM MUNICIPAL OBLIGATIONS (I.E., CASH
EQUIVALENTS) THAT ARE, AT THE TIME OF PURCHASE, RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S (CURRENTLY MIG 1, MIG 2, MIG 3
AND MIG 4 FOR NOTES AND P-1, P-2 AND P-3 FOR COMMERCIAL PAPER) OR S&P (CURRENTLY
A-1, A-2 AND A-3 FOR COMMERCIAL PAPER AND SP-1 AND SP-2 FOR NOTES). See "Other
Investments and Policies--General" below.
The Series may also invest up to 10% of its total assets in debt securities of
financially troubled and operationally troubled obligors (distressed
securities). Financially troubled obligors include obligors involved in
bankruptcy or reorganization proceedings or financial restructurings or
otherwise in default on their obligations. Operationally troubled obligors are
ones experiencing poor operating results that may have severely depressed
earnings or have special competitive or product obsolescence problems.
The Series is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by S&P or Moody's
or having a comparable rating determined by another NRSRO, or in unrated
securities which, in the opinion of the investment adviser, are of equivalent
quality. See "Risk Factors Relating to Investing in High Yield Securities"
19
<PAGE>
below and the "Description of Security Ratings" in the Appendix. Such
lower-quality debt securities are considered to have speculative
characteristics, and involve greater risk of default or price changes due to
changes in the obligor's creditworthiness, or they may already be in default.
The market prices of these securities may fluctuate more than higher-quality
securities and may decline significantly in periods of general or regional
economic difficulty.
The Subadviser maintains a fixed-income research group which the Series'
portfolio manager may consult in managing the portfolio and in researching
financially troubled and operationally troubled obligors. The Series' portfolio
manager reviews on an ongoing basis financially troubled and operationally
troubled obligors, including prospective purchases and portfolio holdings of the
Series. The portfolio manager has broad access to research and financial
reports, data retrieval services and industry analysts.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. FIXED-INCOME
SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET PRINCIPAL
AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE SUBJECT
TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY AND THE
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER (MARKET RISK). Lower
rated (I.E., high yield) securities or non-rated securities of comparable
quality are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. The investment adviser considers both
credit risk and market risk in making investment decisions for the Series.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term trading.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Furthermore, changes in economic conditions and other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of higher grade bonds. In addition, the secondary market for
high yield securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated securities.
Under adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Series'
NAV. If the investment adviser becomes involved in activities such as
reorganizations of obligors of troubled investments held by the Series, this may
prevent the Series from disposing of the securities, due to its possession of
material, non-public information concerning the obligor.
Debt rated Ba, B, Caa, Ca and C by Moody's, and debt rated BB, B, CCC, CC and
C by S&P is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Among junk bonds,
Ba/BB indicates the lowest degree of speculation and C/D the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Debt rated C by S&P is the lowest rated debt
that is not in default as to principal or interest and such issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be subject
to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in payment
default. Moody's does not have a D rating. See the "Description of Security
Ratings" in the Appendix.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicated.
20
<PAGE>
From time to time proposals have been introduced to limit the use, or tax and
other advantages, of municipal securities which, if enacted, could adversely
affect the Series' NAV and investment practices. Such proposals could also
adversely affect the secondary market for high yield municipal securities, the
financial condition of issuers of these securities and the value of outstanding
high yield municipal securities. Reevaluation of the Series' investment
objective and structure might be necessary in the future due to market
conditions which may result from future changes in state or federal law.
LOWER RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the portfolio and increasing the
exposure of the Series to the risks of high yield securities.
During the year ended April 30, 1998, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
------------ -------------------
<S> <C>
AAA/Aaa 26.7%
AA/Aa 4.9%
A/A 0.8%
BBB/Baa 10.6%
BB/Ba 4.5%
B/B 1.9%
CCC/Caa 0.0%
Unrated
AAA/Aaa 2.7%
AA/Aa 0.0%
A/A 0.3%
BBB/Baa 3.0%
BB/Ba 14.1%
B/B 27.8%
CCC/Caa 0.5%
D 2.2%
</TABLE>
THE INSURED SERIES
THE INSURED SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH ARE
(i) INSURED BY AN ENTITY WHOSE CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS
RATED Aaa BY MOODY'S OR AAA BY S&P, OR A SIMILAR NRSRO, SO THAT THE OBLIGATION
IS RATED AAA OR Aaa OR MEETS THE ELIGIBILITY CRITERIA IMPOSED BY SUCH INSURERS,
(ii) RATED Aaa OR AAA BY MOODY'S OR S&P, RESPECTIVELY, OR A SIMILAR NRSRO (OR,
IN THE CASE OF NOTES OR VARIABLE RATE SECURITIES, A-1, P-1, MIG 1 OR SP-1),
BASED ON THE CREDIT OF THE ISSUER OR (iii) BACKED BY THE FULL FAITH AND CREDIT
OF THE U.S. GOVERNMENT. The Series may also invest up to 5% of its total assets
in municipal obligations which are rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. See "Description of Security Ratings" in the
Appendix. The Series may also invest in municipal securities which are not rated
if, based upon a credit analysis by the Fund's investment adviser, the
investment adviser believes that such securities are of comparable quality to
other municipal securities that the Series may purchase.
UNDER NORMAL CONDITIONS, AT LEAST 70% OF THE SERIES' TOTAL ASSETS WILL CONSIST
OF INSURED OBLIGATIONS. AS OF APRIL 30, 1998, APPROXIMATELY 90% OF THE SERIES'
TOTAL ASSETS WERE OBLIGATIONS INSURED BY A MUNICIPAL BOND INSURER. This
insurance may be provided either (i) under a new issue insurance policy obtained
by the issuer or underwriter of a bond or note or
21
<PAGE>
(ii) under a secondary market insurance policy on a particular bond or note
purchased either by the Series or a previous bondholder or noteholder. See
"Insurance" below. As noted above, the Series will acquire insurance only from,
and purchase municipal bonds and notes insured by, insurers whose claims-paying
ability is rated AAA or Aaa at the time of purchase. Changes in the financial
condition of an insurer could result in a subsequent reduction or withdrawal of
this rating. In each case, the insurance policies protect only against the
timely payment of principal and interest on the insured municipal bonds and
notes. The price of the municipal obligations, which may fluctuate due to
changes in interest rates generally or factors affecting the credit of the
insurer, and the stability of the Series' NAV are not insured.
INSURANCE. The Series may at times purchase secondary market insurance on
municipal bonds and notes which it holds or acquires. Secondary market insurance
would be reflected in the market value of the municipal obligation and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the municipal bonds and notes held by the Insured Series
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, I.E., the market value, of the municipal obligations caused by changes in
interest rates and other factors, nor in turn against fluctuations in the NAV of
the shares of the Insured Series.
The ratings of insured municipal obligations depend, in substantial part, on
the creditworthiness of the insurer; thus their value will fluctuate largely on
the basis of factors relating to the insurer's ability to satisfy its
obligations, as well as on market factors generally. It is anticipated that,
under current market conditions, a great majority of the municipal obligations
held by the Insured Series will be insured by the following entities, among
others: MBIA Insurance Corporation, AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company and Financial Security Assurance Inc. S&P rates
securities insured by all of these companies AAA. Moody's rates securities
insured by all of these companies Aaa. The Insured Series may, from time to
time, purchase municipal securities insured by other entities or acquire
insurance coverage for individual uninsured municipal securities directly from
another insurer provided any such entity has a claims-paying ability rated AAA
or Aaa by S&P or Moody's, respectively. See "Investment Objectives and
Policies--The Insured Series" in the Statement of Additional Information for
additional information concerning the insurers.
New issue insurance is obtained by the issuer or underwriter upon issuance of
a bond or note, and the insurance premiums are reflected in the price of such
bond or note. Insurance premiums with respect to secondary insurance may, on the
other hand, be paid by the Series. Premiums paid for secondary market insurance
will be treated as capital costs, increasing the cost basis of the investment
and thereby reducing the effective yield of the investment.
THE INTERMEDIATE SERIES
THE INTERMEDIATE SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WITH
MATURITIES BETWEEN 3 AND 15 YEARS AND WILL HAVE A DOLLAR-WEIGHTED AVERAGE
PORTFOLIO MATURITY OF MORE THAN 3 AND LESS THAN 10 YEARS. ALL OF THE MUNICIPAL
OBLIGATIONS HELD BY THE INTERMEDIATE SERIES WILL BE RATED AT LEAST Baa BY
MOODY'S OR BBB BY S&P OR A SIMILAR NRSRO AT THE TIME OF PURCHASE OR BE NON-RATED
OBLIGATIONS OF COMPARABLE QUALITY IN THE OPINION OF THE FUND'S INVESTMENT
ADVISER. Subsequent to its purchase by the Series, a municipal obligation may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the investment adviser will
consider such an event in determining whether the Series should continue to hold
the security in its portfolio. Under normal circumstances, at least 60% of the
municipal obligations purchased by the Series will be rated A or better by
Moody's or S&P or a similar NRSRO. See "Description of Security Ratings" in the
Appendix.
For purposes of determining the dollar-weighted average portfolio maturity of
the Series' portfolio, the maturity of a municipal security will be its ultimate
maturity, unless it is probable that the issuer of the security will take
advantage of maturity-shortening
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devices such as a call, refunding or redemption provision, in which case the
maturity date will be the date on which it is probable that the security will be
called, refunded or redeemed. If the municipal security includes the right to
demand payment, the maturity of the security for purposes of determining the
Series' dollar-weighted average portfolio maturity will be the period remaining
until the principal amount of the security can be recovered by exercising the
right to demand payment.
GENERALLY, THE YIELD EARNED ON LONGER-TERM MUNICIPAL OBLIGATIONS IS GREATER
THAN THAT EARNED ON SIMILAR OBLIGATIONS WITH SHORTER MATURITIES. HOWEVER,
OBLIGATIONS WITH LONGER MATURITIES ARE SUBJECT TO GREATER MARKET RISK. Given a
specific change in the level of interest rates, the value of longer-term
obligations will fluctuate relatively more than the value of shorter-term
obligations. For example, 30-year municipal obligations typically yield 60-90
basis points (.60%-.90%) more than 10-year obligations and have 60-70% more
price volatility (market risk) than 10-year obligations.
THE INTERMEDIATE SERIES INTENDS TO INVEST IN LONGER-TERM, HIGHER YIELDING
OBLIGATIONS AND REDUCE THE GREATER MARKET RISK OF SUCH OBLIGATIONS THROUGH THE
USE OF FINANCIAL FUTURES CONTRACTS. SPECIFICALLY, THE SERIES WILL INVEST IN
MUNICIPAL OBLIGATIONS WITH MATURITIES OF BETWEEN 5 AND 30 YEARS AND
SIMULTANEOUSLY HEDGE THE PRICE VOLATILITY OF SUCH OBLIGATIONS THROUGH THE SALE
OF FUTURES CONTRACTS. RATHER THAN HEDGING THE MUNICIPAL OBLIGATION ENTIRELY, THE
SERIES WILL SELL FUTURES CONTRACTS IN SUFFICIENT AMOUNTS SO THAT THE
DOLLAR-WEIGHTED AVERAGE MATURITY OF THE COMBINED MUNICIPAL OBLIGATION/FUTURES
POSITION WILL BE MORE THAN 3 AND LESS THAN 10 YEARS. IN THIS MANNER, THE
INVESTMENT ADVISER WILL CREATE A SYNTHETIC OBLIGATION THROUGH THE CONSTRUCTION
OF A PARTIALLY HEDGED LONGER-TERM OBLIGATION POSITION.
The Fund's investment adviser intends to create such synthetic obligation
positions when, in its opinion, the Series will realize one or more of the
following benefits compared to buying municipal obligations with shorter
maturities: (a) greater market liquidity; (b) lower transaction costs; (c)
greater expected capital appreciation or enhanced preservation of capital; or
(d) higher yields.
In the municipal securities market, most new issues are structured with many
serial maturities that are relatively small in principal amount and one or
several longer-term maturities that are relatively large in principal amount.
Therefore, long-term municipal obligations typically have greater liquidity and
the associated transaction costs are relatively less than obligations with
maturities of 3 to 15 years.
It is expected that synthetic obligation positions will often provide greater
returns than actual intermediate maturity municipal obligations. This can occur
when interest rate futures contracts are relatively overpriced in relation to
the current prices of municipal obligations, so that the sale of the futures
contracts, as part of a synthetic position, would be advantageous to the Series.
Synthetic positions can also be more attractive to the Series when the
investment adviser expects yields on longer-term municipal obligations to
decrease more (or increase less) than yields on medium-term municipal
obligations. If such expectations are correct, the net capital appreciation of
the synthetic obligation position should exceed (or the price decline be less
than) that of an actual intermediate-term municipal obligation.
THERE IS NO ASSURANCE THAT THE SYNTHETIC OBLIGATION POSITION WILL TRADE LIKE
AN INTERMEDIATE-TERM MUNICIPAL OBLIGATION. ANY USE OF FUTURES CONTRACTS INVOLVES
THE RISK OF IMPERFECT CORRELATION IN MOVEMENTS IN THE PRICE OF THE FUTURES
CONTRACTS AND MOVEMENTS IN THE PRICE OF THE SECURITY BEING HEDGED. FURTHERMORE,
THE SERIES' ABILITY TO CREATE SYNTHETIC OBLIGATIONS IS SUBJECT TO VARIOUS OTHER
LIMITATIONS. See "Hedging Strategies--Futures Contracts and Options Thereon"
below.
THE SERIES ALSO MAY USE FUTURES CONTRACTS TO HEDGE AGAINST OVERALL MARKET RISK
OF THE ENTIRE PORTFOLIO, as described under "Hedging Strategies--Futures
Contracts and Options Thereon" below.
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BORROWING
Each Series may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes and to take advantage of investment opportunities or for
the clearance of transactions. Each Series may pledge up to 33 1/3% of the value
of its total assets to secure these borrowings. If a Series' asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time.
If a Series borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the NAV of the
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on the money borrowed) to the Series,
the Series' NAV will decrease faster than would otherwise be the case. This is
the speculative factor known as leverage. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased and may exceed the income from the securities
purchased. In addition, the Fund may be required to maintain minimum average
balances in connection with such borrowing or pay a commitment fee to maintain a
line of credit which would increase the cost of borrowing over the stated
interest rate.
HEDGING STRATEGIES
FUTURES CONTRACTS AND OPTIONS THEREON
EACH SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF ATTEMPTING TO HEDGE ITS INVESTMENT IN MUNICIPAL OBLIGATIONS AGAINST
FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST RATES AND
ATTEMPTING TO HEDGE AGAINST INCREASES IN THE COST OF SECURITIES THE SERIES
INTENDS TO PURCHASE. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH
UNSUCCESSFUL USE OF THESE STRATEGIES. In that regard, the Intermediate Series
may sell futures contracts to create synthetic positions by partially hedging
longer-term obligation positions. See "Investment Objectives and Policies--The
Intermediate Series" above. The successful use of futures contracts and options
thereon by a Series involves additional transaction costs, is subject to various
risks and depends upon the investment adviser's ability to predict the direction
of the market and interest rates.
A FUTURES CONTRACT OBLIGATES THE SELLER OF A CONTRACT TO DELIVER TO THE
PURCHASER OF A CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made. A
Series will engage in transactions in only those futures contracts and options
thereon that are traded on a commodities exchange or a board of trade.
EACH SERIES INTENDS TO ENGAGE IN FUTURES CONTRACTS AND OPTIONS THEREON AS A
HEDGE AGAINST CHANGES, RESULTING FROM MARKET CONDITIONS, IN THE VALUE OF
SECURITIES WHICH ARE HELD IN THE SERIES' PORTFOLIO OR WHICH THE SERIES INTENDS
TO PURCHASE, IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE COMMODITY
FUTURES TRADING COMMISSION (THE CFTC). The Series also intend to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series. A Series may purchase and sell
futures contracts and options thereon for bona fide hedging transactions, except
that a Series may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the Fund's total assets.
In addition, a Series may not purchase or sell futures contracts or purchase
options thereon if, immediately thereafter, the sum of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options
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thereon, would exceed 20% of the total assets of the Series. There are no
limitations on the percentage of a portfolio which may be hedged and no
limitations on the use of a Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of a Series' assets.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. Futures
contracts are also available on a municipal bond index, based on THE BOND BUYER
Municipal Bond Index, an index of 40 actively traded municipal bonds. Each
Series may also engage in transactions in other futures contracts that become
available, from time to time, in other fixed-income securities or municipal bond
indices and in other options on such contracts if the investment adviser
believes such contracts and options would be appropriate for hedging investments
in municipal obligations.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
a Series, the Series will continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Series had insufficient cash, it might have to sell portfolio securities
to meet daily variation margin requirements at a time when it might be
disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of a Series to hedge effectively. There is
also a risk of loss by a Series of margin deposits in the event of bankruptcy of
a broker with whom the Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY A SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
RISKS OF HEDGING STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH A SERIES WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH UNSUCCESSFUL
USE OF THESE STRATEGIES. If the investment adviser's prediction of movements in
the direction of the securities and interest rate markets is inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures contracts
and options thereon include (1) dependence on the investment adviser's ability
to predict correctly movements in the direction of interest rates and securities
prices or the movement in indicies; (2) imperfect correlation between the price
of futures contracts and options thereon and movements in the prices of the
securities being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (5) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain cover or to segregate securities
in connection with hedging transactions. See "Investment Objectives and
Policies" in the Statement of Additional Information.
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OTHER INVESTMENTS AND POLICIES
GENERAL
EACH SERIES MAY INVEST MORE THAN 5% OF ITS ASSETS IN FLOATING RATE AND
VARIABLE RATE SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN. Floating
and variable rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
Bonds or Bills or the prime rate at a major commercial bank. These securities
also allow the holder to demand payment of the obligation on short notice at par
plus accrued interest, which amount may be more or less than the amount the
Series paid for them. Variable rate securities provide for a specified periodic
adjustment in the interest rate. The interest rate on floating rate securities
changes whenever there is a change in the designated base interest rate.
Each Series may also invest in inverse floaters. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect the
residual interest rate paid on the inverse floater, with the result that the
inverse floater's price will be considerably more volatile than that of a fixed
rate bond. The market for inverse floaters is relatively new.
Each Series may purchase a rating from an NRSRO for non-rated securities. The
purchase of a rating is expected to enhance the value of the security for which
the rating is purchased. The cost of purchasing a rating is an expense of the
Series.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Series may purchase municipal obligations on a when-issued or delayed
delivery basis and may from time to time sell obligations on a delayed delivery
basis, in each case without limit. When municipal obligations are offered on a
when-issued or delayed delivery basis, the price and coupon rate are fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. During the period between
purchase and settlement, no interest accrues to the purchaser. In the case of
purchases by a Series, the price that the Series is required to pay on the
settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, each Series intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment reasons.
At the time a Series makes the commitment to purchase a municipal obligation on
a when-issued basis, it will record the transaction and reflect the value of the
obligation, each day, in determining its NAV. This value may fluctuate from day
to day in the same manner as values of municipal obligations otherwise held by
the Series. If the seller defaults in the sale, the Series could fail to realize
the appreciation, if any, that had occurred. Each Series will establish a
segregated account in which it will maintain cash or other liquid assets having
a value equal to or greater than the Series' purchase commitments.
As in the case of purchases, the price of the municipal obligations sold on a
delayed delivery basis is determined at the time of the commitment. The price
that a Series may be required to accept on the settlement date may be less than
the market value of the obligation on that date.
Each Series may also purchase municipal forward contracts. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. The investment
adviser will monitor the liquidity, value, credit quality and delivery of the
security under the supervision of the Trustees.
MUNICIPAL LEASE OBLIGATIONS
Each Series may invest in municipal lease obligations. A municipal lease
obligation is a municipal security the interest on and principal of which is
payable out of lease payments made by the party leasing the facilities financed
by the issue. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities
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(E.G., schools, dormitories, office buildings or prisons) or the acquisition of
equipment. The facilities are typically used by the state or municipality
pursuant to a lease with a financing authority. Certain municipal lease
obligations may trade infrequently. Accordingly, the investment adviser will
monitor the liquidity of municipal lease obligations under the supervision of
the Trustees. See "Illiquid Securities" below.
LIQUIDITY PUTS
Each Series may purchase and exercise puts on municipal bonds and notes
without limit. Puts give the Series the right to sell the securities at a
specified exercise price on a specified date. Puts may be acquired to reduce the
volatility of the market value of the securities subject to the puts, but the
acquisition of the puts may involve an additional cost to the Series. See
"Investment Objectives and Policies" in the Statement of Additional Information.
REPURCHASE AGREEMENTS
Each Series may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Series at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the repurchase agreement. The Series' repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily and, if the value of
the instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. Each Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Commission.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Series may invest up to 10% of its total assets in securities of other
investment companies. To the extent that a Series does invest in securities of
other investment companies, shareholders of the Series may be subject to
duplicate management and advisory fees.
ILLIQUID SECURITIES
Each Series may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for purposes of this limitation. The Subadviser will
monitor the liquidity of such restricted securities under the supervision of the
Trustees. A Series' investment in Rule 144A securities could have the effect of
increasing illiquidity to the extent that qualified institutional buyers become,
for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
Municipal lease obligations will not be considered illiquid for purposes of
the each Series' 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
27
<PAGE>
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.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100%, determined daily, of the market value of the securities loaned which are
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
not lend more than 33% of the value of its total assets. See "Investment
Objectives and Policies--Municipal Securities--Lending of Securities" in the
Statement of Additional Information. The Fund may pay reasonable administration
and custodial fees in connection with a loan.
PORTFOLIO TURNOVER
The Series do not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of a Series'
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover (over 100%) of a Series
may involve correspondingly greater brokerage commissions (or markups) and other
transaction costs, which will be borne directly by that Series. In addition,
high portfolio turnover may result in increased short-term capital gains, which,
when distributed to shareholders, are treated as ordinary income.
INVESTMENT RESTRICTIONS
Each Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of each
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended April 30, 1998, the total expenses as a percentage
of average net assets were .62%, 1.02%, 1.27% and .52% of the Class A, Class B,
Class C and Class Z shares, respectively, of the High Income Series, .69%,
1.09%, 1.34% and .60% of the Class A, Class B, Class C and Class Z shares,
respectively, of the Insured Series, and 1.31%, 1.71%, 1.96% and 1.21% of the
Class A, Class B, Class C and Class Z shares, respectively, of the Intermediate
Series. See "Financial Highlights."
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF EACH SERIES UP TO $1 BILLION AND .45 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF EACH SERIES IN EXCESS OF $1 BILLION. PIFM is
organized in New York as a limited liability company. It is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to PIFM in
September 1996. For the fiscal year ended April 30, 1998, PIFM received a
management fee of .45%, .48% and .48% of average daily net assets on behalf of
the High Income Series, Insured Series and Intermediate Series, respectively.
See "Manager" in the Statement of Additional Information.
PIFM may from time to time waive its management fee and subsidize operating
expenses of a Series. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized), with respect to
the High Income Series. See "Fund Expenses." The Fund is not required to
reimburse PIFM for such fee waiver. Fee waivers and expense subsidies will
increase a Series' yield and total return. See "How the Fund Calculates
Performance."
As of May 31, 1998, PIFM served as the manager to 45 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $65 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), THE SUBADVISER FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM
FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIC's
address is Prudential Plaza, Newark, New Jersey 07102-3777. Under the Management
Agreement, PIFM continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises the Subadviser's
performance of such services.
The current portfolio manager of the High Income Series is Peter J. Allegrini,
a Managing Director of Prudential Investments, a business group of PIC. Mr.
Allegrini has managed the Series' portfolio since July 1994. From 1982 to 1986,
he was employed by Fidelity Investments as a senior bond analyst and, from 1986
to 1994, he was a portfolio manager, most recently of Fidelity Advisor High
Income Municipal Fund, and has been employed by PIC since 1994. Mr. Allegrini
has responsibility for the day-to-day management of the Series' portfolio. The
current portfolio manager of the Insured Series is Christian Smith. Mr. Smith
has responsibility for the day-to-day management of the Series' portfolio. He
has managed the Series' portfolio since October 1997 and has been employed by
PIC in various capacities since 1988. The current portfolio managers of the
Intermediate Series are Peter Allegrini and Mr. Diamond, who share
responsibility for the day-to-day management of the Series' portfolio. They have
managed the portfolio since October 1997. Mr. Diamond has been employed by PIC
in various capacities since 1993.
PIFM and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE SHARES OF EACH SERIES OF THE FUND. IT IS A
WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities, One Seaport Plaza,
New York, New York 10292, previously served as distributor of Fund shares. It is
an indirect, wholly-owned subsidiary of Prudential.
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<PAGE>
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
CLASS A, CLASS B AND CLASS C SHARES. THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF
WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These expenses include
commissions and account servicing fees paid to, or on account of, Dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
the Distributor associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses. Certain Dealers are paid
higher fees than others with respect to Class A shares pursuant to separate
agreements with the Distributor.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by Dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, EACH SERIES MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of up to .25 of 1%) may not exceed
.30 of 1% of the average daily net assets of the Class A shares.
UNDER THE CLASS B AND CLASS C PLANS, EACH SERIES MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .50 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholders accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended April 30, 1998, each Series paid distribution
expenses of .10%, .50% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Series record all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of each Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not interested persons of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
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Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Series at any time by vote of a majority of the Rule 12b-1 Trustees
or of a majority of the outstanding shares of the applicable class of the
Series. The Series will not be obligated to pay distribution and service fees
incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to Dealers and other persons which distribute
shares of the Fund (including Class Z shares). Such payments may be calculated
by reference to the NAV sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time voluntarily waive all or a portion of its
management fee and subsidize all or a portion of the operating expenses of the
Fund. Effective August 31, 1997, PIFM discontinued its waiver of 10% of its
management fee related to the Insured Series and Intermediate Series. The
Distributor has voluntarily waived a portion of its distribution fees for the
Class A and Class C shares as described under "Fund Expenses." Fee waivers and
expense subsidies will increase the Fund's total return. Any such waivers may be
terminated at any time without prior notice to shareholders. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities and cash
of each Series and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records for
the Fund. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is P.O.
Box 15005, New Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000 and expect that their systems, and those of
outside service providers, will be adapted in time for that event.
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HOW THE FUND VALUES ITS SHARES
EACH SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE SERIES'
NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. Securities may also be valued based on
values provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
Each Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declare dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
TOTAL RETURN (INCLUDING AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN)
OF A SERIES IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The yield refers to the income generated by an investment in a Series over a
30-day period. This income is then annualized; that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The tax equivalent yield is calculated
similarly to the yield, except that the yield is increased using a stated income
tax rate to demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to a Series. The total return shows how much an investment in a
Series would have increased (decreased) over a specified period of time (I.E.,
one, five or ten years or since inception of the Series) assuming that all
distributions and dividends by the Series were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the shares of each Series. Such performance information
may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals and market
indices. See "Performance Information" in the Statement of Additional
Information. Further performance information is contained in the Series' annual
and semi-annual reports to shareholders, which may be obtained without charge.
See "Shareholder Guide-- Shareholder Services--Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
EACH SERIES OF THE FUND HAS QUALIFIED AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, EACH
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET TAXABLE INVESTMENT
INCOME AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
TO THE EXTENT NOT DISTRIBUTED BY A SERIES, NET TAXABLE INVESTMENT INCOME AND
CAPITAL GAINS ARE TAXABLE TO THE SERIES. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
To the extent a Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent a Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
capital gain or loss. Capital gain or loss may also arise upon the sale of
municipal securities, as well as taxable obligations. Under the Internal Revenue
Code, special rules apply to the treatment of certain options and futures
contracts (Section 1256 contracts). At the end of each year, such investments
held by the Series will be required to be marked to market for federal income
tax purposes; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on these deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by each Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of each Series' net assets will be
invested in such obligations. See "How the Fund Invests--Other Investments and
Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any capital gains (I.E., the excess of net capital gains from the sale of assets
held for more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
Any gain or loss realized upon the sale or redemption of a Series' shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital gain if the shares were held for not more than 12 months,
gain taxable at the maximum rate of 28% if such shares were held for more than
12, but not more than 18 months, and gain taxable at the maximum rate of 20% if
such shares were held for more than 18 months. In the case of a corporation, any
such capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary
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income, if such shares were held for more than 12 months. Any such capital loss
will be treated as long-term capital loss if the shares have been held for more
than one year and otherwise as short-term capital loss. Any loss realized by a
shareholder upon the sale of shares of a Series held by the shareholder for six
months or less will be disallowed to the extent of any exempt interest dividends
received with respect to such shares and treated as long-term capital loss to
the extent of capital gains distributions received by the shareholder.
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.
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.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by a Series which has invested in
such municipal obligations will be attributed to the Series' shareholders,
although some portion of such items could be allocated to the Series itself.
Depending upon each shareholder's individual circumstances, the attribution of
items of tax preference incurred by a Series could result in liability for the
shareholder for the alternative minimum tax. Similarly, a Series could be liable
for the alternative minimum tax for items of tax preference attributed to it.
With the exception of the High Income Series, the Fund intends to minimize the
investment of each Series in municipal obligations of the type that will produce
items of tax preference. With respect to the High Income Series, however, it is
anticipated that a substantial portion of the Series' assets will be invested in
such obligations.
Distributions relating to interest on all municipal obligations will be
included in a corporate shareholder's current earnings for purposes of the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state, local or foreign taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholders' status under the federal
income tax law. Withholding generally is also required on taxable dividends and
capital gains distributions made by a Series.
Dividends of net investment income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends
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<PAGE>
paid to a foreign shareholder are generally not subject to withholding tax. A
foreign shareholder will, however, be required to pay U.S. income tax on any
dividends and capital gain distributions which are effectively connected with a
U.S. trade or business of the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by each Series with respect to each class of shares, to
the extent dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A shares
and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF A SERIES
BASED ON THE NAV OF EACH CLASS ON THE PAYMENT DATE, OR SUCH OTHER DATE AS THE
TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
Any taxable dividends or distributions of net capital gains paid shortly after
a purchase by an investor will have the effect of reducing the NAV of the
investor's shares by the per share amount of the dividends or distributions.
Such dividends or distributions, although in effect a return of invested
principal, are subject to federal income taxes. Accordingly, prior to purchasing
shares of a Series, an investor should carefully consider the impact of taxable
dividends and capital gains distributions which are expected to be or have been
announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z. 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
(except for Class Z shares, which are not subject to any sales charges or
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its 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, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively to a limited group of investors. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes of shares
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine.
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Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
each Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of beneficial
interest in each Series is entitled to its portion of all of the Fund's assets
after all debt and expenses of the Fund have been paid. Since Class B and Class
C shares bear higher distribution expenses than Class A shares, the liquidation
proceeds to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the Commission under
the Securities Act of 1933. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
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SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF EACH SERIES OF THE FUND THROUGH THE DISTRIBUTOR,
THROUGH DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE
FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR
THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW
BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs sponsored by
Prudential Retirement Services should contact their client representative for
more information about Class Z shares. The purchase price is the NAV next
determined following receipt of an order in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors
accounts) by the Distributor, your Dealer or the Transfer Agent, plus a sales
charge which, at your option, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares are offered to a limited group of investors at NAV without any sales
charge. Payments may be made by wire, check or through your brokerage account.
See "Alternative Purchase Plan" below. See also "How the Fund Values its
Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum initial investment for Class C
shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no minimum. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from the Transfer Agent or the Distributor
(Class A shares only). If a share certificate is desired, it must be requested
in writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Dealers may charge their customers a separate fee for processing purchases and
redemptions. In addition, transactions in Fund shares may be subject to postage
and handling charges imposed by your Dealer. Any such charges are retained by
the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Bond Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares) and the name of
the Series.
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If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of a Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Bond
Fund, the name of the Series, Class A, Class B, Class C or Class Z shares and
your name and individual account number. It is not necessary to call PMFS to
make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL
SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF
THE PURCHASE AND THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER
RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of each Series and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees (with
the exception of Class Z shares, which are not subject to any distribution or
service fees), which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to its
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, and (iii) only Class B shares have a conversion feature. The
four classes also have separate exchange privileges. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee (if any) of each class. Class B and Class C shares bear the expenses of a
higher distribution fee which will generally cause them to have higher expense
ratios and to pay lower dividends than the Class A and Class Z shares.
Dealers, financial advisers and other sales agents who sell shares of the
Series will receive different compensation for selling Class A, Class B, Class C
and Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.
38
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in a Series for less than 5 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 3% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 5 years and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fee on Class A shares. This does not take
into account the time value of money, which further reduces the impact of the
higher Class C distribution-related fee on the investment, fluctuations in NAV,
the effect of the return on the investment over this period of time or
redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------ ---------------- ---------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
39
<PAGE>
The Distributor may reallow the entire initial sales charge to Dealers.
Dealers may be deemed to be underwriters, as that term is defined under the
federal securities laws. The Distributor reserves the right, without prior
notice to any Dealer, to suspend or eliminate Dealer concessions or commissions.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
may pay Dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
OTHER WAIVERS. Class A shares may be purchased at NAV, through the
Distributor, Dealers or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an employee related account at Prudential
Securities or the Transfer Agent, (c) employees of subadvisers of the Prudential
Mutual Funds provided that the purchases at NAV are permitted by such person's
employer, (d) Prudential employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service with
Prudential or one of its subsidiaries, (e) registered representatives and
employees of Dealers who have entered into a selected dealer agreement with the
Distributor provided that purchases at NAV are permitted by such person's
employer and (f) investors who have a business relationship with a financial
adviser who joined Prudential Securities from another investment firm, provided
that (i) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities or within one year in
the case of benefit plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Distributor, your Dealer or the Transfer Agent.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to Dealers, financial advisers and other persons who sell Class B shares
at the time of sale from its own resources. This facilitates the ability of the
Fund to sell the Class B shares without an initial sales charge being deducted
at the time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor." In connection with
the sale of Class C shares, the Distributor will pay, from its own resources,
Dealers, financial advisers and other persons which distribute Class C shares a
sales commission of up to 1% of the purchase price at the time of the sale.
40
<PAGE>
CLASS Z SHARES
Class Z shares of the Fund are currently available for purchase by the
following categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay Dealers, financial advisers and other persons
which distribute shares a finders' fee, from its own resources, based on a
percentage of the NAV of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF EACH SERIES OF THE FUND AT ANY TIME FOR CASH AT
THE NAV NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
(IN ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, DISTRIBUTOR, OR YOUR DEALER.
SEE "HOW THE FUND VALUES ITS SHARES." In certain cases, however, redemption
proceeds will be reduced by the amount of any applicable CDSC as described
below. See "Contingent Deferred Sales Charges" below. If you are redeeming your
shares through a Dealer, your Dealer must receive your sell order before the
Fund computes its NAV for that day (I.E., 4:15 P.M., New York time) in order to
receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER. IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A
WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS
REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN
THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
eligible guarantor institution. An eligible guarantor institution includes any
bank, broker, dealer or credit union. The Transfer Agent reserves the right to
request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
41
<PAGE>
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the Commission, by order, so permits, provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of a
Series, in lieu of cash, in conformity with applicable rules of the Commission.
Securities will be readily marketable and will be valued in the same manner as a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during
any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a NAV of less
than $500 due to a redemption. The Fund will give such shareholders 60 days'
prior written notice in which to purchase sufficient additional shares to avoid
such redemption. No CDSC will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of a Series of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a PRO RATA basis. You must notify the Transfer Agent,
either directly or through the Distributor or your Dealer, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of any gain or loss realized upon redemption.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a CDSC declining from 5% to
zero over a six-year period. Class C shares redeemed within one year of purchase
will be subject to a 1% CDSC. The CDSC will be deducted from the redemption
proceeds and reduce the amount paid to you. The CDSC will be imposed on any
redemption by you which reduces the current value of your Class B or Class C
shares of a Series of the Fund to an amount which is lower than the amount of
all payments by you for shares of the Series during the preceding six years, in
the case of Class B shares, and one year, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of Contingent Deferred Sales Charges--Class B
Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
42
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------- ------------------------
<S> <C>
First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 1.0%
Sixth.......................... 1.0%
Seventh........................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability. In addition, the CDSC will be waived on redemptions of
shares held by a Trustee of the Fund.
You must notify the Transfer Agent either directly or through your Dealer, at
the time of redemption, that you are entitled to waiver of the CDSC and provide
the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer
43
<PAGE>
Agent will calculate the total amount available for this waiver annually on the
anniversary date of your purchase, or for shares purchased prior to March 1,
1997, on March 1 of the current year. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% amount is reached.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative NAV without the imposition of any additional sales charge. The first
conversion of Class B shares occurred in February 1995, when the conversion
feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs, the number of Eligible Shares calculated as
described above will generally be either more or less than the number of shares
actually purchased approximately seven years before such conversion date. For
example, if 100 shares were initially purchased at $10 per share (for a total of
$1,000) and a second purchase of 100 shares was subsequently made at $11 per
share (for a total of $1,100), 95.24 shares would convert approximately seven
years from the initial purchase (I.E., $1,000 divided by $2,100 (47.62%),
multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the NAV of the Class A shares may be higher than that of the Class B
shares at the time of conversion. Thus, although the aggregate dollar value will
be the same, you may receive fewer Class A shares than Class B shares converted.
See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute preferential dividends under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
44
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND AND OF ANOTHER FUND ON THE
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds or two Series next determined after the request is
received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV, on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another Dealer that they are
eligible for this special exchange privilege.
45
<PAGE>
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund, including the Fund, reserves the right
to refuse purchase orders and exchanges by any person, group or commonly
controlled accounts, if, in the Manager's sole judgment, such person, group or
accounts were following a market timing strategy or were otherwise engaging in
excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENTS OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
your Dealer, you should contact your financial adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or brokerage account (including a Command Account). For
additional information about this service, you may contact the Distributor, your
Dealer or the Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at
(732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
46
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations I.E.,
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.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable strength
of the preceding grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues with the A-3 designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. Municipal notes are rated SP-1, SP-2 or SP-3. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
Those issues determined to possess extremely strong characteristics are given a
plus (+) designation. An SP-2 designation indicates a satisfactory capacity to
pay principal and interest. An SP-3 designation indicates speculative capacity
to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.
The Global Total Return Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- -TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No Dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................. 2
What are the Series' Risk Factors and Special Characteristics?............ 2
FUND EXPENSES............................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
HOW THE FUND INVESTS........................................................ 18
Investment Objectives and Policies........................................ 18
Hedging Strategies........................................................ 24
Other Investments and Policies............................................ 26
Investment Restrictions................................................... 28
HOW THE FUND IS MANAGED..................................................... 28
Manager................................................................... 29
Distributor............................................................... 29
Fee Waivers and Subsidy................................................... 31
Portfolio Transactions.................................................... 31
Custodian and Transfer and Dividend Disbursing Agent...................... 31
Year 2000................................................................. 31
HOW THE FUND VALUES ITS SHARES.............................................. 32
HOW THE FUND CALCULATES PERFORMANCE......................................... 32
TAXES, DIVIDENDS AND DISTRIBUTIONS.......................................... 33
GENERAL INFORMATION......................................................... 35
Description of Shares..................................................... 35
Additional Information.................................................... 36
SHAREHOLDER GUIDE........................................................... 37
How to Buy Shares of the Fund............................................. 37
Alternative Purchase Plan................................................. 38
How to Sell Your Shares................................................... 41
Conversion Feature--Class B Shares........................................ 44
How to Exchange Your Shares............................................... 45
Shareholder Services...................................................... 46
DESCRIPTION OF SECURITY RATINGS............................................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY........................................... B-1
</TABLE>
- -------------------------------------------
MF133A
CUSIP Nos.:
Class A: 74435L103; Class B: 74435L202
High Income Series Class C: 74435L707 Class Z: 74435L871
Class A: 74435L301; Class B: 74435L400
Insured Series Class C: 74435L806 Class Z: 74435L863
Class A: 74435L509; Class B: 74435L608
Intermediate Series Class C: 74435L889 Class Z: 74435L855
PRUDENTIAL
MUNICIPAL
BOND FUND
- -----------
HIGH INCOME SERIES
INSURED SERIES
INTERMEDIATE SERIES
PROSPECTUS
July 1, 1998
www.prudential.com
--------------------------
[LOGO]
<PAGE>
Supplement dated July 1, 1998
THE FOLLOWING INFORMATION SUPPLEMENTS YOUR PROSPECTUS:
Effective July 1, 1998, Prudential Investment Management Services LLC,
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, was
appointed the exclusive Distributor of Fund shares. Shares continue to be
offered through Prudential Securities Incorporated, Pruco Securities
Corporation and other brokers and dealers. Prudential Investment Management
Services is a wholly owned subsidiary of The Prudential Insurance Company of
America and an affiliate of Prudential Securities Incorporated and Pruco
Securities Corporation. All other arrangements with respect to the
distribution of Fund shares described in the Prospectus remain unchanged.
<PAGE>
Supplement dated September 1, 1998
The following information should be added to the cover page of the
Prospectus.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
The following information should be added under the heading "Shareholder
Guide--Shareholder Services".
SHAREHOLDER GUIDE
SHAREHOLDER SERVICES
THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential makes
available optional group term life insurance coverage to purchasers of shares of
certain Prudential Mutual Funds which are held in an eligible brokerage account.
This insurance protects the value of your mutual fund investment for your
beneficiaries against market downturns. The insurance benefit is based on the
difference at the time of the insured's death between the "protected value" and
the then current market value of the shares. This coverage is not available in
all states and is subject to various restrictions and limitations. For more
complete information about this program, including charges and expenses, please
contact your Prudential representative.
<PAGE>
[LOGO]
PRUDENTIAL MUNICIPAL SERIES FUND/MARYLAND AND MICHIGAN SERIES
PRUDENTIAL MUNICIPAL BOND FUND/INTERMEDIATE SERIES
October , 1998
Dear Shareholder:
You may be aware that the Trustees of Prudential Municipal Series Fund/Maryland
Series and Michigan Series and the Trustees of Prudential Municipal Bond
Fund/Intermediate Series have recently approved a proposal to exchange the
assets and liabilities of your Series for shares of Prudential National
Municipals Fund. The enclosed proxy materials describe this proposal in detail.
If the proposal is approved by the shareholders and implemented, you will
automatically receive shares of Prudential National Municipals Fund in exchange
for your share of each Series.
THE TRUSTEES AND I STRONGLY RECOMMEND THAT YOU VOTE FOR THE PROPOSAL. WE BELIEVE
THAT THIS TRANSACTION SERVES YOUR INTERESTS IN THE FOLLOWING WAYS:
SIMILAR STRATEGIES--GREATER FLEXIBILITY
The Funds' investment objectives and strategies, while not identical, are
similar. Each invests primarily in investment grade, tax-exempt municipal
bonds. While Maryland and Michigan Series seek to provide income exempt
from federal and Maryland and Michigan state income taxes, respectively,
Prudential National Municipals Fund seeks income exempt from only federal
income taxes. Increasingly, single state series have had difficulty finding
attractive issues due to a shrinking municipal bond supply--making
portfolio diversification a challenge. In contrast, Prudential National
Municipals Fund is nationally diversified, enabling it to invest in a wider
range of municipal bond investment opportunities.
EXPENSE LEVELS
The Series have relatively few assets and have not been able to attract new
assets. They operated with relatively high expense ratios before voluntary
management fee waivers, which were discontinued by the Manager as of
September 1, 1997.
POTENTIAL FOR HIGHER INCOME GENERALLY EXEMPT INCOME TAXES
The municipal obligations held by National Municipals Fund have
historically had a higher gross yield than the obligations in the Series'
portfolios and National Municipals Fund has lower expense ratios than the
Series due to its appreciably larger size.
PRUDENTIAL NATIONAL MUNICIPALS FUND'S investment objective is to seek a high
level of current income exempt from federal income taxes by investing in a
broadly diversified portfolio of municipal bonds issued from across the country.
Portfolio manager Peter Allegrini has over 19 years of investment experience.
PLEASE READ THE ENCLOSED MATERIALS CAREFULLY FOR MORE COMPLETE INFORMATION. Your
vote is important, no matter how many shares you own. Voting your shares early
may permit your Series to avoid costly follow-up mail and telephone
solicitation. After you have reviewed the enclosed materials, please complete,
date and sign your proxy card and mail it in the enclosed postage-paid return
envelope today.
SAVE TIME AND POSTAGE COSTS. Help us save time and postage costs (savings that
we can pass on to you) by voting through the internet or via a touch tone phone.
Each method is generally available 24 hours per day. If you are voting via these
methods, you do not need to return your proxy card.
TO VOTE BY INTERNET, FOLLOW THESE INSTRUCTIONS:
Read your proxy statement and have your proxy card available.
Go to website www.proxyvote.com
Enter your 12 digit control number found on your proxy card.
Follow the simple instructions found at the website.
TO VOTE BY TELEPHONE, FOLLOW THESE INSTRUCTIONS:
Read your proxy statement and have your proxy card available.
Call the toll free number shown on your proxy card.
Enter your 12 digit control number found on your proxy card.
Follow the simple recorded instructions
SHAREHOLDERS ON SYSTEMATIC ACCUMULATION PLANS SHOULD CONTACT THEIR FINANCIAL
ADVISOR OR CALL PRUDENTIAL MUTUAL FUNDS CUSTOMER SERVICE DIVISION
(1-800-225-1852) TO CHANGE THEIR OPTIONS. IF NO CHANGE IS MADE BY NOV 20, 1998,
FUTURE PURCHASES WILL BE MADE IN SHARES OF PRUDENTIAL NATIONAL MUNICIPALS FUND.
SHAREHOLDERS WITH CERTIFICATES OUTSTANDING SHOULD CONTACT THEIR FINANCIAL
ADVISOR OR CALL PRUDENTIAL MUTUAL FUNDS CUSTOMER SERVICE DIVISION
(1-800-225-1852) TO DEPOSIT THEIR CERTIFICATES.
We value your investment and thank you for the confidence you have placed in
Prudential Mutual Funds.
Sincerely,
Brian M. Storms
PRESIDENT, PRUDENTIAL MUTUAL FUNDS AND ANNUITIES
Prudential Municipal Series Fund and Prudential Municipal Bond Fund, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 09102-4077
