<PAGE>
As filed with the Securities and Exchange Commission on November 7, 2000
Securities Act Registration No. 333-46832
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
(Check appropriate box or boxes)
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
(Exact name of registrant as specified in charter)
(973) 367-7521
(Area Code and Telephone Number)
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Number, Street, City, State, Zip Code)
DEBORAH A. DOCS
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
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.
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 registered on Form N-1A (File No. 2-66407).
TITLE OF SECURITIES BEING REGISTERED . . . .SHARES OF COMMON STOCK, PAR VALUE
$.01 PER SHARE
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Facing Page
Contents of Registration Statement
President's Letter to Shareholders
Notice of Special Meeting
Part A - Proxy Statement and Prospectus (Attachment A - Agreement and
Plan of Reorganizations)
Forms of Proxy Cards
Part B - Statement of Additional Information
Part C - Other Information
Exhibits
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
NORTH CAROLINA SERIES
OHIO SERIES
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
November 3, 2000
Dear Shareholder:
I am writing to ask you to vote on important proposals that would
effectively merge each of Massachusetts Series, North Carolina Series and Ohio
Series of Prudential Municipal Series Fund into Prudential National Municipals
Fund, Inc. A shareholder meeting of your Series is scheduled for December 7,
2000. This package contains information about the proposals and includes
materials you will need to vote. The Board of Trustees of the Prudential
Municipal Series Fund has reviewed the proposal with respect to each Series, and
has recommended that it be presented to shareholders for their consideration.
Although the Trustees have determined that each merger proposal is in the best
interest of shareholders of each Series, the final decision is up to you.
If approved, each merger would give you the opportunity to participate in a
larger fund with similar investment policies. In addition, shareholders are
expected to realize a reduction in the annual operating expenses paid on their
investment in the combined fund. To help you understand the proposals, we are
including a "Q and A" that answers common questions about the proposed
transactions. The accompanying proxy statement includes a detailed description
of each proposal. Please read the enclosed materials carefully and cast your
vote. Remember, your vote is extremely important, no matter how large or small
your holdings. By voting now, you can help avoid additional costs that would be
incurred with follow-up letters and calls.
TO VOTE, YOU MAY USE ANY OF THE FOLLOWING METHODS:
- BY MAIL. You can vote your shares by completing and signing the enclosed
proxy card, and mailing it in the enclosed postage paid envelope. If you
need any assistance, or have any questions regarding a proposal or how to
vote your shares, please call Prudential at (800) 225-1852.
- BY INTERNET. You may also vote via the internet. To do so, have your
proxy card available and go to the website: www.proxyvote.com. Follow the
instructions on the website and be prepared to enter your 12 digit control
number from your proxy card to enter your vote.
- BY TELEPHONE. Finally, you may vote by telephone by calling (800)
690-6903 toll free. Enter your 12 digit control number from your proxy
card and follow the instructions given.
If you have any questions before you vote, please call us at
(800) 225-1852. We are glad to help you understand the proposals and assist you
in voting. Thank you for your participation.
Very truly yours,
John R. Strangfeld, Jr.
PRESIDENT
<PAGE>
IMPORTANT INFORMATION TO HELP YOU UNDERSTAND AND VOTE ON THE PROPOSALS
Please read the enclosed proxy statement for a complete description of the
proposals. As a quick reference, the following provides a brief overview of the
proposals.
WHAT PROPOSAL AM I BEING ASKED TO VOTE ON?
These proxy materials relate to three mergers -- Massachusetts Series, North
Carolina Series and Ohio Series, each a series of Prudential Municipal Series
Fund, into Prudential National Municipals Fund (National Municipals Fund). You
are being asked to approve only the merger of your Series into Prudential
National Municipals Fund. When we refer to a "merger," we mean the transfer of a
Series' assets to, and the assumption of its liabilities by, Prudential National
Municipals Fund, in exchange for shares of Prudential National Municipals Fund.
The shareholders of each Series will vote separately on whether to approve the
merger of their Series into Prudential National Municipals Fund. The Merger of a
Series is not contingent on the Merger of any other Series.
WHAT ARE THE REASONS FOR THESE MERGERS?
The proposed mergers are intended to combine similarly managed funds,
resulting in what are expected to be overall lower expenses. The mergers are
also desirable because of the inability of any Series to attract investors and
build an investment portfolio that can effectively pursue the Series' respective
objective at a reasonable cost to shareholders. Both the assets and the number
of shareholders of each Series have been declining for a number of years. As of
June 30, 2000, the assets and the number of shareholder accounts of
Massachusetts Series, North Carolina Series and Ohio Series declined to
approximately $35.3 million and 1,214, $39.4 million and 1,280, and $62.0
million and 1,280, respectively. The small and declining asset base of each
Series has resulted in relatively high expense ratios and prevents each Series
from enjoying the economies of scale of National Municipals Fund. National
Municipals Fund, which is a substantially larger fund than the Series, will
provide a larger asset base over which fixed expenses can be spread, resulting
in lower expense ratios for shareholders of each Series.
DO THE SERIES AND NATIONAL MUNICIPALS FUND HAVE SIMILAR INVESTMENT POLICIES?
Yes. Each Series and National Municipals Fund invest primarily in long-term
investment-grade municipal securities the interest income from which is exempt
from federal income taxes. One of the principal differences in the investment
policies of each Series and National Municipals Fund is that unlike National
Municipals Fund, each Series also seeks interest income that is exempt from
state taxes (Massachusetts, North Carolina or Ohio, as applicable). After each
merger, it is expected that the combined fund will be managed according to the
investment objective and policies of National Municipals Fund. Shareholders
should recognize that if the merger of their Series occurs, income from their
investment in National Municipals Fund will likely be subject to Massachusetts,
North Carolina or Ohio, as applicable, state income taxes. Shareholders should
consult their own tax advisers regarding the implications of federal, state or
local taxes.
Moreover, the investment objective of each Series and National Municipals
Fund differ in that each Series seeks current income consistent with
preservation of capital, while National Municipals Fund does not seek
preservation of capital. Each Series and National Municipals Fund may invest in
high-yield municipal debt obligations (junk bonds), although the Series may
invest up to 30% of their respective assets in junk bonds, while National
Municipals Fund may only invest up to 15% of its assets in junk bonds. Each
Series and National Municipals Fund may purchase insured municipal bonds and
invest in certain municipal bonds the interest on which is subject to the
federal alternative minimum tax (AMT).
ARE THERE ANY OTHER BENEFITS OF THESE MERGERS?
Yes. An investment in National Municipals Fund reduces potential concerns
relating to inadequate supply of municipal bonds from specific states and offers
greater diversification of assets. A state specific municipal fund, such as a
Series, may, from time to time, have difficulty obtaining suitable investments
due
<PAGE>
to inadequate supply. A national municipal fund such as National Municipals Fund
is not similarly constrained with respect to potential investments.
Additionally, since each Series, as a general rule, invests at least 80% of its
total assets in debt obligations of Massachusetts, North Carolina or Ohio
issuers, as applicable, their portfolios are more susceptible to factors
affecting such issuers than that of a national municipal fund such as National
Municipals Fund.
WHO ARE THE MANAGERS FOR THE SERIES AND NATIONAL MUNICIPALS FUND?
Prudential Investments Fund Management currently manages each Series' and
National Municipals Fund's investment operations and administers their business
affairs. The Prudential Investment Corporation is the subadviser managing each
Series' and National Municipals Fund's respective assets. Prudential Investments
Fund Management and The Prudential Investment Corporation are expected to serve
in these capacities for the combined fund. The Municipal Bond Team, headed by
Evan Lamp, is primarily responsible for overseeing the day-to-day management of
each Series and National Municipals Fund.
HOW DO THE EXPENSE STRUCTURES OF THE SERIES AND NATIONAL MUNICIPALS FUND
COMPARE?
Currently, North Carolina Series and Ohio Series have three classes of stock
outstanding: Class A shares, Class B shares and Class C shares. Massachusetts
Series and National Municipals Fund currently have four classes of stock
outstanding: Class A shares, Class B shares, Class C shares and Class Z shares.
The following tables compare the expenses incurred by the classes of stock
offered by each Series with those of National Municipals Fund as of August 31,
2000 and December 31, 1999, respectively.
MASSACHUSETTS SERIES
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management fees....................................... .50% .50% .50% .50%
+ Distribution and service (12b-1) fees............... .30%* .50% 1.00%* None
+ Other expenses...................................... .53% .53% .53% .53%
= Total annual Series operating expenses.............. 1.33% 1.53% 2.03% 1.03%
- Fee waiver or expense reimbursement................. .05%* None .25%* None
= Net annual Series operating expenses(1)............. 1.28% 1.53% 1.78% 1.03%
</TABLE>
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* For the fiscal year ending August 31, 2001, the Distributor of the
Massachusetts Series has contractually agreed to reduce its distribution
and service (12b-1) fees for Class A and Class C shares to .25 of 1% and
.75 of 1% of the average daily net assets of Class A and Class C shares,
respectively.
(1) On August 23, 2000, the Board of Trustees approved the proposal to merge
Massachusetts Series. Effective August 23, 2000, the distribution and
service (12b-1) fees for Class A, Class B and Class C shares were limited
to .25 of 1% of the average daily net assets of Class A, Class B and
Class C shares, respectively. As a result of this limitation, the total net
operating expenses at August 31, 2000, were 1.28%, 1.52% and 1.76% for
Class A, Class B and Class C shares, respectively.
<PAGE>
NORTH CAROLINA SERIES
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
Management fees............................................. .50% .50% .50%
+ Distribution and service (12b-1) fees..................... .30%** .50% 1.00%**
+ Other expenses............................................ .40% .40% .40%
= Total annual Series operating expenses.................... 1.20% 1.40% 1.90%
- Fee waiver or expense reimbursement....................... .05%** None .25%**
= Net annual Series operating expenses(1)................... 1.15% 1.40% 1.65%
</TABLE>
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** For the fiscal year ending August 31, 2001, the Distributor of the North
Carolina Series has contractually agreed to reduce its distribution and
service (12b-1) fees for Class A and Class C shares to .25 of 1% and .75 of
1% of the average daily net assets of Class A and Class C shares,
respectively.
(1) On August 23, 2000, the Board of Trustees approved the proposal to merge
North Carolina Series. Effective August 23, 2000, the distribution and
service (12b-1) fees for Class A, Class B and Class C shares were limited
to .25 of 1% of the average daily net assets of Class A, Class B and
Class C shares, respectively. As a result of this limitation, the total net
operating expenses at August 31, 2000, were 1.15%, 1.39% and 1.64% for
Class A, Class B and Class C shares, respectively.
OHIO SERIES
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
Management fees............................................. .50% .50% .50%
+ Distribution and service (12b-1) fees..................... .30%*** .50% 1.00%***
+ Other expenses............................................ .37% .37% .37%
= Total annual Series operating expenses.................... 1.17% 1.37% 1.87%
- Fee waiver or expense reimbursement....................... .05%*** None .25%***
= Net annual Series operating expenses(1)................... 1.12% 1.37% 1.62%
</TABLE>
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*** For the fiscal year ending August 31, 2001, the Distributor of the Ohio
Series has contractually agreed to reduce its distribution and service
(12b-1) fees for Class A and Class C shares to .25 of 1% and .75 of 1% of
the average daily net assets of Class A and Class C shares, respectively.
(1) On August 23, 2000, the Board of Trustees approved the proposal to merge
Ohio Series. Effective August 23, 2000, the distribution and service
(12b-1) fees for Class A, Class B and Class C shares were limited to .25 of
1% of the average daily net assets of Class A, Class B and Class C shares,
respectively. As a result of this limitation, the total net operating
expenses at August 31, 2000, were 1.12%, 1.36% and 1.61% for Class A,
Class B and Class C shares, respectively.
NATIONAL MUNICIPALS FUND
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Management fees.................................... .48% .48% .48% .48%
+ Distribution and service (12b-1) fees............ .30%**** .50% 1.00%**** None
+ Other expenses................................... .13% .13% .13% .13%
= Total annual Fund operating expenses............. .91% 1.11% 1.61% .61%
- Fee waiver or expense reimbursement.............. .05%**** None .25%**** None
= Net annual Fund operating expenses............... .86% 1.11% 1.36% .61%
</TABLE>
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**** For the fiscal year ending December 31, 2000, the Distributor of National
Municipals Fund has contractually agreed to reduce its distribution and
service (12b-1) fees for Class A and Class C shares to .25 of 1% and .75 of
1% of the average daily net assets of Class A and Class C shares,
respectively.
<PAGE>
ARE THE MERGERS TAXABLE EVENTS FOR FEDERAL INCOME TAX PURPOSES?
Typically, the exchange of shares pursuant to a merger does not result in a
gain or loss for federal income tax purposes. For more information, see the
proxy statement.
WHAT WILL BE THE SIZE OF NATIONAL MUNICIPALS FUND AFTER THE MERGERS?
If each proposal is approved, based on information available as of June 30,
2000, the combined Fund is anticipated to have approximately $729.9 million in
assets.
HOW WILL WE DETERMINE THE NUMBER AND CLASS OF SHARES OF NATIONAL MUNICIPALS FUND
THAT YOU WILL RECEIVE?
As of the close of business of the New York Stock Exchange on the date each
Merger is consummated, shareholders of each Series will receive the number of
full and fractional Class A shares of National Municipals Fund that is equal in
value to the net asset value of their Class A, Class B or Class C shares of
Massachusetts Series, North Carolina Series or Ohio Series, as applicable, on
that date. On that date, Class Z shareholders of Massachusetts Series will
receive the number of full and fractional Class Z shares of National Municipals
Fund that is equal in value to the net asset value of their Class Z shares. Each
Merger is anticipated to occur on December 15, 2000.
HAS THE BOARD OF TRUSTEES APPROVED THE PROPOSALS?
Yes. The Board of Trustees of Prudential Municipal Series Fund, of which
each Series is a part, has approved the proposal with respect to each Series and
recommends that you vote to approve the proposals.
WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH QUORUM BY THE SCHEDULED SHAREHOLDER
MEETING DATE?
If we do not receive sufficient votes to hold the meeting, we or Shareholder
Communications Corporation, a proxy solicitation firm, may contact you by mail
or telephone to encourage you to vote. Shareholders should review the proxy
materials and cast their vote to avoid additional mailings or telephone calls.
If there are not sufficient votes to approve a merger proposal by the time of
the meeting (December 7, 2000), the meeting may be adjourned to permit further
solicitation of proxy votes.
WHAT HAPPENS IF THE PROPOSAL FOR MY SERIES IS NOT APPROVED?
If shareholders of a Series do not approve the Merger with respect to such
Series or if such Merger is not completed, such Series will continue to engage
in business as a series of a registered investment company with its current fee
structure, and the Board will consider other proposals for such Series,
including proposals for the reorganization or liquidation of such Series. The
Merger of a Series is not contingent on the Merger of any other Series.
HOW MANY VOTES AM I ENTITLED TO CAST?
As a shareholder, you are entitled to one vote for each share you own of a
Series on the record date. The record date is October 13, 2000. Remember, you
are voting to approve the proposal only with respect to the Series in which you
own shares.
HOW DO I VOTE MY SHARES?
You can vote your shares by completing and signing the enclosed proxy card,
and mailing it in the enclosed postage paid envelope. If you need any
assistance, or have any questions regarding a proposal or how to vote your
shares, please call Prudential at (800) 225-1852.
You may also vote via the internet. To do so, have your proxy card available
and go to the website: www.proxyvote.com. Follow the instructions on the website
and be prepared to enter your 12 digit control number from your proxy card to
enter your vote.
<PAGE>
Finally, you can vote by telephone by calling (800) 690-6903 toll free.
Enter your 12 digit control number from your proxy card and follow the
instructions given.
HOW DO I SIGN THE PROXY CARD?
INDIVIDUAL ACCOUNTS: Shareholders should sign exactly as their names appear
on the account registration shown on the card.
JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
ALL OTHER ACCOUNTS: The person signing must indicate his or her capacity.
For example, a trustee for a trust should include his or her title when he
or she signs, such as "Jane Doe, Trustee"; or an authorized officer of a
company should indicate his or her position with the company, such as "John
Smith, President."
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
NORTH CAROLINA SERIES
OHIO SERIES
100 Mulberry Street
Gateway Center Three, 4th Floor
Newark, New Jersey 07102-4077
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the Meeting)
of each of Massachusetts Series, North Carolina Series and Ohio Series (each, a
Series, and collectively, the Series), each a series of Prudential Municipal
Series Fund (Municipal Series Fund) will be held at 100 Mulberry Street, Gateway
Center Three, 14th Floor, Newark, New Jersey 07102, on December 7, 2000, at
10:00 a.m. Eastern time, for the following purposes:
1. To approve an Agreement and Plan of Reorganizations under which each
Series will transfer all of its assets to, and all of its liabilities will be
assumed by, Prudential National Municipals Fund, Inc. (National Municipals
Fund), National Municipals Fund will be the surviving fund, and each whole and
fractional share of Class A, Class B and Class C shares of each Series shall be
exchanged for whole and fractional shares of equal net asset value of Class A
shares of National Municipals Fund, and each whole and fractional share of
Class Z shares of the Massachusetts Series shall be exchanged for whole and
fractional shares of equal net asset value of Class Z shares of National
Municipals Fund.
2. To transact such other business as may properly come before the Meeting
or any adjournments of the Meeting.
The Board of Trustees has fixed the close of business on October 13, 2000 as
the record date for the determination of the shareholders of each
Series entitled to notice of, and to vote at, this Meeting and any adjournments.
Deborah A. Docs
SECRETARY
Dated: November 3, 2000
A PROXY CARD FOR YOUR SERIES IS ENCLOSED ALONG WITH THE PROXY STATEMENT.
PLEASE VOTE YOUR SHARES TODAY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD
IN THE POSTAGE PREPAID ENVELOPE PROVIDED. YOU ALSO MAY VOTE BY TELEPHONE OR
VIA THE INTERNET AS DESCRIBED IN THE ENCLOSED MATERIALS. THE BOARD OF THE
MUNICIPAL SERIES FUND RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL RELATING TO
YOUR SERIES.
YOUR VOTE IS IMPORTANT.
PLEASE RETURN YOUR PROXY CARD PROMPTLY.
<PAGE>
SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ANY SHAREHOLDER WHO
DOES NOT EXPECT TO ATTEND THE MEETING IS URGED TO COMPLETE THE ENCLOSED PROXY
CARD, DATE AND SIGN IT, AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH NEEDS NO
POSTAGE IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID UNNECESSARY EXPENSE,
WE ASK YOUR COOPERATION IN MAILING YOUR PROXY CARD PROMPTLY, NO MATTER HOW
LARGE OR SMALL YOUR HOLDINGS MAY BE.
INSTRUCTIONS FOR EXECUTING YOUR PROXY CARD
The following general rules for executing proxy cards may be of assistance
to you and may help avoid the time and expense involved in validating your vote
if you fail to execute your proxy card properly.
1. INDIVIDUAL ACCOUNTS: Your name should be signed exactly as it appears on
the account registration shown on the proxy card.
2. JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
3. ALL OTHER ACCOUNTS should show the capacity of the individual signing.
This can be shown either in the form of account registration or by the
individual executing the proxy card. For example:
<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
------------------------------------------------ ------------------------
<S> <C>
A. 1. XYZ Corporation John Smith, President
2. XYZ Corporation John Smith, President
c/o John Smith, President
B. 1. ABC Company Profit Sharing Plan Jane Doe, Trustee
2. Jones Family Trust Charles Jones, Trustee
3. Sarah Clark, Trustee Sarah Clark, Trustee
u/t/d 7/1/85
C. 1. Thomas Wilson, Custodian Thomas Wilson, Custodian
f/b/o Jessica Wilson UTMA
New Jersey
</TABLE>
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PROSPECTUS
AND
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PROXY STATEMENT
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
------------------------
NOVEMBER 3, 2000
---------------------
This Proxy Statement and Prospectus (Proxy Statement) is being furnished to
shareholders of Massachusetts Series, North Carolina Series and Ohio
Series (each, a Series, and collectively, the Series), each a series of
Prudential Municipal Series Fund (Municipal Series Fund) in connection with the
solicitation of proxies by the Municipal Series Fund's Board of Trustees for use
at the Special Meeting of Shareholders of each Series and at any adjournments of
the meeting (the Meeting). The Meeting will be held on December 7, 2000, at
10:00 a.m. Eastern time at 100 Mulberry Street, Gateway Center Three, 14th
Floor, Newark, New Jersey 07102.
The purpose of the Meeting is to vote on an Agreement and Plan of
Reorganizations (the Agreement) under which each Series will transfer all of its
assets to, and all of its liabilities will be assumed by, Prudential National
Municipals Fund, Inc. (National Municipals Fund), in exchange for shares of
National Municipals Fund. With respect to each Series, these transactions are
collectively referred to as the Merger. If the Mergers are approved, each
Series will be terminated and National Municipals Fund will be the surviving
fund, and each whole and fractional share of Class A, Class B and Class C shares
offered by each Series shall be exchanged for whole and fractional shares of
equal net asset value of Class A shares of National Municipals Fund, and each
whole and fractional share of Class Z shares of the Massachusetts Series shall
be exchanged for whole and fractional shares of equal net asset value of
Class Z shares of the National Municipals Fund on December 15, 2000, or such
later date as the parties may agree (the Closing Date).
National Municipals Fund is an open-end diversified registered management
investment company which is organized as a Maryland corporation. National
Municipals Fund's investment objective is to seek a high level of current income
exempt from federal income taxes. National Municipals Fund seeks to achieve its
objective by normally investing primarily in long-term municipal bonds of medium
quality. National Municipals Fund also invests in junk bonds, insured municipal
bonds and certain municipal bonds the interest on which is subject to the
federal alternative minimum tax (AMT).
Municipal Series Fund is an open-end registered management investment
company comprised of eleven individual series, three of which are the
Massachusetts Series, North Carolina Series and Ohio Series. Municipal
Series Fund is organized as a Massachusetts business trust under the laws of the
state of Massachusetts. Each Series is diversified. The objective of each
Series is to maximize current income that
<PAGE>
is exempt from state income tax (Massachusetts, North Carolina or Ohio, as
applicable) and federal income tax, consistent with the preservation of capital.
Each Series invests primarily in long-term, investment grade state and local
municipal obligations of Massachusetts, North Carolina or Ohio, as applicable.
In conjunction with its respective investment objective, each Series may invest
in debt obligations with the potential for capital gain. Each Series also
invests in junk bonds, insured municipal bonds and certain municipal bonds the
interest on which is subject to the AMT.
IF SHAREHOLDERS OF MASSACHUSETTS SERIES, NORTH CAROLINA SERIES AND OHIO
SERIES APPROVE THE MERGER WITH RESPECT TO THEIR SERIES, THE SHAREHOLDERS OF SUCH
SERIES WILL BECOME SHAREHOLDERS OF NATIONAL MUNICIPALS FUND. THE MERGER OF A
SERIES INTO NATIONAL MUNICIPALS FUND IS NOT CONTINGENT ON THE MERGER OF ANY
OTHER SERIES. SHAREHOLDERS OF EACH SERIES VOTE SEPARATELY ON THE MERGER OF THEIR
SERIES.
This Proxy Statement should be retained for your future reference. It sets
forth concisely the information about the Merger of each Series and National
Municipals Fund that a shareholder of the Series should know before voting on
the proposed Merger with respect to their Series. A Statement of Additional
Information dated November 3, 2000, which relates to this Proxy Statement, has
been filed with the Securities and Exchange Commission (the Commission) and is
incorporated into this Proxy Statement by reference. This Proxy Statement is
accompanied by the Prospectus, dated March 3, 2000, as supplemented to date,
which offers shares of National Municipals Fund. The Statement of Additional
Information for National Municipals Fund, dated March 3, 2000, as supplemented
to date, is available upon request. Enclosed with this Proxy Statement are the
Annual and Semi-Annual Reports to shareholders of National Municipals Fund for
the fiscal year ended December 31, 1999 and the six-month period ended June 30,
2000, respectively. The Prospectus and Statement of Additional Information and
supplements thereto for National Municipals Fund have been filed with the
Commission and are incorporated into this Proxy Statement by reference. Enclosed
is a Prospectus for your Series dated November 3, 2000, as supplemented to date.
A Prospectus for each Series dated November 3, 2000, as supplemented to date,
and the Statement of Additional Information for Municipal Series Fund, which
includes each Series, dated November 3, 2000, have been filed with the
Commission and are incorporated into this Proxy Statement by reference. Copies
of the documents referred to above may be obtained without charge by contacting
Prudential Mutual Fund Services LLC at Post Office Box 15005, New Brunswick, New
Jersey 08906-5005, or by calling (800) 225-1852.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
NATIONAL MUNICIPALS FUND'S SHARES, NOR HAS THE COMMISSION DETERMINED THAT THIS
PROXY STATEMENT AND PROSPECTUS IS COMPLETE OR ACCURATE. IT IS A CRIMINAL OFFENSE
TO STATE OTHERWISE.
ii
<PAGE>
TABLE OF CONTENTS TO THE PROXY STATEMENT AND PROSPECTUS
<TABLE>
<S> <C>
1 VOTING INFORMATION
6 Vote Required
6 SYNOPSIS
6 Investment Objectives and Policies
7 Purchases, Redemptions, Exchanges and Distributions
7 The Proposed Mergers
8 Expense Structures
10 Comparative Fee Tables
11 Examples of the Effect of Series and National Municipals
Fund Expenses
13 Pro Forma Capitalization and Ratios
14 Performance Comparisons of the Series and National
Municipals Fund
15 Forms of Organization
17 COMPARISON OF PRINCIPAL RISK FACTORS
19 INVESTMENT OBJECTIVES AND POLICIES
19 Investment Objectives
19 Principal Investment Strategies
20 COMPARISON OF OTHER POLICIES OF EACH SERIES AND NATIONAL
MUNICIPALS FUND
20 Diversification
20 Borrowing
21 Lending
21 Illiquid Securities
21 Temporary Defensive Investments
21 OPERATIONS OF NATIONAL MUNICIPALS FUND FOLLOWING THE MERGERS
21 PURCHASES, REDEMPTIONS AND EXCHANGES
21 Purchasing Shares
22 Redeeming Shares
22 Minimum Investment Requirements
22 Purchases and Redemptions of each Series and National
Municipals Fund
22 Exchanges of Series and National Municipals Fund Shares
23 Dividends and Other Distributions
23 FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE MERGERS
23 THE PROPOSED TRANSACTIONS
23 Agreement and Plan of Reorganizations
24 Reasons for the Mergers
25 Description of the Securities to be Issued
26 U.S. Federal Income Tax Considerations
27 Conclusion
27 ADDITIONAL INFORMATION ABOUT NATIONAL MUNICIPALS FUND
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
28 MISCELLANEOUS
28 Legal Matters
28 Independent Accountants
28 Available Information
28 Notice to Banks, Broker-Dealers and Voting Trustees and
Their Nominees
28 SHAREHOLDER PROPOSALS
29 OTHER BUSINESS
A-1 ATTACHMENT A: Agreement and Plan of Reorganizations between
Prudential Municipal Series Fund and Prudential National
Municipals Fund, Inc.
</TABLE>
iv
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS OF
MASSACHUSETTS SERIES
NORTH CAROLINA SERIES
OHIO SERIES
each a series of
PRUDENTIAL MUNICIPAL SERIES FUND
TO BE HELD ON DECEMBER 7, 2000, AT: 10:00 A.M.
100 MULBERRY STREET
GATEWAY CENTER THREE, 14TH FLOOR
NEWARK, NEW JERSEY 07102-4077
------------------------
PROXY STATEMENT AND PROSPECTUS
------------------------
VOTING INFORMATION
This Proxy Statement and Prospectus (Proxy Statement) is furnished in
connection with a solicitation of proxies made by, and on behalf of, the Board
of Trustees of Prudential Municipal Series Fund (Municipal Series Fund) to be
used at the Special Meeting of Shareholders of each of Massachusetts Series,
North Carolina Series and Ohio Series (each, a Series, and collectively, the
Series), each a series of Municipal Series Fund, and at any adjournments of the
Special Meeting (the Meeting), to be held on December 7, 2000, at 10:00 a.m.
Eastern time at 100 Mulberry Street, Gateway Center Three, 14th Floor, Newark,
New Jersey 07102-4077, the principal executive office of The Prudential
Investment Corporation (PIC). PIC serves as the investment adviser to Prudential
National Municipals Fund, Inc. (National Municipals Fund, and together with the
Municipal Series Fund, the Funds) and each Series.
The purpose of the Meeting is described in the accompanying Notice. The
solicitation is made primarily by the mailing of this Proxy Statement and the
accompanying proxy card on or about November 7, 2000. Supplementary
solicitations may be made by mail, telephone, telegraph, facsimile, electronic
means or by personal interview by representatives of Municipal Series Fund, on
behalf of each Series. In addition, Shareholder Communications Corporation, a
proxy solicitation firm, may be retained to solicit shareholders on behalf of
Municipal Series Fund, on behalf of each Series. The expenses in connection with
preparing this Proxy Statement and its enclosures and of all solicitations
(including the costs of retaining Shareholder Communications Corporation) will
be borne by each Series and National Municipals Fund based on their respective
assets and will include reimbursement of brokerage firms and others for expenses
in forwarding proxy solicitation materials to the shareholders of each Series.
Even if you sign and return the enclosed proxy card, you may revoke your
proxy at any time prior to its use by written notification received by Municipal
Series Fund, on behalf of a Series, by submitting a later-dated proxy card, or
by attending the Meeting and voting in person.
All proxy cards solicited by the Board of Trustees that are properly
completed and received by Municipal Series Fund, on behalf of a Series, prior to
the Meeting, and that are not revoked, will be voted at the Meeting. Shares
represented by proxies will be voted in accordance with the instructions you
provide. If no instruction is made on a proxy card, it will be voted FOR
Proposal No. 1. Only proxies that are actually voted will be counted toward
establishing a quorum, which is the minimum number of shares necessary to
transact business at the Meeting. With respect to each Series, quorum is
established when a majority of a Series' total shares outstanding and entitled
to vote are present in person at the Meeting or represented by proxy.
If a proxy that is properly signed 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
they have not received instructions from the beneficial owner or other person
entitled to vote shares on this matter for which the broker or nominee does not
have discretionary power), the shares
<PAGE>
represented thereby will be considered present for purposes of determining the
existence of a quorum for the transaction of business, but because Proposal No.
1 requires approval by the votes of a majority of shares represented at a
meeting at which a quorum is present, will have the effect of a vote AGAINST
Proposal No. 1.
Municipal Series Fund, on behalf of each Series, also may arrange to have
votes recorded by telephone. The expenses associated with telephone voting will
be borne by the Series and National Municipals Fund based on their respective
assets. If a Series takes votes by telephone, it will use procedures designed to
authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded. Proxies given by telephone
may be revoked at any time before they are voted in the same manner that proxies
voted by mail may be revoked.
Shareholders may also cast their vote via the internet. The expenses
associated with internet voting will be borne by the Series and National
Municipals Fund based on their respective assets. The internet voting procedures
have been designed to authenticate shareholders' identities, to allow
shareholders to authorize the voting of their shares in accordance with their
instructions, and to confirm that shareholders' instructions have been recorded
properly. We have been advised that the internet voting procedures are
consistent with the requirements of applicable law. Shareholders voting via the
internet should understand that there may be costs associated with electronic
access, such as usage charges from an internet access provider and telephone
companies, that must be borne by the shareholder. Proxies given by the internet
may be revoked at any time before they are voted in the same manner proxies
voted by mail may be revoked.
With respect to each Series, if a quorum is not present at the Meeting, or
if a quorum is present at the Meeting but sufficient votes to approve Proposal
No. 1 are not received, or if other matters arise requiring shareholder
attention, the persons named as proxy agents may propose one or more
adjournments of the Meeting with respect to such Series, to permit the further
solicitation of proxies. An adjournment will require the affirmative vote of a
majority of shares of a Series present in person at the Meeting or represented
by proxy. When voting on a proposed adjournment with respect to a Series, the
persons named as proxy agents will vote FOR the proposed adjournment all shares
that they are entitled to vote with respect to Proposal No. 1, unless directed
to vote AGAINST Proposal No. 1, in which case such shares will be voted against
the proposed adjournment. A shareholder vote may be taken on a Merger with
respect to a Series described in this Proxy Statement or on any other business
properly presented at the Meeting prior to adjournment if sufficient votes have
been received. The shareholders of each Series vote separately on the Merger of
their Series and on any other business relating to their Series.
Shareholders of record of each class of each Series at the close of business
on October 13, 2000 (the Record Date), will be entitled to vote at the Meeting.
Each such shareholder will be entitled to one vote for each share held on that
date (fractional shares will be entitled to a proportionate fractional vote). On
the Record Date, there were: 2,461,746.591 Class A shares, 674,355.694 Class B
shares, 27,684.039 Class C shares and 6,670.678 Class Z shares issued and
outstanding of Massachusetts Series; 2,582,048.507 Class A shares, 774,638.084
Class B shares and 2,773.979 Class C shares issued and outstanding of North
Carolina Series; and 3,991,878.019 Class A shares, 1,169,643.821 Class B shares
and 15,834.039 Class C shares issued and outstanding of Ohio Series.
2
<PAGE>
As of October 13, 2000, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of the Massachusetts
Series:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
---- ------------ -----------
<S> <C> <C>
Henry P. Hall 2,895/C 10.46%
35 River St.
Concord, MA 01742-2223
Richard M. Osgood 2,262/C 8.17%
& Mary R. Osgood JT TEN
P.O. Box 12
Winchester, MA 01890-0012
Mr. Mark W. Lightbody 4,558/C 16.46%
& Mrs. Arlyn F. Lightbody JT TEN
31 Edge St.
Ipswich, MA 01938-1109
Stanley F. Wisniewski Jr. & 5,416/C 19.56%
Eleanor A. Wisniewski JT TEN
173 Fales Rd.
No. Attleboro, MA 02760-4461
Legg Mason Wood Walker, Inc. 4,162/C 15.03%
425-00072-10
P.O. Box 1476
Baltimore, MD 21203
Ms. Bertha S. Sacco 4,657/C 16.82%
70 Gaslight Ln.
North Easton, MS 02356-2731
James A. Meagher 651/Z 9.76%
Mrs. Loriann R. Meagher JT TEN
85 Westland Rd.
Weston, MA 02193-1327
Mr. Jerome S. Nasolewski 346/Z 5.19%
31 Lamplighter Dr.
Shrewbury, MA 01545-5453
Dr. Suzanne Keller 1,408/Z 21.12%
P.O. Box 85
Deerfield, MA 01342-0085
Dr. Joseph Lash Jr. TTEE 4,251/Z 63.73%
Joseph Lash Jr. Revocable Trust
DTD 10/21/96
UA DTD 11/03/98
649 Main Street
P.O. Box 649
Chester, VT 05143
</TABLE>
3
<PAGE>
As of October 13, 2000, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of the North Carolina
Series:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
---- ------------ -----------
<S> <C> <C>
Mrs. Melba S. Jones 1,298/C 46.79%
200 W. Cornwall Rd. #107
Cary, NC 27511-3865
Melvin K. Morgan 200/C 7.21%
1135 Gold Knob Rd.
Salisbury, NC 28145-8167
S. J. Black And Son Inc. 1,031/C 37.17%
P.O. Box 1105
Monroe, NC 28111-1105
David M. Heathcoat Jr. 222/C 8.00%
Mary Grace Heathcoat JT TEN
100 Honeysuckle Ln.
Cary, NC 27513
</TABLE>
As of October 13, 2000, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of the Ohio Series:
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
---- ------------ -----------
<S> <C> <C>
Orvilla J. Wangler 2,435/C 15.38%
Subject To STA TOD RULES-NJ
182 St. Francis Ave., Room 108
Tiffin, OH 44883-3456
Mrs. Mary C. Leon 2,687/C 16.97%
1003 Lakeville Dr.
Cincinnati, OH 45233-4527
Bobby G. Gresham 994/C 6.28%
Mildred V. Gresham JT TEN
1309 Fowles Dr.
Columbus, OH 43224
Charles E. Cartwright 806/C 5.09%
Janet L. Cartwright JT TEN
700 Swayne Dr.
Coshocton, OH 43812
Larry A. Smith & 1,779/C 11.24%
Peggy S. Smith JT TEN
500 Coover Rd.
Delaware, OH 43015
Mr. Frederick L. Bookout 3,327/C 21.01%
TTEE G. Naomi Bookout Trust
UA DTD 01/21/98
2571 Little Dry Run Rd.
Cincinnati, OH 45244-2849
</TABLE>
4
<PAGE>
On October 13, 2000, there were 31,770,392.904 Class A shares, 4,088,383.382
Class B shares, 161,469.070 Class C shares and 53,699.887 Class Z shares issued
and outstanding of National Municipals Fund.
<TABLE>
<CAPTION>
NAME SHARES/CLASS % OWNERSHIP
---- ------------ -----------
<S> <C> <C>
Katz-Ridgefield 21,242/C 13.16%
Investment
Partnership LP
c/o John Katz
473 Ridgebury Rd.
Ridgefield, CT 06877-1214
Worldwide Fowarders Inc. 36,975/C 22.90%
Richard H. Panadero
9706 SW 155 CT
Miami, FL 33196
Huntington Newspaper Inc. 8,787/C 5.44%
Attn: Larry Hensley
P.O. Box 860
Huntington, IN 46750-0860
Anna E. Stedman 4,739/Z 8.82%
Cooper River Plaza
121 South Bldg
5105 Park Dr.
Pennsauken, NJ 08109
Mr. Peter H. Chang 3,194/Z 5.95%
Mr. Herbert L. Limpan &
Mr. Davis S. Wilson
CO-TTEES
UW ENID D MINTZ DECD
FBO Deborah L. Cramer (A Trust)
3382 Fielders Pt.
Dacula, GA 30019-2968
Mr. Marvin E. Tower 2,712/Z 5.05%
4642 Buckline Ct.
Dunwoody, GA 30338-5646
Mr. Paul L. Pahmier & 3,565/Z 6.64%
Mrs. Helen A. Pahmier JT TEN
TOD ACCOUNT
3120 S. Broadway
Yorktown, IN 47396-9647
Mrs. Mary Lou Marshall 3,494/Z 6.51%
TOD ACCT
4741 E. 500 S
Middletown, IN 47356
</TABLE>
Shareholders of National Municipals Fund are not entitled to vote on any
Merger.
As of October 13, 2000, the Trustees/Directors and officers of Municipal
Series Fund and National Municipals Fund, owned, in the aggregate, less than 1%
of each class of each Series' and National Municipals Fund's total outstanding
shares, respectively. Prudential Securities Incorporated intends to vote any
shares of a Series for which it has direct voting authority FOR Proposal No. 1.
5
<PAGE>
VOTE REQUIRED
APPROVAL OF THE MERGER WITH RESPECT TO EACH SERIES REQUIRES THE AFFIRMATIVE
VOTE OF A MAJORITY OF SHARES REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO
VOTE AT THE MEETING, IF A QUORUM IS PRESENT, WITH RESPECT TO SUCH SERIES.
SYNOPSIS
The following is a summary of information contained elsewhere in this Proxy
Statement, in the Agreement and Plan of Reorganizations (the Agreement, the form
of which is attached as Attachment A), and in the Prospectuses of each
Series and National Municipals Fund, which are incorporated into this Proxy
Statement by reference. Shareholders should read this Proxy Statement and the
Prospectus of National Municipals Fund for more complete information.
The Mergers would transfer all of the assets and liabilities of each
Series into National Municipals Fund, a larger mutual fund also managed by
Prudential Investments Fund Management LLC (PIFM), for which PIC also acts as
investment adviser. For each Series as to which the Merger is approved, that
Series will cease to exist and current shareholders of that Series will become
shareholders of National Municipals Fund.
INVESTMENT OBJECTIVES AND POLICIES
Each Series and National Municipals Fund have similar investment objectives
and policies. The investment objective of each of Massachusetts Series, North
Carolina Series and Ohio Series is to maximize current income that is exempt
from state income tax (Massachusetts, North Carolina and Ohio, respectively),
and federal income tax, consistent with the preservation of capital. Each
Series seeks to achieve its respective investment objective by investing
primarily in long-term investment grade state (Massachusetts, North Carolina or
Ohio, as applicable) and local municipal fixed-income securities, as well as
obligations of other issuers (such as issuers located in Puerto Rico, the Virgin
Islands and Guam) that pay interest income exempt from those state and federal
income taxes. In conjunction with its respective investment objective, each
Series may invest in debt obligations with the potential for capital gain.
Investment grade debt obligations in which each Series invests are rated at
least BBB by Standard & Poor's Ratings Group (S&P), Baa by Moody's Investors
Service (Moody's), or comparably rated by another major rating service, and
unrated debt obligations that PIC believes are comparable in quality.
National Municipals Fund's investment objective is to seek a high level of
current income exempt from federal income taxes. National Municipals Fund seeks
to achieve its objective by investing primarily in long-term municipal bonds of
medium quality issued by a state, territory or possession of the United States
of America, or any political subdivision thereof, or the District of Columbia.
Medium quality bonds are bonds rated A and Baa by Moody's and A and BBB by S&P,
or comparably rated by another major rating service.
The investment objectives of each Series and National Municipals Fund
primarily differ in that National Municipals Fund does not seek to provide
income that is exempt from state income taxes. This means that if the Mergers
occur, income from your investment in National Municipals Fund will likely be
subject to income taxation by your state of residence.
Although each Series and National Municipals Fund may invest in
"non-investment grade" bonds (commonly known as "junk bonds"), each Series may
invest up to 30% of its respective assets in junk bonds, while National
Municipals Fund may only invest up to 15% of its assets in junk bonds. Each
Series and National Municipals Fund may invest in insured municipal bonds and
certain municipal bonds the interest of which is subject to the federal
alternative minimum tax (AMT).
6
<PAGE>
Each Series and National Municipals Fund have the same manager (PIFM), the
same investment adviser (PIC), the same investment team (Municipal Bond Team)
and the same team leader (Evan Lamp). The Municipal Bond Team, which is
primarily responsible for overseeing the day-to-day management of each
Series and National Municipals Fund, utilizes the same investment approach in
selecting investments for each Series and National Municipals Fund. The address
of PIFM is Gateway Center Three, 100 Mulberry Street, 14th Floor, Newark, New
Jersey 07102-4077. PIFM and its predecessors have served as manager or
administrator to investment companies since 1987. As of September 30, 2000, PIFM
served as manager to all 49 of the Prudential mutual funds, and as manager or
administrator to 21 closed-end investment companies, with aggregate assets of
approximately $75.1 billion.
The benchmark index for each Series and National Municipals Fund is the
Lehman Brothers Municipal Bond Index, an unmanaged index of over 39,000
long-term investment-grade municipal bonds, which gives a broad look at how
long-term investment grade municipal bonds have performed. Each Series and
National Municipals Fund also use the Lipper Municipal Debt Funds Category
(which is based on the average return of all mutual funds in this category) as a
benchmark of their performance, although each Series uses its applicable state
specific category of this benchmark.
While each Series and National Municipals Fund make every effort to achieve
their respective investment objective, they can't guarantee success.
PURCHASES, REDEMPTIONS, EXCHANGES AND DISTRIBUTIONS
The purchase, redemption and exchange policies of each Series and National
Municipals Fund are identical and are not expected to change after the Mergers.
Each Series and National Municipals Fund distribute dividends out of any net
investment income, plus short-term capital gains, to shareholders, typically
every month. As discussed above, each Series' dividends are exempt from
Massachusetts, North Carolina and Ohio, as applicable, personal income taxes
imposed upon residents of such states. National Municipals Fund's dividends will
likely not be exempt from any state income taxes. Each Series and National
Municipals Fund also distributes long-term capital gains to shareholders,
typically once a year.
THE PROPOSED MERGERS
Shareholders of each Series will be asked at the Meeting to vote upon and
approve the Agreement, under which each Series will transfer all of its assets
to, and all of its liabilities will be assumed by, National Municipals Fund
whereupon the separate existence of each Series will cease and National
Municipals Fund will be the surviving mutual fund, and each whole and fractional
share of Class A, Class B and Class C shares of each Series shall be exchanged
for whole and fractional shares of equal net asset value of Class A shares of
National Municipals Fund, and each whole and fractional share of Class Z shares
of Massachusetts Series shall be exchanged for whole and fractional shares of
equal net asset value of Class Z shares of National Municipals Fund, on or about
the Closing Date. Approval of each Merger will be determined solely by approval
of the shareholders of the relevant Series. Shareholders of each Series will
vote separately on whether to approve the Merger of their Series into National
Municipals Fund. No vote by shareholders of National Municipals Fund is
required.
The Agreement provides that it is a condition to each Series' and National
Municipals Fund's obligation to complete each respective Merger that the Funds,
with respect to each Series, will have received an opinion of counsel that no
Merger will result in any gain or loss for U.S. federal income tax purposes to
the respective Series, National Municipals Fund, or the shareholders of the
respective Series.
7
<PAGE>
EXPENSE STRUCTURES
Each Series and National Municipals Fund pays a management fee to PIFM for
managing its investment operations and administering its business affairs. The
management fee is calculated daily and paid to PIFM every month. PIFM, in turn,
reimburses PIC, the investment adviser, for its reasonable costs and expenses in
providing advisory services to each Series and National Municipals Fund,
respectively. Municipal Series Fund, on behalf of each Series, has agreed to pay
a management fee to PIFM at an annual rate of .50 of 1% of the average daily net
assets of such Series, with no breakpoints. National Municipals Fund has agreed
to pay a management fee to PIFM with breakpoints which lower the management fee
as fund size increases so that PIFM's contractual fee is .50 of 1% 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% in excess of $1.5 billion, in each case of National
Municipals Fund's average daily net assets. Since National Municipals Fund's
assets currently exceed $250 million, it currently pays PIFM at a lower rate
than that currently paid by each Series. Moreover, if all three Mergers are
consummated, the effective management fee is expected to decrease further as a
result of the breakpoints.
The management fee paid by each Series and National Municipals Fund covers
PIFM's oversight of each Series' and National Municipals Funds' respective
investment portfolios. PIFM also administers Municipal Series Fund's, including
the Series', and National Municipals Funds' corporate affairs and, in connection
therewith, furnishes the Funds' office facilities, together with those ordinary
clerical and bookkeeping services that are not furnished by the Funds' custodian
or transfer and dividend disbursing agent. Officers and employees of PIFM serve
as officers and Trustees/Directors of the Funds without compensation.
Each Series' and National Municipals Fund's distribution expense structures
are the same. Prudential Investment Management Services LLC (the Distributor), a
wholly-owned subsidiary of Prudential, serves as the distributor of each Series'
and National Municipals Fund's shares. The Distributor incurs the expenses of
distributing each Series' and National Municipals Fund's shares, including
commissions and account servicing fees paid to or on account of brokers or
financial institutions that 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 shares, including lease, utility, communications and sales promotion
expenses.
Each Series and National Municipals Fund pay the Distributor a distribution
and service (12b-1) fee at an annual rate of: .30 of 1% of the average daily net
assets of their respective Class A shares; .50 of 1% of the average daily net
assets of their respective Class B shares; and 1% of the average daily net
assets of their respective Class C shares. Class Z shares are not subject to any
distribution and service (12b-1) fees. For the current fiscal year of each
Series and National Municipals Fund, the Distributor has contractually agreed to
reduce its distribution and service (12b-1) fees for Class A and Class C shares
to .25 of 1% and .75 of 1% of the average daily net assets of each such class.
Since each Series' Class B and Class C shareholders will, as a result of the
Mergers, receive Class A shares of National Municipals Fund in exchange for
their shares, such shareholders will benefit from the lower distribution and
service (12b-1) fees incurred by Class A shares.
Shareholders should understand that the contractual waiver by the
Distributor is enforceable for one-year periods and may be terminated with
respect to any subsequent fiscal year on not less than 30 days' notice prior to
the end of a current fiscal year. The contractual waiver extends through
August 31, 2001 and December 31, 2000 for each Series and National Municipals
Fund, respectively. There is no assurance that the Distributor will continue any
waiver beyond the indicated dates.
Each Series and National Municipals Fund also pay certain other expenses in
connection with their operations, including accounting, legal, audit and
registration expenses. Other expenses incurred by each class of Massachusetts
Series, North Carolina Series and Ohio Series, for the fiscal year ending
August 31,
8
<PAGE>
2000 were .53%, .40% and .37%, respectively, and by each class of National
Municipals Fund for the fiscal year ending December 31, 1999 was .13%.
Annualized other expenses incurred by each class of National Municipals Fund for
the period ending June 30, 2000 were .17%. 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 National Municipals 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.
The following table shows the net annual operating expenses for each class
of shares of each Series, as applicable, as of August 31, 2000, and for each
class of shares of National Municipals Fund as of December 31, 1999. The table
also shows National Municipals Fund's annualized total operating expenses for
the period ended June 30, 2000.
<TABLE>
<CAPTION>
NATIONAL
MUNICIPALS NATIONAL
MASSACHUSETTS NORTH CAROLINA OHIO SERIES FUND MUNICIPALS
SERIES (AS OF SERIES (AS OF (AS OF (AS OF FUND (AS
8/31/00) (1) 8/31/00) (1) 8/31/00) (1) 12/31/99) OF 6/30/00)
------------- -------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Class A*........................... 1.28% 1.15% 1.12% .86% .90%
Class B............................ 1.53% 1.40% 1.37% 1.11% 1.15%
Class C*........................... 1.78% 1.65% 1.62% 1.36% 1.40%
Class Z............................ 1.03% N/A N/A .61% .65%
</TABLE>
------------------------
* These expense ratios are after deduction of fee waivers. As discussed above,
for each of the Series and National Municipals Fund, the Distributor has
agreed to reduce its distribution and service (12b-1) fees for Class A and
Class C shares to .25 of 1% and .75 of 1% of the average daily net assets of
the Class A and Class C shares, respectively, of each Series and National
Municipals Fund.
(1) On August 23, 2000, the Board of Trustees of Municipal Series Fund, of which
each of the Massachusetts Series, North Carolina Series and Ohio Series is a
part, approved the proposal to merge each series into National Municipals
Fund. Effective August 23, 2000, the distribution and service (12b-1) fees
for Class A, Class B and Class C shares of each of Massachusetts Series,
North Carolina Series and Ohio Series were limited to .25 of 1% of the
average daily net assets of Class A, Class B and Class C shares. As a result
of this limitation, the total net operating expenses at August 31, 2000,
were 1.28%, 1.52% and 1.76% for Class A, Class B and Class C shares,
respectively, for Massachusetts Series; 1.15%, 1.39% and 1.64% for Class A,
Class B and Class C shares, respectively, for North Carolina Series; and
1.12%, 1.36% and 1.61% for Class A, Class B and Class C shares,
respectively, for Ohio Series.
If shareholders approve the Mergers, National Municipals Fund's expense
structure will apply. Assuming continuation of National Municipals Fund's
current expenses, this expense structure would decrease the total operating
expenses currently incurred by shareholders of each class of each Series. If the
proposed Merger is not approved with respect to a Series, such Series will
continue with its current fee structure except that there is no assurance that
the fee waiver of the Distributor will continue past August 31, 2001. For more
information about each Series' and National Municipals Fund's current fees,
refer to their respective Prospectuses. See the Pro Forma Capitalization and
Ratios below for estimates of expenses if the Mergers are approved.
Overall, the proposed Mergers would provide each Series' shareholders with
the following benefits:
- the opportunity to participate in a larger fund with an investment
objective and policies similar to each Series' investment objective and
policies, which may be able to more effectively pursue its investment
objective at a reasonable cost to shareholders;
- greater diversification of assets;
9
<PAGE>
- due to greater economies of scale, annual operating expenses for each
class of shares of each Series are expected to be lower than those
currently incurred by such shares;
- as a result of their receipt of Class A shares of National Municipals
Fund, each Series' Class B and Class C shareholders will no longer be
subject to a CDSC and will benefit from lower distribution and service
(12b-1) fees; and
- reduced concerns relating to inadequate supply of state specific municipal
bonds.
THE BOARD OF TRUSTEES OF THE MUNICIPAL SERIES FUND BELIEVES THAT THE MERGERS
WILL BENEFIT EACH SERIES' SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE IN
FAVOR OF THE MERGER WITH RESPECT TO THEIR SERIES.
COMPARATIVE FEE TABLES
The following tables show the fees and expenses of Class A, Class B and
Class C shares of each Series, and Class Z shares of Massachusetts Series, and
of Class A, Class B, Class C and Class Z shares of National Municipals Fund, and
pro forma fees for the combined fund after giving effect to the Mergers,
including the effect of the Distributor's contractual fee waiver previously
described. Class B and Class C shareholders of each Series should bear in mind
that they will receive Class A shares for their Series shares.
Operating expenses for each Series and National Municipals Fund are paid out
of their respective assets. Expenses are factored into each Series' and National
Municipals Fund's share price or dividends and are not charged directly to
shareholder accounts. The following figures are based on historical expenses of
each Series for the twelve-month period ended August 31, 2000 and of National
Municipals Fund for the twelve-month period ended December 31, 1999 and are
calculated as a percentage of average net assets of each Series and National
Municipals Fund, respectively. The pro forma combined figures are based on
June 30, 2000 amounts.
CLASS A SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES NORTH CAROLINA OHIO SERIES FUND FUND
CLASS A SERIES CLASS A CLASS A CLASS A
SHARES CLASS A SHARES SHARES SHARES SHARES
------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Management fees........................... .50% .50% .50% .48% .48%
+ Distribution and service (12b-1) fees... .30%* .30%* .30%* .30%* .30%*
+ Other expenses.......................... .53% .40% .37% .13% .14%
= TOTAL ANNUAL OPERATING EXPENSES......... 1.33% 1.20% 1.17% .91% .92%
- Fee waiver or expense reimbursement..... .05%* .05%* .05%* .05%* .05%*
----- ----- ----- ---- ----
= NET ANNUAL OPERATING EXPENSES........... 1.28% 1.15% 1.12% .86% .87%
</TABLE>
------------------------
* For the fiscal year ending August 31, 2001 and December 31, 2000, for each
Series and National Municipals Fund, respectively, the Distributor has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A shares to .25 of 1% of the average daily net assets of the respective
Class A shares.
10
<PAGE>
CLASS B SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES NORTH CAROLINA OHIO SERIES FUND FUND
CLASS B SERIES CLASS B CLASS B CLASS B
SHARES CLASS B SHARES SHARES SHARES SHARES
------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Management fees........................... .50% .50% .50% .48% .48%
+ Distribution and service (12b-1) fees... .50% .50% .50% .50% .50%
+ Other expenses.......................... .53% .40% .37% .13% .14%
= TOTAL ANNUAL OPERATING EXPENSES......... 1.53% 1.40% 1.37% 1.11% 1.12%
- Fee waiver or expense reimbursement..... None None None None None
-------- -------- ------- ------- -------
= NET ANNUAL OPERATING EXPENSES........... 1.53% 1.40% 1.37% 1.11% 1.12%
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES NORTH CAROLINA OHIO SERIES FUND FUND
CLASS C SERIES CLASS C CLASS C CLASS C
SHARES CLASS C SHARES SHARES SHARES SHARES
------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Management fees........................... .50% .50% .50% .48% .48%
+ Distribution and service (12b-1) fees... 1.00%* 1.00%* 1.00%* 1.00%* 1.00%*
+ Other expenses.......................... .53% .40% .37% .13% .14%
= TOTAL ANNUAL OPERATING EXPENSES......... 2.03% 1.90% 1.87% 1.61% 1.62%
- Fee waiver or expense reimbursement..... .25%* .25%* .25%* .25%* .25%*
---- ---- ---- ---- ----
= NET ANNUAL OPERATING EXPENSES........... 1.78% 1.65% 1.62% 1.36% 1.37%
</TABLE>
------------------------
* For the fiscal year ending August 31, 2001 and December 31, 2000, for each
Series and National Municipals Fund, respectively, the Distributor has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class C shares to .75 of 1% of the average daily net assets of the respective
Class C shares.
CLASS Z SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES FUND FUND
CLASS Z CLASS Z CLASS Z
SHARES SHARES SHARES
------------- ---------- ---------
<S> <C> <C> <C>
Management fees............................................ .50% .48% .48%
+ Distribution and service (12b-1) fees.................... None None None
+ Other expenses........................................... .53% .13% .14%
= TOTAL ANNUAL OPERATING EXPENSES.......................... 1.03% .61% .62%
- Fee waiver or expense reimbursement...................... None None None
-------- ------- -------
= NET ANNUAL OPERATING EXPENSES............................ 1.03% .61% .62%
</TABLE>
EXAMPLES OF THE EFFECT OF SERIES AND NATIONAL MUNICIPALS FUND EXPENSES
The following tables illustrate the expenses on a hypothetical $10,000
investment in each Series and National Municipals Fund, respectively, under the
current and pro forma (combined fund) expenses calculated at the rates stated
above for the first year, and thereafter using gross expenses with no fee
11
<PAGE>
waivers or expense reimbursements, assuming a 5% annual return, and assuming
that you sell your shares at the end of each period.
CLASS A SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES NORTH CAROLINA OHIO SERIES FUND FUND
CLASS A SERIES CLASS A CLASS A CLASS A
SHARES CLASS A SHARES SHARES SHARES SHARES
------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 Year............................. $ 426 $ 414 $ 411 $ 385 $ 386
3 Years............................ $ 704 $ 665 $ 656 $ 577 $ 580
5 Years............................ $1,002 $ 935 $ 920 $ 784 $ 789
10 Years........................... $1,849 $1,707 $1,673 $1,382 $1,393
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES NORTH CAROLINA OHIO SERIES FUND FUND
CLASS B SERIES CLASS B CLASS B CLASS B
SHARES CLASS B SHARES SHARES SHARES SHARES
------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 Year............................. $ 656 $ 643 $ 639 $ 613 $ 614
3 Years............................ $ 783 $ 743 $ 734 $ 653 $ 656
5 Years............................ $ 934 $ 866 $ 850 $ 712 $ 717
10 Years........................... $1,745 $1,600 $1,566 $1,270 $1,281
</TABLE>
CLASS C SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES NORTH CAROLINA OHIO SERIES FUND FUND
CLASS C SERIES CLASS C CLASS C CLASS C
SHARES CLASS C SHARES SHARES SHARES SHARES
------------- -------------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 Year............................. $ 379 $ 366 $ 363 $ 337 $ 338
3 Years............................ $ 706 $ 667 $ 658 $ 579 $ 582
5 Years............................ $1,159 $1,093 $1,078 $ 944 $ 949
10 Years........................... $2,415 $2,280 $2,248 $1,971 $1,982
</TABLE>
CLASS Z SHARES
<TABLE>
<CAPTION>
NATIONAL PRO FORMA
MASSACHUSETTS MUNICIPALS COMBINED
SERIES FUND FUND
CLASS Z CLASS Z CLASS Z
SHARES SHARES SHARES
------------- ---------- ---------
<S> <C> <C> <C>
1 Year..................................................... $ 105 $ 62 $ 63
3 Years.................................................... $ 328 $195 $199
5 Years.................................................... $ 569 $340 $346
10 Years................................................... $1,259 $762 $774
</TABLE>
12
<PAGE>
These examples assume that all dividends and other distributions are
reinvested and that the percentage amounts listed under total annual operating
expenses remain the same in the years shown, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A and Class C
shares during the first year. The examples also assume a stable shareholder
base, but in fact the shareholder base of each Series has been declining in
recent years. A continued decline would result in higher per share expenses
going forward. These examples illustrate the effect of expenses, but are not
meant to suggest actual or expected expenses, which may vary. The assumed return
of 5% is not a prediction of, and does not represent, actual or expected
performance of any Series or National Municipals Fund.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of each Series and National
Municipals Fund as of June 30, 2000, and the pro forma combined capitalization
as if the Merger, with respect to each Series, had occurred on that date.
<TABLE>
<CAPTION>
MASSACHUSETTS NORTH CAROLINA NATIONAL PRO FORMA
SERIES SERIES OHIO SERIES MUNICIPALS FUND COMBINED FUND
------------- -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net Assets (000s)
Class A.................... $26,416 $29,493 $ 45,199 $480,871 $617,504
Class B.................... $ 8,587 $ 9,862 $ 16,622 $ 69,186 $ 69,186
Class C.................... $ 249 $ 30 $ 174 $ 2,262 $ 2,262
Class Z.................... $ 74 N/A N/A $ 763 $ 837
Net Asset Value Per Share
Class A.................... $ 10.85 $ 10.76 $ 11.06 $ 14.85 $ 14.85
Class B.................... $ 10.85 $ 10.76 $ 11.07 $ 14.89 $ 14.89
Class C.................... $ 10.85 $ 10.76 $ 11.07 $ 14.89 $ 14.89
Class Z.................... $ 10.84 N/A N/A $ 14.85 $ 14.85
Shares Outstanding (000s)
Class A.................... 2,434 2,741 4,086 32,373 41,583
Class B.................... 791 916 1,502 4,647 4,647
Class C.................... 23 3 16 152 152
Class Z.................... 7 N/A N/A 51 56
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets (based upon average
weighted shares outstanding during the relevant period) of each Series for the
twelve-month period ended August 31, 2000 and of National Municipals Fund for
the twelve-month period ended December 31, 1999. The ratios also are shown on a
pro forma combined basis as of June 30, 2000.
<TABLE>
<CAPTION>
NORTH NATIONAL PRO FORMA
MASSACHUSETTS CAROLINA MUNICIPALS COMBINED
SERIES SERIES OHIO SERIES FUND FUND
------------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets
Class A................................. 1.28% 1.15% 1.12% .86% .87%
Class B................................. 1.53% 1.40% 1.37% 1.11% 1.12%
Class C................................. 1.78% 1.65% 1.62% 1.36% 1.37%
Class Z................................. 1.03% N/A N/A .61% .62%
Ratio of net investment income to
average net assets
Class A................................. 4.87% 4.81% 4.86% 4.88% 5.35%
Class B................................. 4.62% 4.55% 4.62% 4.62% 5.10%
Class C................................. 4.38% 4.33% 4.36% 4.39% 4.85%
Class Z................................. 5.13% N/A N/A 5.45% 5.60%
</TABLE>
13
<PAGE>
PERFORMANCE COMPARISONS OF THE SERIES AND NATIONAL MUNICIPALS FUND
The following tables compare each Series' and National Municipals Fund's
average annual total returns for the periods set forth below. Average annual
total returns are based on past results and are not an indication of future
performance, and include the deduction of applicable sales charges.
AVERAGE ANNUAL TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED JUNE 30, 2000)
<TABLE>
<CAPTION>
ONE YEAR* FIVE YEARS* TEN YEARS* SINCE INCEPTION*
---------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Massachusetts Series.................. (2.23)% 4.05% 5.98% 5.95%
(since 1-22-90)
North Carolina Series................. (1.59)% 4.29% 5.74% 5.74%
(since 1-22-90)
Ohio Series........................... (1.53)% 4.03% 5.89% 5.93%
(since 1-22-90)
National Municipals Fund.............. (1.68)% 4.35% 6.17% 6.17%
(since 1-22-90)
</TABLE>
------------------------
* Without the management fee waiver and the distribution and service (12b-1) fee
waiver, the Average Annual Total Returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED JUNE 30, 2000)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS* TEN YEARS* SINCE INCEPTION*
---------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Massachusetts Series.................. (4.38)% 4.14% 5.89% 6.87%
(since 9-25-84)
North Carolina Series................. (3.89)% 4.39% 5.67% 6.56%
(since 2-13-85)
Ohio Series........................... (3.74)% 4.12% 5.83% 6.98%
(since 9-20-84)
National Municipals Fund.............. (3.81)% 4.47% 6.11% 7.87%
(since 4-25-80)
</TABLE>
------------------------
* Without the management fee waiver, the Average Annual Total Returns would have
been lower.
14
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED JUNE 30, 2000)
<TABLE>
<CAPTION>
ONE YEAR* FIVE YEARS* TEN YEARS SINCE INCEPTION*
---------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Massachusetts Series.................. (1.64)% 3.84% N/A 4.18%
(since 8-1-94)
North Carolina Series................. (1.15)% 4.09% N/A 4.17%
(since 8-1-94)
Ohio Series........................... (1.00)% 3.83% N/A 4.08%
(since 8-1-94)
National Municipals Fund.............. (1.07)% 4.17% N/A 4.42%
(since 8-1-94)
</TABLE>
------------------------
* Without the management fee waiver and the distribution and service (12b-1) fee
waiver, the Average Annual Total Returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS (CLASS Z SHARES)
(PERIODS ENDED JUNE 30, 2000)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
---------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Massachusetts Series................... 1.02% N/A N/A 3.79%
(since 12-6-96)
North Carolina Series.................. N/A N/A N/A N/A
Ohio Series............................ N/A N/A N/A N/A
National Municipals Fund............... 1.68% N/A N/A (.48)%
(since 1-22-99)
</TABLE>
FORMS OF ORGANIZATION
Massachusetts Series, North Carolina Series and Ohio Series are diversified
series of Municipal Series Fund, which is an open-end management investment
company organized as a Massachusetts business trust on May 18, 1984. National
Municipals Fund is also a diversified, open-end management investment company
organized as a Maryland corporation on January 9, 1980. Municipal Series Fund is
permitted to issue an unlimited number of full and fractional shares of
beneficial interest, $.01 par value, in separate series, three of which are
currently designated as the Massachusetts Series, North Carolina Series and Ohio
Series. The other eight series currently designated by Municipal Series Fund are
the Connecticut Money Market Series, Florida Series, Massachusetts Money Market
Series, New Jersey Series, New Jersey Money Market Series, New York Series, New
York Money Market Series, North Carolina Series, Ohio Series and Pennsylvania
Series. Each of the Florida Series, Massachusetts Series, New Jersey Series and
New York Series is authorized to issue an unlimited number of shares of
beneficial interest, $.01 par value, divided into four classes, designated
Class A, Class B, Class C and Class Z. Each of the North Carolina Series, Ohio
Series and Pennsylvania Series is authorized to issue an unlimited number of
shares of beneficial interest, .01 par value, divided into three classes,
designated Class A, Class B and Class C. Each of the Connecticut Money Market
Series, Massachusetts Money Market Series, New Jersey Money Market Series and
New York Money Market Series are authorized to issue an unlimited number of
shares of beneficial interest, .01 par value, of one class. Shareholders of the
Connecticut Money Market Series and Massachusetts Money Market Series are
scheduled to vote on a merger of their respective series into another Prudential
mutual fund. National Municipals Fund is authorized to issue 1 billion shares of
15
<PAGE>
common stock, par value $.01 per share, divided into four classes of shares
designated Class A, Class B, Class C and Class Z shares. Each class is
authorized to issue 250 million shares.
National Municipals Fund is a Maryland corporation and the rights of its
shareholders are governed by its Charter, By-Laws and the Maryland General
Corporation Law. Municipal Series Fund is a Massachusetts business trust and the
rights of its shareholders are governed by its Declaration of Trust, By-Laws and
applicable Massachusetts law.
Generally, neither Fund is required to hold annual meetings of its
shareholders. Each Fund is required to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Director/Trustee when
requested in writing to do so by the holders of at least 10% of the Fund's
outstanding shares. In addition, each Fund is required to call a meeting of
shareholders for the purpose of electing Directors/Trustees to fill any existing
vacancies on the Board of Directors/Trustees if, at any time, less than a
majority of the Directors/Trustees holding office at that time were elected by
the holders of the outstanding voting securities.
Under the Declaration of Trust, Municipal 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 Municipal Series Fund's name, authorize additional series
of shares, to supply any omission, to cure, correct or supplement any ambiguous,
defective or inconsistent provision contained therein, or if they deem it
necessary to conform the Declaration of Trust to the requirements of applicable
federal laws or regulations or the requirements of the regulated investment
company provisions of the Internal Revenue Code; (4) any termination or
reorganization of Municipal Series Fund to the extent and as provided in the
Declaration of Trust; (5) a determination as to whether a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of Municipal Series Fund or its shareholders, to
the same extent as the shareholders of a Massachusetts business corporation
would be entitled to vote on such a determination; (6) with respect to any plan
of distribution adopted pursuant to Rule 12b-1 under the Investment Company Act;
and (7) such additional matters relating to Municipal Series Fund as may be
required or authorized by law, the Declaration of Trust, Municipal
Series Fund's By-Laws, or any registration of Municipal Series Fund with the SEC
or any state securities commission, or as the Trustees may consider necessary or
desirable. Municipal Series Fund shareholders also vote upon changes in
fundamental investment policies or restrictions.
The Declaration of Trust provides that a "Majority Shareholder Vote" of
Municipal Series Fund is required to decide most questions upon which
shareholders vote. "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 of 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.
Municipal Series Fund's and National Municipals Fund's By-Laws provide that
a majority of the outstanding shares shall constitute a quorum for the
transaction of business at a shareholders' meeting.
16
<PAGE>
Matters requiring a larger vote by law or under the organization documents for
either Fund are not affected by such quorum requirements.
With respect to 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, Municipal
Series Fund's shareholders, under certain circumstances, could be held
personally liable for Municipal Series Fund's obligations. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
Municipal Series Fund and requires that notice of such disclaimer be given in
every written obligation, contract, instrument, certificate, share, other
security of Municipal Series Fund or undertaking made or issued by the Trustees.
The Declaration of Trust provides for indemnification out of the applicable
series' property for all losses and expenses of any shareholder held personally
liable for Municipal Series Fund's obligations solely by reason of his or her
being or having been a Municipal Series Fund shareholder and not because of his
or her acts or omissions or some other reason. Thus, Municipal Series Fund
considers the risk of a shareholder incurring financial loss on account of
shareholder liability to be remote since it is limited to circumstances in which
a disclaimer is inoperative or Municipal Series Fund itself would be unable to
meet its obligations.
With respect to the liability and indemnification of Directors 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 of such exemption
from liability or limitation thereof is not permitted by law, including under
the Investment Company Act. With respect to the liability and indemnification of
National Municipals Fund's Directors and officers, National Municipals Fund's
By-Laws provide that its present and former directors, officers, employees and
agents of National Municipals Fund shall be indemnified by National Municipals
Fund against judgments, fines, settlements, and expenses to the fullest extent
authorized and in the manner permitted by applicable federal and state law.
With respect to the liability and indemnification of Trustees of Municipal
Series Fund, under Municipal Series Fund's Declaration of Trust, a Trustee is
entitled to indemnification against all liability and expenses reasonably
incurred or paid 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, and against amounts paid or incurred by him in the settlement
thereof, unless such Trustee has acted with bad faith, willful misfeasance,
gross negligence or in reckless disregard of his or her duties.
Under the Investment Company Act, a Director of National Municipals Fund and
a Trustee of Municipal Series Fund may not be protected against liability to
National Municipals Fund or Municipal Series Fund, respectively, and their
security holders to which he or she would otherwise be subject as a result of
his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. The staff
of the SEC interprets the Investment Company Act to require additional limits on
indemnification of Directors, Trustees and officers.
COMPARISON OF PRINCIPAL RISK FACTORS
Each Series and National Municipals Fund is subject to the risks normally
associated with funds that invest in municipal bonds.
As described more fully below, each Series and National Municipals Fund has
similar investment objectives, policies and permissible investments.
As stated above, one of the principal differences in the investment policies
of each Series and National Municipals Fund is that unlike National Municipals
Fund, each Series also seeks interest income that is exempt from state taxes
(Massachusetts, North Carolina or Ohio, as applicable). Because each
Series concentrates its investments in Massachusetts, North Carolina or Ohio
obligations (as applicable), it is more susceptible to economic, political or
other developments that may adversely affect issuers of state obligations than a
municipal bond fund that is not as geographically concentrated.
17
<PAGE>
Because each Series and National Municipals Fund normally invest in
long-term investment-grade municipal obligations, the Series and National
Municipals Fund have similar levels of risk. Since each Series may invest up to
30% of its respective assets in "non-investment" grade bonds ("junk bonds"),
while National Municipals Fund may invest only up to 15% of its assets in junk
bonds, at times the risk level of National Municipals Fund may be lower than
that of a Series. As of June 30, 2000, each of Massachusetts Series, North
Carolina Series and Ohio Series invested 98.7%, 98.1% and 98.6%, respectively,
of their total assets in municipal bonds. As of June 30, 2000, National
Municipals Fund invested 103.7% of its total assets in municipal bonds.
Investments in municipal bonds expose each Series and National Municipals Fund
to the following risks:
- Credit risk -- the risk that the borrower can't pay back the money
borrowed or make interest payments (lower for insured and higher rated
bonds). The lower a bond's quality, the higher its potential volatility
- Market risk -- the risk that bonds will lose value in the market,
sometimes rapidly or unpredictably, because interest rates rise or there
is a lack of confidence in the borrower or the bond's insurer. Bond prices
and the Series' and National Municipals Fund's net asset values generally
move in opposite directions from interest rates -- if interest rates go
up, the prices of the bonds in the Series' and National Municipals Fund's
respective portfolios may fall because the bonds they hold won't, as a
rule, pay as well as the newer bonds issued
- Illiquidity risk -- the risk that bonds may be difficult to value
precisely and sell at time or price desired, in which case valuation would
depend more on investment adviser's judgment than is generally the case
with other types of municipal bonds.
- Nonappropriation risk -- the risk that the state or municipality may not
include the bond obligations in future budgets
- Tax risk -- the risk that federal (and state or local, with respect to
each Series) income tax rates may decrease, which could decrease demand
for municipal bonds or that a change in law may limit or eliminate
exemption of interest on municipal bonds from such taxes
- Concentration risk -- the risk that bonds may lose value because of
political, economic or other events in the geographic region where its
investments are focused (greater with respect to each Series due to each
Series' geographic concentration)
- Bonds with longer maturity dates are subject to greater price fluctuations
as a result of changes in interest rates than bonds with shorter maturity
dates
Each of the Series and National Municipals Fund may invest in junk bonds
which expose them to higher market, credit and illiquidity risks than
higher-grade municipal bonds.
Although each Series and National Municipals Fund may purchase insured
municipal bonds to reduce credit risk, insured obligations do not provide
protection against the market fluctuations of insured bonds or fluctuations in
the price of shares of each Series and National Municipals Fund. Each
Series and National Municipals Fund may also use various investment
strategies -- such as derivatives -- that involve risk. Each Series and National
Municipals Fund use derivative strategies to try to improve returns or protect
assets. Derivatives, which involve costs and can be volatile, may not fully
offset the underlying positions and this could result in losses that would not
have otherwise occurred.
Like any mutual fund, an investment in a Series or National Municipals Fund
could lose value, and you could lose money. An investment in a Series or
National Municipals Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or by any other government agency.
For a more complete discussion of the risks associated with each Series or
National Municipals Fund, please refer to the "Risk/Return Summary" or the
section entitled "Investment Risks" in each Series' and National Municipals
Fund's respective Prospectus.
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INVESTMENT OBJECTIVES AND POLICIES
If the Mergers are approved, the shareholders of each Series will become
shareholders of National Municipals Fund. The following information compares the
objectives and policies of each Series and National Municipals Fund.
INVESTMENT OBJECTIVES
Each Series and National Municipals Fund have similar investment objectives
and policies. The investment objective of each Series is to maximize current
income that is exempt from state income tax (Massachusetts, North Carolina or
Ohio, as applicable) and federal income tax 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. The investment
objectives primarily differ in that, unlike each Series, National Municipals
Fund does not invest in state specific (such as Massachusetts, North Carolina or
Ohio) state and local municipal obligations. Each Series' dividends are exempt
from Massachusetts, North Carolina or Ohio, as applicable, personal income taxes
for residents of such states. National Municipals Fund's dividends, however,
will likely not be exempt from any state income taxes. Therefore, shareholders
of each Series should recognize that if the Merger occurs with respect to their
Series, income from their investment in National Municipals Fund will likely be
subject to Massachusetts, North Carolina or Ohio state income taxes, as
applicable. The respective investment objective of each Series and National
Municipals Fund also differ in that each Series seeks current income consistent
with preservation of capital, while National Municipals Fund does not seek
preservation of capital. Moreover, in conjunction with its respective investment
objective, each Series may invest in debt obligations with the potential for
capital gain. The Series and National Municipals Fund have the same Manager
(PIFM), investment adviser (PIC), the same investment team (Municipal Bond Team)
and same team leader (Evan Lamp). The Municipal Bond Team, which is primarily
responsible for overseeing the day-to-day management of each Series and National
Municipals Fund, utilizes the same investment approach in selecting investments
for each Series and National Municipals Fund, consistent with their respective
investment objectives. Each Series and National Municipals Fund invests
primarily in long-term investment grade municipal bonds.
The investment objective of each Series and National Municipals Fund is a
fundamental policy. This means that the objective cannot be changed without the
approval of shareholders of each Series and National Municipals Fund,
respectively. With the exception of fundamental policies, investment policies
(other than specified investment restrictions) of each Series and National
Municipals Fund can be changed without shareholder approval.
For purposes of measuring their performance, each Series and National
Municipals Fund use the Lehman Brothers Municipal Bond Index, an unmanaged index
of over 39,000 long-term investment-grade municipal bonds, which gives a broad
look at how long-term investment-grade municipal bonds have performed. Each
Series and National Municipals Fund also use the Lipper Municipal Debt Funds
Category (which is based on the average return of all mutual funds in this
category), as a benchmark for measuring their performance, although each
Series uses its applicable state specific category of this benchmark.
PRINCIPAL INVESTMENT STRATEGIES
Each Series and National Municipals Fund have similar investment strategies,
the main difference being that each Series primarily invests in state specific
municipal obligations, whereas National Municipals Fund invests in municipal
obligations irrespective of their state of origin. Massachusetts Series, North
Carolina Series and Ohio Series each seek to achieve their respective investment
objective by investing primarily in state (Massachusetts, North Carolina and
Ohio, respectively,) and local municipal bonds, which are debt obligations or
fixed income securities, including notes, commercial paper and other
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securities, as well as obligations of other issuers (such as issuers located in
Puerto Rico, the Virgin Islands and Guam), which pay interest income exempt from
those state and federal income taxes. Each Series will normally invest so that
at least 80% of the income from the Series' investments will be exempt from
state income tax (Massachusetts, North Carolina or Ohio, as applicable), and
federal income tax or each Series will invest at least 80% of its total assets
in Massachusetts, North Carolina or Ohio, as applicable, obligations. National
Municipals Fund also seeks to achieve its investment objective by investing
primarily in municipal bonds, which include notes issued by a state, territory
or possession of the United States, or any political subdivision thereof, or the
District of Columbia.
Each Series and National Municipals Fund invests primarily in long-term
investment grade municipal bonds. Investment grade debt obligations are rated at
least BBB by Standard & Poor's Ratings Group (S&P), Baa by Moody's Investors
Service (Moody's), or comparably rated by another major rating service, and
unrated debt obligations that PIC believes to be of comparable quality.
Each Series and National Municipals Fund may invest in general obligation
bonds or revenue bonds. General obligation bonds are obligations supported by
the credit of an issuer that has the power to tax and are payable from that
issuer's general revenues and not from any specific source. Revenue bonds, on
the other hand, are payable from revenues derived from a particular source or
project. Each Series and National Municipals Fund may invest in certain
municipal bonds the interest on which is subject to the federal alternative
minimum tax (AMT). Each Series and National Municipals Fund may also invest in
insured municipal bonds.
Each Series and National Municipals Fund may invest in high-yield municipal
debt obligations (junk bonds), although the Series may invest up to 30% of their
respective assets in junk bonds, while National Municipals Fund may only invest
up to 15% of its assets in junk bonds. The dollar-weighted average maturity of
the obligations held by each Series will normally be between 10 and 20 years. A
substantial portion of National Municipals Fund is invested in long-term
municipal bonds, including obligations with maturities of 20 years or more.
Each Series and National Municipals Fund may invest in municipal lease
obligations, municipal asset-backed securities, zero coupon municipal bonds,
various floating and variable rate bonds and when-issued and delayed-delivery
securities. Each Series and National Municipals Fund may also use various
derivative strategies to try to improve their respective performance or protect
their respective assets. National Municipals Fund may also invest up to 10% of
its total assets in shares of other investment companies, which can result in
the duplication of management and advisory fees, although the Series may not do
so.
COMPARISON OF OTHER POLICIES OF EACH SERIES AND
NATIONAL MUNICIPALS FUND
DIVERSIFICATION
Each Series and National Municipals Fund are diversified funds. This means
that, with respect to 75% of each Series' and National Municipals Fund's total
assets, they may not invest more than 5% of each of their total assets in the
securities of a single issuer, and they may not hold more than 10% of the
outstanding voting securities of a single issuer. These limitations do not apply
to U.S. government securities.
BORROWING
Municipal Series Fund, on behalf of each Series, and National Municipals
Fund may borrow an amount up to 33 1/3% of the value of their respective total
assets for temporary, extraordinary or emergency purposes or for the clearance
of transactions. With respect to National Municipals Fund, this amount must be
borrowed from banks. Each Series and National Municipals Fund will not purchase
portfolio securities if their respective borrowings exceed 5% of assets.
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LENDING
Each Series and National Municipals Fund cannot make loans, except through
repurchase agreements.
ILLIQUID SECURITIES
Each Series and National Municipals Fund may invest in illiquid securities,
including securities with legal or contractual restrictions on resale, those
without a readily available market, and repurchase agreements with maturities
longer than seven days. Each Series and National Municipals Fund may hold up to
15% of its respective net assets in illiquid securities.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, each
Series may hold up to 100% of its respective assets in cash, cash equivalents or
investment-grade bonds, including bonds that are not exempt from state, local
and federal income taxation. In response to adverse market, economic or
political conditions, or for liquidity purposes, pending investment in municipal
bonds, National Municipals Fund may take a temporary defensive position and
invest up to 100% of its assets in short-term municipal debt obligations.
Investing heavily in these securities limits a fund's ability to achieve its
investment objective, but can help to preserve its assets.
For more information about the risks and restrictions associated with these
policies, see the Series' and National Municipal Fund's respective Prospectuses
and Statements of Additional Information, and for a more detailed discussion of
the Series' and National Municipal Fund's investments, see their respective
Statements of Additional Information, all of which are incorporated into this
Proxy Statement by reference.
OPERATIONS OF NATIONAL MUNICIPALS FUND
FOLLOWING THE MERGERS
Neither PIFM nor PIC expect National Municipals Fund to revise its
investment policies, management or general investment approach as a result of
the Mergers. In addition, because Evan Lamp serves as the investment team leader
for each Series and National Municipals Fund, neither PIFM nor PIC anticipates
any significant changes from the Series' management or general investment
approach. The agents that provide each Series with services, such as its
Custodian and Transfer Agent, who also provide these services to National
Municipals Fund, are not expected to change. The Trustees of Municipal
Series Fund, of which each Series is a part, are the same individuals who serve
as Directors of National Municipals Fund. The officers of Municipal Series Fund
and National Municipals Fund are also the same.
All of the current investments of each Series are permissible investments
for National Municipals Fund. Nevertheless, PIC may sell securities held by
National Municipals Fund after the Closing Date of the Mergers as may be
necessary or desirable in the ongoing management of National Municipals Fund.
Transaction costs associated with such adjustments will be borne by National
Municipals Fund.
PURCHASES, REDEMPTIONS AND EXCHANGES
PURCHASING SHARES
The price to buy one share of a class of each Series or National Municipals
Fund is that class' net asset value, or NAV, plus in the case of Class A and
Class C shares, a front-end sales charge. Each Series and National Municipals
Fund offer Class A, Class B and Class C shares. Massachusetts Series and
National Municipals Fund also offer Class Z shares. The Series and National
Municipals Fund impose the same front-end sales charge on Class A shares (3% of
Class A shares' public offering price). The sales charges imposed by Class B and
Class C shares of National Municipals Fund are also identical to those charged
by
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the Series. In the case of Class B shares, only a contingent deferred sales
charge (CDSC) is charged, while Class C shares are sold with a 1% front-end
sales load and a 1% CDSC. Class Z shares, offered by Massachusetts Series and
National Municipals Fund, are sold without either a front-end sales load or a
CDSC and are available only to a limited group of investors. Each Class A,
Class B or Class C shareholder of each Series will receive Class A shares of
National Municipals Fund, and each Class Z shareholder of Massachusetts
Series will receive Class Z shares of National Municipals Fund, in each case
equal in value to his or her shares of the Series immediately before the Merger,
without any dilution. Class A shares of National Municipals Fund that Class A,
Class B, and Class C shareholders of each Series will receive in the Merger will
not be subject to a front-end sales charge. Since each Series' Class B and
Class C shareholders will, as a result of the Mergers, receive Class A shares of
National Municipals Fund in exchange for their shares, such shareholders will no
longer be subject to a CDSC and will benefit from the lower distribution and
service (12b-1) fees incurred by Class A shares.
Shares in each Series and National Municipals Fund are purchased at the next
NAV, plus initial sales charges, if any, calculated after your investment is
received and accepted. Each Series' and National Municipals Fund's NAV is
normally calculated once each business day at 4:15 p.m., New York time, on days
when the New York Stock Exchange (NYSE) is open for trading. Refer to each
Series' and National Municipals Fund's respective Prospectuses for more
information regarding how to buy shares.
REDEEMING SHARES
The redemption policies for each Series and National Municipals Fund are
identical. Your shares will be sold at the next NAV, less any applicable CDSC
imposed on Class B and Class C shares, calculated after your order is received
and accepted. Refer to each Series' and National Municipals Fund's respective
Prospectuses for more information regarding how to sell shares.
MINIMUM INVESTMENT REQUIREMENTS
For each Series and National Municipals Fund, the minimum initial investment
amount is $1,000 for Class A and Class B shares. The minimum initial investment
amount for Class C shares is $2,500 and $5,000 for each Series and National
Municipals Fund, respectively. There is no minimum initial or additional
investment amount for Class Z shares. The minimum additional investment amount
is $100 for Class A, Class B and Class C shares of each Series and National
Municipals Fund. All minimum investment requirements are waived for certain
custodial accounts for the benefit of minors. Refer to each Series' and National
Municipals Fund's respective Prospectuses for more information regarding minimum
investment requirements.
PURCHASES AND REDEMPTIONS OF EACH SERIES AND NATIONAL MUNICIPALS FUND
As of August 24, 2000, Municipal Series Fund stopped accepting orders to
purchase or exchange into shares of the Series, except for certain retirement
and employee plans (excluding IRA accounts) that are currently shareholders and
successor or related programs and plans, investors who have executed a letter of
intent prior to August 24, 2000, reinvestment of dividends and/or distributions,
former shareholders exercising their 90-day repurchase privilege and
participations in automatic investment plans. Shareholders of each Series may
redeem shares through the Closing Date of each Merger. If each Merger is
approved, the purchase and redemption policies of the combined fund will be the
same as the current policies of National Municipals Fund.
EXCHANGES OF SERIES AND NATIONAL MUNICIPALS FUND SHARES
The exchange privilege currently offered by National Municipals Fund is the
same as that of each Series and is not expected to change after the Mergers.
Shareholders of each Series and National Municipals Fund may exchange their
shares for shares of the same class of certain other Prudential mutual
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funds. If you hold Class B or Class C shares and wish to exchange into a money
market fund, you must exchange into Prudential Special Money Market Fund, Inc.
During the time you are invested in Prudential Special Money Market Fund, Inc.,
the period of time during which your CDSC is calculated is frozen. Refer to each
Series' and National Municipals Fund's respective Prospectuses for additional
information regarding exchanges.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Series and National Municipals Fund distributes substantially all of
its net investment income and capital gains to shareholders each year. Each
Series and National Municipals Fund declares dividends, if any, daily, and
distributes dividends of net investment income, if any, typically monthly. Net
capital gains for each Series and National Municipals Fund, if any, are
distributed at least annually. At or before the Closing Date, each Series shall
declare additional dividends or other distributions in order to distribute
substantially all of its investment company taxable income and net realized
capital gains.
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE MERGERS
It is a condition to each Fund's obligation to complete the Mergers that the
Funds will have received, with respect to each Series, an opinion of outside
counsel, Swidler Berlin Shereff Friedman, LLP or a ruling from the Internal
Revenue Service satisfactory to each of them, that, among other things, each
Merger will constitute a reorganization within the meaning of
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the Code),
and that no gain or loss will be recognized by National Municipals Fund or any
Series, and no gain or loss will be recognized by shareholders of the Series as
a result of the Merger.
As discussed above, National Municipals Fund may purchase municipal
obligations of any state, territory or possession of the United States and the
District of Columbia. As a result, upon the consummation of each Merger,
shareholders of the Massachusetts Series, North Carolina Series and Ohio
Series that are residents in Massachusetts, North Carolina or Ohio,
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 Massachusetts, North Carolina
or Ohio state income taxes.
During the period between shareholder approval and the Closing Date, PIC may
sell certain securities held by the Series to make portfolio adjustments in
connection with the Mergers. Selling these securities may result in realization
of capital gains, which, when distributed, would be taxable to the Series'
shareholders.
Shareholders of each Series are advised to consult their own tax advisers
regarding specific questions with respect to federal, state or local taxes.
Please see the section entitled 'The Proposed Transaction -- U.S. Federal Income
Tax Considerations' for more information.
THE PROPOSED TRANSACTIONS
AGREEMENT AND PLAN OF REORGANIZATIONS
The Agreement describes the terms and conditions under which the proposed
transactions may be completed. Significant provisions of the Agreement are
summarized below; however, this summary is qualified in its entirety by
reference to the Agreement, the form of which is attached as Attachment A to
this Proxy Statement.
The Agreement contemplates that at the Closing Date, each Series will
transfer and deliver all of its assets to National Municipals Fund, and that
National Municipals Fund, will (a) assume all of the liabilities of each Series,
and (b) issue and deliver to each Series the number of Class A and Class Z
shares of National Municipals Fund as provided for in the Agreement. The assets
of each Series to be acquired by
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National Municipals Fund include all cash, cash equivalents, securities,
receivables (including interest or dividends receivable), claims and other
property owned by such Series, and any deferred or prepaid expenses shown as an
asset on the books of such Series at the Closing Date. National Municipals Fund
will assume from each Series all liabilities, debts and obligations of whatever
kind or nature, whether absolute, accrued, contingent or otherwise, whether or
not arising in the ordinary course of business, whether or not determinable at
the Closing Date and whether or not specifically referred to in the Agreement;
provided, however, that Municipal Series Fund will use its best efforts to cause
each Series to discharge all of its known liabilities prior to the Closing Date.
National Municipals Fund will deliver to each Series the number of full and
fractional Class A and/or Class Z shares of National Municipals Fund, as
applicable, having an aggregate net asset value equal to the value of the assets
less the liabilities of such Series as of the Closing Date. Each Series will
then distribute PRO RATA to its Class A, Class B, Class C and Class Z (if any),
shareholders of record, the Class A and Class Z, if any, shares of National
Municipals Fund received by the Series.
The value of each Series' assets to be acquired by National Municipals Fund
and the amount of its liabilities to be assumed by National Municipals Fund will
be determined as of the close of business on the Closing Date, using the
valuation procedures set forth in each Series' Prospectus and Statement of
Additional Information. The net asset value of a share of National Municipals
Fund will be determined as of the same time using the valuation procedures set
forth in its Prospectus and Statement of Additional Information. The valuation
procedures are the same for each Series and National Municipals Fund.
As of the Closing Date, each Series will distribute to its respective
Class A, Class B and Class C shareholders of record the shares of National
Municipals Fund it receives, so that shareholders of each Series will receive
the number of full and fractional Class A shares of National Municipals Fund
that is equal in value to the net asset value of their Class A, Class B or
Class C shares of such Series at the Closing Date. At that time, Class Z
shareholders of Massachusetts Series will receive the number of full and
fractional Class Z shares of National Municipals Fund that is equal in value to
the net asset value of their Class Z shares. Each Series will then be terminated
as soon as practicable. The distribution of shares of National Municipals Fund
will be accomplished by opening accounts on the books of National Municipals
Fund in the names of each Series' respective shareholders and by transferring to
such accounts shares of National Municipals Fund. Each shareholder's account
will be credited with the respective PRO RATA number of full and fractional
Class A and Class Z shares of National Municipals Fund due such Series'
shareholder. Fractional shares of National Municipals Fund shall be rounded to
the third decimal place.
Immediately after each Merger, each former Series shareholder will own
shares of National Municipals Fund equal to the aggregate net asset value of
that shareholder's shares of the respective Series immediately prior to the
Merger. The net asset value per share of National Municipals Fund will not be
affected by the transaction. Thus, the Merger will not result in a dilution of
any shareholder's interest.
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 a Series as of that time will be payable by the person to whom such
shares are to be issued as a condition of such transfer.
The completion of each Merger is subject to a number of conditions set forth
in the Agreement, some of which may be waived by the relevant Series or National
Municipals Fund. In addition, the Agreement may be amended in any mutually
agreeable manner, except that no amendment that may have a materially adverse
effect on the shareholders' interests may be made subsequent to the Meeting.
REASONS FOR THE MERGERS
The Boards of Trustees/Directors (the Boards) of Municipal Series Fund, of
which each Series is a part, and National Municipals Fund have determined that
each Merger is in the best interests of the respective shareholders of each
Series and National Municipals Fund and that no Merger will result in a
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dilution of the pecuniary interests of the respective shareholders of the
Series or National Municipals Fund.
In considering each Merger, each Board considered a number of factors,
including the following:
- the compatibility of the investment objective, policies and restrictions
of each Series and National Municipals Fund and the fact that National
Municipals Fund's portfolio is less susceptible to risks associated with
investments concentrated in a single state;
- the relative past and current growth in assets and investment performance,
and future prospects of each Series and National Municipals Fund;
- the effect of the proposed transactions, individually and in the
aggregate, on the expense ratios of each Series and National Municipals
Fund, including expected economies of scale;
- the costs of the Mergers, which will be paid for by National Municipals
Fund and each Series in proportion to their respective assets;
- the tax consequences of the Mergers to each Series and its shareholders
including the fact that: (i) each Merger will be of a tax-free nature with
respect to each Series, National Municipals Fund and their respective
shareholders; and (ii) if the Mergers are approved, shareholders who would
otherwise have received income generally exempt from Massachusetts, North
Carolina or Ohio, as applicable, taxation will likely be subject to such
state's taxation on income derived from National Municipals Fund following
the Mergers;
- the potential benefits to the shareholders of each Series and National
Municipals Fund, including the fact that as a result of their receipt of
Class A shares of National Municipals Fund, each Series' Class B and
Class C shareholders will no longer be subject to a CDSC and will benefit
from lower distribution and service (12b-1) fees; and
- other alternatives to each Merger, including a continuance of a Series in
its present form, a change of manager or investment objective, or a
termination of the Series with the distribution of the cash proceeds to
the Series' respective shareholders.
PIFM and PIC recommended each Merger to the Board of Municipal Series Fund,
with respect to each Series, and of National Municipals Fund at meetings of the
Boards held on August 23, 2000. In recommending the Mergers, PIFM and PIC
advised the Boards that each Series and National Municipals Fund have similar
investment objectives, policies and investment portfolios. PIFM and PIC informed
the Boards that each Series and National Municipals Fund differed primarily with
respect to each Series' investment emphasis in state specific municipal
obligations and expense structures.
The Boards considered that if any or all Mergers are approved, shareholders
of the relevant Series, regardless of the class of shares they own, should
realize a reduction in annual operating expenses paid on their investment.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
National Municipals Fund was incorporated in Maryland on January 9, 1980. It
is registered with the Securities and Exchange Commission (the Commission) as an
open-end management investment company. National Municipals Fund is authorized
to issue 1 billion shares of common stock, $.01 par value per share, divided
into four classes of shares, designated as Class A, Class B, Class C and
Class Z common stock. Each class consists of 250 million shares of the
authorized common stock of National Municipals Fund. Each class of common stock
represents an interest in the same assets of National Municipals Fund and is
identical in all respects except that:
- each class is subject to different sales charges and distribution and
service (12b-1) fees, except for Class Z shares, which are not subject to
any sales charges or distribution and service (12b-1) fees;
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- 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;
- each class has a different exchange privilege;
- only Class B shares have a conversion feature whereby Class B shares held
for approximately seven years will automatically convert to Class A
shares, on a quarterly basis; and
- Class Z shares are offered exclusively for sale to a limited group of
investors.
Shares of National Municipals Fund, when issued, are fully paid and
nonassessable. Except for the conversion feature applicable to Class B shares,
there are no conversion, preemptive or other subscription rights. The dividend
rights, the right of redemption and the privilege of exchange are described in
National Municipals Fund's Prospectus.
National Municipals Fund does not intend to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the purpose
of electing Directors unless less than a majority of the Directors holding
office have been elected by shareholders, at which time the Directors then in
office will call a shareholder meeting for the election of Directors.
Shareholders of record of at least two-thirds of the outstanding shares of
National Municipals Fund may remove a Director by votes cast in person or by
proxy at a meeting called for that purpose. The Directors are required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Director, or to transact any other business, when requested in writing to
do so by the shareholders of record holding at least 10% of National Municipals
Fund's outstanding shares.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Each Merger is intended to qualify for U.S. federal income tax purposes as a
reorganization under the Code. It is a condition to each Fund's obligation to
complete the respective Mergers that the Funds will have received, with respect
to each Series, an opinion from Swidler Berlin Shereff Friedman, LLP, counsel to
the Funds, or a ruling from the Internal Revenue Service (IRS) satisfactory to
each of them, based upon representations made by each of Municipal Series Fund
and National Municipals Fund, and upon certain factual assumptions,
substantially to the effect that for federal income tax purposes:
1. The acquisition by National Municipals Fund of the assets of a
Series in exchange solely for voting shares of National Municipals Fund
and the assumption by National Municipals Fund of such Series'
liabilities, if any, followed by the distribution of National Municipals
Fund's voting shares acquired by each Series PRO RATA to each 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;
2. Each Series' shareholders will not recognize 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, as described above and in the Agreement;
3. No gain or loss will be recognized by any Series upon the transfer of
its assets to National Municipals Fund in exchange solely for Class A and
Class Z shares, as applicable, 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;
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4. No gain or loss will be recognized by National Municipals Fund upon the
acquisition of any Series' assets in exchange solely for Class A and
Class Z shares, as applicable, of National Municipals Fund and the
assumption of such Series' liabilities, if any;
5. National Municipals Fund's basis for the assets of each Series acquired
in the reorganizations will be the same as the basis of these assets 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 of these assets when held by such Series;
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
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 as defined in Section 1221 of the Internal
Revenue Code, on the date of the exchange.
An opinion of counsel is not binding on the IRS or any court. If the IRS
were to successfully assert that a Merger does not qualify as a reorganization
under the Code, then the Merger would be treated as a taxable sale of the
applicable Series' assets to National Municipals Fund followed by liquidation of
the applicable Series that would be taxable to the shareholders of such Series.
Shareholders of each Series should consult their tax advisers regarding the
tax consequences to them, if any, of the Mergers in light of their individual
circumstances. Because the foregoing discussion relates only to the U.S. federal
income tax consequences of the Mergers, shareholders also should consult their
tax advisers as to state, local and foreign tax consequences, if any, of the
Mergers.
CONCLUSION
The Agreement was approved by the Boards of Trustees/Directors of Municipal
Series Fund and National Municipals Fund at meetings held on August 23, 2000.
The Boards of each Fund determined that each Merger is in the best interests of
shareholders of the respective Series and National Municipals Fund, and that the
interests of existing shareholders of each Series and National Municipals Fund
would not be diluted as a result of the Mergers. If the shareholders of a
Series do not approve the Merger with respect to such Series or if such Merger
is not completed, such Series will continue to engage in business as a series of
a registered investment company and the Board of Municipal Series Fund will
consider other proposals for such Series, including proposals for the
reorganization or liquidation of such Series.
ADDITIONAL INFORMATION ABOUT NATIONAL MUNICIPALS FUND
National Municipals Fund's Prospectus dated March 3, 2000, as supplemented
to date, is enclosed with this Proxy Statement and is incorporated into this
Proxy Statement by reference. The Prospectus contains additional information
about National Municipals Fund, including its investment objective and policies,
Manager, investment adviser, advisory fees and expenses and procedures for
purchasing and redeeming shares. The Prospectus also contains National
Municipals Fund's financial highlights for the fiscal period ended December 31,
1999. The audited financial statements of National Municipals Fund for the
fiscal year ended December 31, 1999 are included in National Municipals Fund's
Annual Report, which is also enclosed with this Proxy Statement. Unaudited
financial statements of National Municipals Fund for the six months ended
June 30, 2000 are included in National Municipals Fund's Semiannual Report,
which is also enclosed with this Proxy Statement.
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MISCELLANEOUS
LEGAL MATTERS
Certain legal matters in connection with the issuance of National Municipals
Fund shares have been passed upon by Piper Marbury Rudnick & Wolfe, LLP. Certain
legal and tax matters in connection with the Mergers have been or will be passed
upon by Swidler Berlin Shereff Friedman, LLP, counsel to National Municipals
Fund and each Series. As to matters of Maryland or Massachusetts law, Swidler
Berlin Shereff Friedman, LLP will rely on the opinion of Piper Marbury
Rudnick & Wolfe, LLP or Sullivan & Worcester, LLP, respectively.
INDEPENDENT ACCOUNTANTS
The audited financial statements of each Series and National Municipals Fund
for the fiscal periods ended August 31, 2000 and December 31, 1999,
respectively, included in the applicable Statements of Additional Information,
have been examined by PricewaterhouseCoopers LLP, independent accountants, whose
reports thereon are included in the respective Statements of Additional
Information and in the Annual Reports to Shareholders for the fiscal years ended
August 31, 2000 and December 31, 1999, respectively. The financial statements
audited by PricewaterhouseCoopers LLP have been incorporated by reference in
reliance on their reports given on their authority as experts in auditing and
accounting.
AVAILABLE INFORMATION
Each Series and National Municipals Fund is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act of 1940, as amended (the 1940 Act), and in accordance
with these laws, they each file reports, proxy material and other information
with the Commission. Such reports, proxy material and other information can be
inspected and copied at the Public Reference Room maintained by the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549 and 7 World Trade Center, New
York, NY 10048. Copies of such material can also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington D.C. 20549, at prescribed rates,
or at the Commission's website (http://www.sec.gov).
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise Prudential Municipal Series Fund, care of Prudential
Investment Management Services LLC, Gateway Center Three, 100 Mulberry Street,
14th Floor, Newark, New Jersey 07102-4077, whether other persons are beneficial
owners of shares for which proxies are being solicited and, if so, the number of
copies of this Proxy Statement you wish to receive in order to supply copies to
the beneficial owners of the shares.
SHAREHOLDER PROPOSALS
Any shareholder of a Series who wishes to submit a proposal to be considered
by such Series' shareholders at the next meeting of shareholders of
Massachusetts Series, North Carolina Series or Ohio Series, as applicable,
should send the proposal to Prudential Municipal Series Fund, Massachusetts
Series, North Carolina Series or Ohio Series, as applicable, c/o Deborah A.
Docs, Secretary, at Gateway Center Three, 100 Mulberry Street, 4th Floor,
Newark, New Jersey 07102-4077, so as to be received within a reasonable time
before the Board of Trustees of Municipal Series Fund makes the solicitation
relating to such meeting. Shareholder proposals that are submitted in a timely
manner will not necessarily be included in the applicable Series' proxy
materials. Including shareholder proposals in proxy materials is subject to
limitations under federal securities laws. If Proposal No. 1 is approved with
respect to a Series at the Meeting, there will likely not be any future
shareholder meetings of such Series.
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National Municipals Fund's By-Laws provide that it will not be required to
hold annual meetings of shareholders if the election of Directors is not
required under the 1940 Act. It is the present intention of the Board of
Directors of National Municipals Fund not to hold annual meetings of
shareholders unless required to do so by the 1940 Act.
OTHER BUSINESS
Management of Massachusetts Series, North Carolina Series and Ohio Series,
knows of no business to be presented at the Meeting other than the Proposal
described in this Proxy Statement. However, if any other matter requiring a
shareholder vote should arise, the proxies will vote according to their best
judgment in the interest of each Series, as applicable, taking into account all
relevant circumstances.
By order of the Board of Trustees,
DEBORAH A. DOCS
SECRETARY
November 3, 2000
IT IS IMPORTANT THAT YOU EXECUTE AND RETURN YOUR PROXY PROMPTLY.
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ATTACHMENT A
AGREEMENT AND PLAN OF REORGANIZATIONS
Agreement and Plan of Reorganizations (Agreement) made as of the 30th day of
October, 2000, by and between Prudential Municipal Series Fund (Municipal Series
Fund) -- on behalf of Massachusetts Series, North Carolina Series and Ohio
Series -- and Prudential National Municipals Fund, Inc. (National Municipals
Fund and, collectively with Municipal Series Fund, the Funds and each
individually, a Fund). The Municipal Series Fund is a business trust organized
under the laws of the Commonwealth of Massachusetts and the National Municipals
Fund is a corporation organized under the laws of the State of Maryland. Each
Fund maintains its principal place of business at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. Shares of National Municipals
Fund are divided into four classes, designated Class A, Class B, Class C and
Class Z. Shares of Massachusetts Series are divided into four classes,
designated Class A, Class B, Class C and Class Z. Shares of North Carolina
Series and Ohio Series are divided into three classes, designated Class A,
Class B and Class C. Municipal Series Fund consists of eleven series, three of
which are the Massachusetts Series, North Carolina Series and Ohio Series
(collectively, the Series and each individually, a Series).
This Agreement is intended to be, and is adopted as, a plan of
reorganization for each of Massachusetts Series, North Carolina Series and Ohio
Series, pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of 1986,
as amended (Internal Revenue Code). Each reorganization will comprise the
transfer of all of the assets of each of Massachusetts Series, North Carolina
Series and Ohio Series, respectively, in exchange for shares of common stock
(Common Stock) of National Municipals Fund, and National Municipals Fund's
assumption of the relevant 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 each such 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 EACH SERIES (MASSACHUSETTS SERIES, NORTH CAROLINA
SERIES OR OHIO SERIES, AS APPLICABLE) IN EXCHANGE FOR SHARES OF NATIONAL
MUNICIPALS FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF EACH
SERIES.
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, Municipal Series Fund on
behalf of each Series agrees to sell, assign, transfer and deliver the assets of
each such 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), (b) to issue and deliver to Massachusetts Series in exchange
therefor the number of shares of Class Z Common Stock in National Municipals
Fund determined by dividing the net asset value of the Massachusetts 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 Z 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 each Series' liabilities, if any, as set forth in
paragraph 1.3. Such transactions shall take place with respect to each Series 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)
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and all 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 any Series, other than in
the ordinary course of business.
1.3 Except as otherwise provided herein, National Municipals Fund will
assume from each Series all debts, liabilities, obligations and duties of such
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 Municipal
Series Fund agrees to utilize its best efforts to cause each 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 the Closing Date.
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, Class C and
Class Z, (if any), shareholders of record, determined as of the close of
business on the Closing Date, the Class A and Class Z shares of National
Municipals Fund received by such 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 and Class Z shares due such Series' Class A, Class B,
Class C and Class Z (if any) shareholders, respectively. Fractional shares of
National Municipals Fund shall be rounded to the third decimal place.
1.6 National Municipals Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Series shareholder
holding Series receipts for shares of beneficial interest as of the Closing
Date, until National Municipals Fund is notified by Municipal Series Fund's
transfer agent that such shareholder has surrendered his or her outstanding
Series receipts for shares of beneficial interest or, in the event of lost,
stolen or destroyed receipts for shares of beneficial interest, posted adequate
bond or submitted a lost certificate form, as the case may be, National
Municipals Fund will not permit such shareholder to (1) receive dividends or
other distributions on National Municipals Fund shares in cash (although such
dividends and distributions shall be credited to the account of such shareholder
established on National Municipals Fund's books pursuant to paragraph 1.5, as
provided in the next sentence), (2) exchange National Municipals Fund shares
credited to such shareholder's account for shares of other Prudential Mutual
Funds, or (3) pledge or redeem such shares. In the event that a shareholder is
not permitted to receive dividends or other distributions on National Municipals
Fund shares in cash as provided in the preceding sentence, National Municipals
Fund shall pay such dividends or other distributions in additional 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 a 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 Municipal Series Fund
with respect to a Series is and shall remain, the responsibility of such Series
up to and including the Termination Date.
1.10 All books and records relating to each Series of Municipal 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 City time, on the Closing Date (such time and
date being hereinafter called the Valuation Time), using the valuation
procedures set forth in such Series' then-current prospectus and Municipal
Series Fund's statement of additional information.
2.2 The net asset value of Class A and Class Z shares of National
Municipals Fund shall be the net asset value for Class A and Class Z shares
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 a 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 15, 2000 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 a Series and of the net asset value
per share of National Municipals Fund is impracticable, each Closing Date shall
be postponed until the first business day after the date when such trading shall
have been fully resumed and such reporting shall have been restored.
3.4 Municipal Series Fund shall deliver to National Municipals Fund on or
prior to the Termination Date the names and addresses of each of the
shareholders of each Series and the number of outstanding
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shares owned by each such shareholder, all as of the close of business on the
Closing Date, certified by the transfer agent of Municipal Series Fund. National
Municipals Fund shall issue and deliver to Municipal Series Fund at the Closing
a confirmation or other evidence satisfactory to Municipal Series Fund that
shares of National Municipals Fund have been or will be credited to each Series'
account on the books of National Municipals Fund. At the Closing, each party
shall deliver to the other such bills of sale, checks, assignments, share
certificates, receipts and other documents as such other party or its counsel
may reasonably request to effect the transactions contemplated by this
Agreement.
4. REPRESENTATIONS AND WARRANTIES.
4.1 Municipal Series Fund represents and warrants as follows:
4.1.1 Municipal Series Fund is a business trust duly organized and
validly existing under the laws of The Commonwealth of Massachusetts and
each of the Series has been duly established in accordance with the terms of
Municipal Series Fund's Declaration of Trust as a separate series of
Municipal Series Fund;
4.1.2 Municipal Series Fund is an open-end, management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.1.3 Municipal Series Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any provision
of the Declaration of Trust or By-Laws of Municipal Series Fund or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which any Series is a party or by which any Series is bound;
4.1.4 All material contracts or other commitments to which any Series,
or the properties or assets of any Series, is subject, or by which any
Series is bound, except this Agreement, will be terminated on or prior to
the Closing Date without such Series or National Municipals Fund incurring
any liability or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Municipal Series Fund or any
of the properties or assets of any Series. Municipal Series Fund knows of no
facts that might form the basis for the institution of such proceedings,
and, with respect to each Series, Municipal Series Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of each Series at August 31, 2000 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 any such Series (contingent or
otherwise) not disclosed therein;
4.1.7 Since August 31, 2000, there has not been any material adverse
change in any Series' financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by any Series of indebtedness maturing more than one year from
the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by National Municipals Fund. For the purposes of this
paragraph 4.1.7, a decline in net assets, net asset value per share or
change in the number of shares outstanding shall not constitute a material
adverse change;
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4.1.8 At the date hereof and at the Closing Date, all U.S. 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 U.S.
federal and other taxes shown as due on said returns and reports shall have
been paid insofar as due, or adequate provision shall have been made for the
payment thereof, and, to the best of Municipal Series Fund's knowledge, all
U.S. 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 any such
returns;
4.1.9 For each past taxable year since it commenced operations, each
Series has elected to be treated as, and has met the requirements of
Subchapter M of the Internal Revenue Code for qualification and treatment
as, a regulated investment company and Municipal Series Fund intends to
cause such Series to make such election and 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 each 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 of its shares, nor is there
outstanding any security convertible into any of its shares, except for the
Class B shares of each Series which have the conversion feature described in
Municipal Series Fund's current prospectuses;
4.1.11 At the Closing Date, Municipal Series Fund will have good and
marketable title to the assets of each Series to be transferred to National
Municipals Fund pursuant to paragraph 1.1, and full right, power and
authority to sell, assign, transfer and deliver such assets hereunder free
of any liens, claims, charges or other encumbrances, and, upon delivery and
payment for such assets, National Municipals Fund will acquire good and
marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement, with
respect to each Series, has been duly authorized by the Trustees of the
Municipal Series Fund and by all necessary action, other than shareholder
approval, on the part of the relevant Series, and this Agreement constitutes
a valid and binding obligation of Municipal Series Fund and of each Series,
subject to such shareholder approval;
4.1.13 The information furnished and to be furnished by Municipal
Series Fund for use in applications for orders, registration statements,
proxy materials and other documents that may be necessary in connection 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 each Series and on the Closing Date, the Proxy Statement of
each 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, as amended (1933 Act), the Securities Exchange Act of 1934, as
amended (1934 Act) and the Investment Company Act, and the rules and
regulations under each such Act, 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
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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 Municipal
Series Fund. Except as previously disclosed in writing to Municipal Series
Fund, National Municipals Fund knows of no facts that might form the basis
for the institution of such proceedings, and National Municipals Fund is not
a party to or subject to the provisions of any order, decree or judgment of
any court or governmental body that materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of National Municipals Fund at December 31, 1999
and for the fiscal year then ended (copies of which have been furnished to
Municipal 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, 1999, 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 Series Fund. For
the purposes of this paragraph 4.2.6, a decline in net assets, 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 U.S. 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 U.S.
federal and other taxes shown as due on said returns and reports shall have
been paid insofar as due, or adequate provision shall have been made for the
payment thereof, and, to the best of National Municipals Fund's knowledge,
all U.S. 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;
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4.2.8 For each past taxable year since it commenced operations,
National Municipals Fund has elected to be treated as, and has met the
requirements of Subchapter M of the Internal Revenue Code for qualification
and treatment as, a regulated investment company and intends to make such
election and 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 Class B shares which have the conversion feature
described in National Municipals Fund's current Prospectus;
4.2.10 The execution, delivery and performance of this Agreement has
been duly authorized by the Board of Directors of National Municipals Fund
and by all necessary corporate action on the part of National Municipals
Fund, and this Agreement constitutes a valid and binding obligation of
National Municipals Fund;
4.2.11 The shares of National Municipals Fund to be issued and
delivered to Municipal Series Fund for and on behalf of each Series pursuant
to this Agreement will, at the Closing Date, have been duly authorized and,
when issued and delivered as provided in this Agreement, will be duly and
validly issued and outstanding shares of National Municipals Fund, fully
paid and non-assessable;
4.2.12 The information furnished and to be furnished by National
Municipals Fund for use in applications for orders, registration statements,
proxy materials and other documents which may be necessary in connection
with the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
4.2.13 On the effective date of the Registration Statement, at the time
of the meeting of the shareholders of each Series and on the Closing Date,
the Proxy Statement and the Registration Statement (i) will comply in all
material respects with the provisions of the 1933 Act, the 1934 Act and the
Investment Company Act and the rules and regulations under each such Act,
(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 a Series for
use therein.
5. COVENANTS OF NATIONAL MUNICIPALS FUND AND MUNICIPAL SERIES FUND.
5.1 A. Municipal 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 Municipal Series Fund covenants to call a meeting of the shareholders
of each Series to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions
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contemplated hereby (including the determinations of its Trustees as set forth
in Rule 17a-8(a) under the Investment Company Act).
5.3 Municipal Series Fund covenants that National Municipals Fund shares to
be received for and on behalf of each Series in accordance herewith are not
being acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4 Municipal Series Fund covenants that it will assist National Municipals
Fund in obtaining such information as National Municipals Fund reasonably
requests concerning the beneficial ownership of each Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or
cause to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Municipal Series Fund covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such Act.
5.7 Municipal Series Fund covenants that it will, from time to time, as and
when requested by National Municipals Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
or cause to be taken such further action, as National Municipals Fund may deem
necessary or desirable in order to vest in and confirm to National Municipals
Fund title to and possession of all the assets of each Series to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
5.8 National Municipals Fund covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 National Municipals Fund covenants that it will, from time to time, as
and when requested by Municipal Series Fund, execute and deliver or cause to be
executed and delivered all such assignments and other instruments, and will take
and cause to be taken such further action, as Municipal Series Fund may deem
necessary or desirable in order to (i) vest in and confirm to the Municipal
Series Fund title to and possession of all the shares of National Municipals
Fund to be transferred to the shareholders of each Series pursuant to this
Agreement and (ii) assume all of the liabilities of each Series in accordance
with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF MUNICIPAL SERIES FUND.
The obligations of Municipal Series Fund to consummate the transactions
provided for herein shall be subject to the performance by National Municipals
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
6.1 All representations and warranties of National Municipals Fund
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
6.2 National Municipals Fund shall have delivered to Municipal Series Fund
on the Closing Date a certificate executed in its name by the President or a
Vice President of National Municipals Fund, in form and substance satisfactory
to Municipal Series Fund and dated as of the Closing Date, to the effect that
the representations and warranties of National Municipals Fund in this Agreement
are true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement, and as to such
other matters as Municipal Series Fund shall reasonably request.
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<PAGE>
6.3 With respect to the reorganization of each Series, Municipal 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. Such counsel may state that they express no opinion as to
the validity or enforceability of any provision regarding choice of New York
law to govern this Agreement.
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 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 Restated Articles of Incorporation, as
supplemented to date, or Amended and Restated By-Laws or (ii) result in a
default or a breach of (a) the Management Agreement, dated May 2, 1988, as
amended on January 22, 1990, between Prudential-Bache National Municipals
Fund, Inc. 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, as amended on February 22, 1999, (c) the Distribution
Agreement, dated November 9, 1998, between Prudential National Municipals
Fund, Inc. and Prudential Investment Management Services LLC, and (d) the
Transfer Agency and Service Agreement, dated January 1, 1988, between
Prudential-Bache National Municipals Fund, Inc. and Prudential Mutual Fund
Services LLC, as successor to Prudential Mutual Fund Services, Inc., as
amended on August 24, 1999; 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.
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<PAGE>
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND.
The obligations of National Municipals Fund to complete the transactions
provided for herein shall be subject to the performance by Municipal Series Fund
of all the obligations to be performed by it hereunder on or before the Closing
Date and the following further conditions:
7.1 All representations and warranties of Municipal Series Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date, with the same force and effect as if
made on and as of the Closing Date.
7.2 Municipal Series Fund shall have delivered to National Municipals Fund
on the Closing Date a statement of the assets and liabilities of each Series,
which statement 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 basis of such
securities by lot, as of the Closing Date, certified by the Treasurer of
Municipal Series Fund.
7.3 Municipal Series Fund shall have delivered to National Municipals Fund
on the Closing Date a certificate executed in its name by the President or one
of the Vice Presidents of Municipal Series Fund, in form and substance
satisfactory to National Municipals Fund and dated as of the Closing Date, to
the effect that the representations and warranties of Municipal Series Fund made
in this Agreement are true and correct at and as of the Closing Date except as
they may be affected by the transactions contemplated by this Agreement, and as
to such other matters as National Municipals Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Municipal Series Fund
shall have declared and paid to the shareholders of record of each Series one or
more dividends and/or other distributions so that it will have distributed
substantially all (and in any event not less than ninety-eight percent) of such
Series' investment company taxable income (computed without regard to any
deduction for dividends paid), net tax-exempt 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, 2000, and for the
period from and after August 31, 2000 through the Closing Date.
7.5 With respect to the reorganization of each Series, National Municipals
Fund shall have received on the Closing Date a favorable opinion from Swidler
Berlin Shereff Friedman, LLP, counsel to Municipal Series Fund, dated as of the
Closing Date, to the effect that:
7.5.1 Municipal Series Fund is duly organized and validly existing
under the laws of the Commonwealth of Massachusetts with power under its
Declaration of Trust to own all of its properties and assets and, to the
knowledge of such counsel, to carry on its business as presently conducted
and each Series has been duly established in accordance with the terms of
the Municipal Series Fund's Declaration of Trust as a separate series of
Municipal Series Fund;
7.5.2 This Agreement has been duly authorized, executed and delivered
by Municipal Series Fund and constitutes a valid and legally binding
obligation of Municipal Series Fund enforceable against the assets of each
Series in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles, provided that such counsel may state that they express no
opinion as to the validity or enforceability of any provision regarding New
York law to govern this agreement;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Municipal Series Fund of its obligations hereunder will not,
(i) violate Municipal Series Fund's Declaration of Trust or Amended and
Restated By-Laws or (ii) result in a default or a breach of (a) the
Management
A-10
<PAGE>
Agreement, dated December 30, 1988, between Prudential-Bache Municipal
Series Fund and Prudential Investments Fund Management LLC, as successor to
Prudential Mutual Fund Management, Inc., (b) the Custodian Contract, dated
August 29, 1984, as amended on February 22, 1999, between Prudential-Bache
Municipal Series Fund and State Street Bank and Trust Company, (c) the
Distribution Agreement dated June 1, 1998, between Prudential Municipal
Series Fund and Prudential Investment Management Services LLC, and (d) the
Transfer Agency and Service Agreement, dated January 1, 1988, between
Prudential-Bache Municipal Series Fund and Prudential Mutual Fund Services
LLC, as successor to Prudential Mutual Fund Services, Inc., as amended on
August 24, 1999; provided, however, that such counsel may state that insofar
as performance by Municipal Series Fund of its obligations under this
Agreement is concerned, they express no opinion as to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights and to
general equity principles;
7.5.4 All regulatory consents, authorizations and approvals required to
be obtained by Municipal Series Fund under the federal laws of the United
States and the laws of The Commonwealth of Massachusetts for the
consummation of the transactions contemplated by this Agreement have been
obtained (other than such as may be required under Massachusetts securities
laws or Blue Sky laws as to which such counsel may state that they express
no opinion);
7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Municipal Series Fund, involving
any Series, that would be required to be disclosed in its Registration
Statement on Form N-1A and is not so disclosed; and
7.5.6 Municipal Series Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration.
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF NATIONAL MUNICIPALS FUND
AND MUNICIPAL SERIES FUND.
The obligations of National Municipals Fund and Municipal Series Fund
hereunder are subject to the further conditions that on or before the Closing
Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Municipal Series Fund and
the Board of Directors of National Municipals Fund, as to the determinations set
forth in Rule 17a-8(a) under the Investment Company Act, (b) the Board of
Directors of National Municipals Fund as to the assumption by 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 Municipal
Series Fund's Declaration of Trust and By-Laws, and certified copies of the
resolutions or other documents, as applicable, evidencing such approvals shall
have been delivered to National Municipals Fund and Municipal Series Fund, as
applicable.
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 General Corporation Law of the
State of Maryland, and certified copies of the resolutions evidencing such
approval shall have been delivered to Municipal Series Fund.
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<PAGE>
8.3 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by National Municipals Fund or Municipal
Series Fund to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of National Municipals Fund
or any Series, provided that either party hereto may for itself waive any part
of this condition.
8.5 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness thereof shall have been
issued, and to the best knowledge of the parties hereto, no investigation or
proceeding under the 1933 Act for that purpose shall have been instituted or be
pending, threatened or contemplated.
8.6 With respect to each reorganization, the Funds shall have received,
with respect to each Series, on or before the Closing Date, an opinion of
Swidler Berlin Shereff Friedman, LLP or a ruling from the Internal Revenue
Service 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 such
Series in exchange solely for voting shares of National Municipals Fund and
the assumption by National Municipals Fund of such Series' liabilities, if
any, followed by the distribution of National Municipals Fund's voting
shares acquired by Municipal Series Fund 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 Such Series' shareholders will not recognize 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,
as described above and in the Agreement;
8.6.3 No gain or loss will be recognized by such Series upon the
transfer of its assets to National Municipals Fund in exchange solely for
Class A and Class Z shares, as applicable, 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 by National Municipals Fund
upon the acquisition of such Series' assets in exchange solely for Class A
and Class Z shares, as applicable, of National Municipals Fund and the
assumption of such Series' liabilities, if any;
8.6.5 National Municipals Fund's basis for the assets of such Series
acquired in the reorganization will be the same as the basis of these assets
when held by such Series immediately before the transfer, and the holding
period of such assets acquired by National Municipals Fund will include the
holding period of these assets when held by such Series;
8.6.6 Such Series shareholders' bases 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 such Series to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of National Municipals Fund shares to be
received by such 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
A-12
<PAGE>
as capital assets by those shareholders as defined in Section 1221 of the
Internal Revenue Code, 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 the relevant Series pro rata in a fair and equitable manner
in proportion to their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES.
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION.
Either National Municipals Fund or Municipal Series Fund as to any Series
may at its option terminate this Agreement at or prior to the Closing Date
because of:
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;
11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will not or
cannot be met; or
11.3 A mutual written agreement of Municipal Series Fund and National
Municipals Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of National
Municipals Fund and the relevant Series to pay their allocated expenses pursuant
to paragraph 9.2) or any Director or officer of National Municipals Fund or any
Trustee or officer of Municipal Series Fund.
12. AMENDMENT.
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Municipal Series Fund pursuant to paragraph 5.2, no such amendment may have
the effect of changing the provisions for determining the number of shares of
National Municipals Fund to be distributed to any Series' shareholders under
this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES.
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Investments Fund Management LLC, Gateway Center Three, Newark, New Jersey 07102,
Attention: Deborah A. Docs.
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.
A-13
<PAGE>
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, provided that, in the case of any conflict
between such laws and the federal securities laws, the latter shall govern.
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 Massachusetts, North Carolina and Ohio 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 any Series is subject to or
contingent upon approval or implementation of the reorganization with respect to
any 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 names "Massachusetts Series," "North Carolina Series" and "Ohio Series" are
each the designation of a portfolio of the assets of Municipal 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 Municipal 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, employees, agents or shareholders of Municipal Series Fund assume or
shall have any personal liability for obligations of Municipal Series Fund
hereunder, and (ii) none of the assets of Municipal Series Fund other than the
portfolio assets of the relevant Series may be resorted to for the enforcement
of any claim based on the obligations of Municipal Series Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the Vice President of each Fund.
Prudential Municipal Series Fund
By: /s/ Robert F. Gunia
------------------------------------------
Name: Robert F. Gunia
------------------------------------------
Title: Vice President
------------------------------------------
Prudential National Municipals Fund, Inc.
By: /s/ Robert F. Gunia
------------------------------------------
Name: Robert F. Gunia
------------------------------------------
Title: Vice President
------------------------------------------
A-14
<PAGE>
PRUDENTIAL INVESTMENTS
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NJ 07102 - 4077
Prudential Municipal Series Fund
(Massachusetts Series)
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Proxy
Special Meeting of Shareholders (Meeting)
December 7, 2000, 10:00 a.m.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Robert F. Gunia, Deborah A. Docs and
Grace C. 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 (Massachusetts Series), held
of record by the undersigned on October 13, 2000, at the Meeting to be held
on December 7, 2000 or any adjournment thereof.
THE SHARES REPRESENTED BY THIS PROXY, WHEN THIS PROXY IS PROPERLY EXECUTED,
WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER.
THE PROXY WILL BE VOTED FOR PROPOSAL NO. 1 IF YOU DO NOT SPECIFY OTHERWISE.
PLEASE REFER TO THE PROXY STATEMENT AND PROSPECTUS DATED NOVEMBER 3, 2000 FOR
DISCUSSION OF THE PROPOSAL.
IF VOTING BY MAIL, PLEASE MARK, SIGN AND DATE THIS PROXY CARD WHERE INDICATED
AND RETURN IT PROMPTLY USING THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof.
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If a
<PAGE>
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have this Proxy card at hand.
2) Call 1-800-690-6903 toll free.
3) Enter the 12 digit control number set forth on the right side of this
Proxy card and follow the simple instructions.
TO VOTE BY INTERNET
1) Read the Proxy Statement and have this Proxy card at hand.
2) Go to website www.proxyvote.com.
3) Follow the instructions on the website and be prepared to enter your 12
digit control number set forth on the right side of this Proxy card
to enter your vote.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: X
KEEP THIS PORTION FOR YOUR RECORDS
-------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
PRUDENTIAL MUNICIPAL SERIES FUND (Massachusetts Series)
For address changes, please check this box / / and write them on the
back.
The Board of Trustees recommends a vote FOR the proposal.
Vote on Proposal For Against Abstain
1) To approve an Agreement and Plan of / / / / / /
Reorganizations between Prudential
Municipal Series Fund, on behalf of
certain of its series, including
Massachusetts Series, and Prudential
National Municipals Fund, Inc.
<PAGE>
Please be sure to sign and date this Proxy.
---------------------------------------
--------------------------------------- ---------------------
Signature (PLEASE SIGN WITHIN BOX) Date
---------------------------------------
--------------------------------------- ---------------------
Signature (Joint Owners) Date
<PAGE>
PRUDENTIAL INVESTMENTS
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NJ 07102 - 4077
Prudential Municipal Series Fund
(North Carolina Series)
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Proxy
Special Meeting of Shareholders (Meeting)
December 7, 2000, 10:00 a.m.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Robert F. Gunia, Deborah A. Docs and
Grace C. 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 (North Carolina Series), held
of record by the undersigned on October 13, 2000, at the Meeting to be held
on December 7, 2000 or any adjournment thereof.
THE SHARES REPRESENTED BY THIS PROXY, WHEN THIS PROXY IS PROPERLY EXECUTED,
WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER.
THE PROXY WILL BE VOTED FOR PROPOSAL NO. 1 IF YOU DO NOT SPECIFY OTHERWISE.
PLEASE REFER TO THE PROXY STATEMENT AND PROSPECTUS DATED NOVEMBER 3, 2000 FOR
DISCUSSION OF THE PROPOSAL.
IF VOTING BY MAIL, PLEASE MARK, SIGN AND DATE THIS PROXY CARD WHERE INDICATED
AND RETURN IT PROMPTLY USING THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting or any adjournment thereof.
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If a
<PAGE>
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have this Proxy card at hand.
2) Call 1-800-690-6903 toll free.
3) Enter the 12 digit control number set forth on the right side of this
Proxy card and follow the simple instructions.
TO VOTE BY INTERNET
1) Read the Proxy Statement and have this Proxy card at hand.
2) Go to website www.proxyvote.com.
3) Follow the instructions on the website and be prepared to enter your 12
digit control number set forth on the right side of this Proxy card to
enter your vote.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: X
KEEP THIS PORTION FOR YOUR RECORDS
-------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
PRUDENTIAL MUNICIPAL SERIES FUND (North Carolina Series)
For address changes, please check this box / /
and write them on the back.
The Board of Trustees recommends a vote FOR the proposal.
Vote on Proposal For Against Abstain
1) To approve an Agreement and Plan of / / / / / /
Reorganizations between Prudential
Municipal Series Fund, on behalf of
certain of its series, including
North Carolina Series, and Prudential
National Municipals Fund, Inc.
<PAGE>
Please be sure to sign and date this Proxy.
---------------------------------------
--------------------------------------- ---------------------
Signature (PLEASE SIGN WITHIN BOX) Date
---------------------------------------
--------------------------------------- ---------------------
Signature (Joint Owners) Date
<PAGE>
PRUDENTIAL INVESTMENTS
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NJ 07102 - 4077
Prudential Municipal Series Fund
(Ohio Series)
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Proxy
Special Meeting of Shareholders (Meeting)
December 7, 2000, 10:00 a.m.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Robert F. Gunia, Deborah A. Docs and
Grace C. 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 (Ohio Series), held of record
by the undersigned on October 13, 2000, at the Meeting to be held on December
7, 2000 or any adjournment thereof.
THE SHARES REPRESENTED BY THIS PROXY, WHEN THIS PROXY IS PROPERLY EXECUTED,
WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER.
THE PROXY WILL BE VOTED FOR PROPOSAL NO. 1 IF YOU DO NOT SPECIFY OTHERWISE.
PLEASE REFER TO THE PROXY STATEMENT AND PROSPECTUS DATED NOVEMBER 3, 2000 FOR
DISCUSSION OF THE PROPOSAL.
IF VOTING BY MAIL, PLEASE MARK, SIGN AND DATE THIS PROXY CARD WHERE INDICATED
AND RETURN IT PROMPTLY USING THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE
IF MAILED IN THE UNITED STATES.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting or any adjournment thereof.
Note: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such. If a
<PAGE>
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have this Proxy card at hand.
2) Call 1-800-690-6903 toll free.
3) Enter the 12 digit control number set forth on the right side of this
Proxy card and follow the simple instructions.
TO VOTE BY INTERNET
1) Read the Proxy Statement and have this Proxy card at hand.
2) Go to website www.proxyvote.com.
3) Follow the instructions on the website and be prepared to enter your 12
digit control number set forth on the right side of this Proxy card to
enter your vote.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: X
KEEP THIS PORTION FOR YOUR RECORDS
-------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
PRUDENTIAL MUNICIPAL SERIES FUND (Ohio Series)
For address changes, please check this box / /
and write them on the back.
The Board of Trustees recommends a vote FOR the proposal.
Vote on Proposal For Against Abstain
1) To approve an Agreement and Plan / / / / / /
of Reorganizations between Prudential
Municipal Series Fund, on behalf of
certain of its series, including
Ohio Series, and Prudential National
Municipals Fund, Inc.
<PAGE>
Please be sure to sign and date this Proxy.
---------------------------------------
--------------------------------------- ---------------------
Signature (PLEASE SIGN WITHIN BOX) Date
---------------------------------------
--------------------------------------- ---------------------
Signature (Joint Owners) Date
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
MASSACHUSETTS SERIES, NORTH CAROLINA SERIES AND OHIO SERIES
OF
PRUDENTIAL MUNICIPAL SERIES FUND
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
dated November 3, 2000
This Statement of Additional Information specifically relates to the
proposed transactions (Mergers) between each of Massachusetts Series, North
Carolina Series and Ohio Series (each, a Series and collectively, the Series),
each a series of Prudential Municipal Series Fund (Municipal Series Fund), and
Prudential National Municipals Fund, Inc. (National Municipals Fund) pursuant to
which each Series will transfer all of its assets to, and all of its liabilities
will be assumed by, National Municipals Fund. National Municipals Fund will be
the surviving corporation, and each whole and fractional share of each Series,
shall be exchanged for whole and fractional shares of equal net asset value of
National Municipals Fund to occur on December 15, 2000, or such later date as
the parties may agree. This Statement of Additional Information consists of this
cover page and the following described documents, each of which is attached
hereto and incorporated herein by reference:
1. Pro Forma Financial Statements as of June 30, 2000.
2. Statement of Additional Information of National Municipals Fund dated
March 3, 2000, as supplemented to date.
3. Annual Report to Shareholders of National Municipals Fund for the fiscal
year ended December 31, 1999.
4. Semi-Annual Report to Shareholders of National Municipals Fund for the
six month period ended June 30, 2000.
5. Annual Report to Shareholders of Massachusetts Series for the fiscal
year ended August 31, 2000.
6. Annual Report to Shareholders of North Carolina Series for the fiscal
year ended August 31, 2000.
7. Annual Report to Shareholders of Ohio Series for the fiscal year ended
August 31, 2000.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated
November 3, 2000, relating to the above-referenced matter. A copy of the
Prospectus and Proxy Statement may be obtained from National Municipals Fund,
without charge, by writing or calling National Municipals Fund at the address or
phone number listed above. This Statement of Additional Information has been
incorporated by reference into the Prospectus and Proxy Statement.
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS
ALASKA
$ -- $ -- $ -- $ 775 $ 775 Alaska Ind. Dev. & Expt. Auth., Revolving Loan A2
Fund
ARIZONA
-- -- -- 2,250 2,250 Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. Aaa
25, B.I.G.
-- -- -- 1,790 1,790 Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa
-- -- -- 3,000 3,000 Pima Cnty. Unified Sch. Dist., Gen. Oblig., No. 1 Aaa
Tuscan, F.G.I.C.
Tucson Gen. Oblig.,
-- -- -- 1,000 1,000 Ser. A Aa2
-- -- -- 1,100 1,100 Ser. A Aa2
CALIFORNIA
-- -- -- 1,200 1,200 Abag Fin. Auth. For Nonprofit Corps. Ref. Amer. BBB*
Baptist Homes., Ser. A
Anaheim California Public Financing Authority
Lease
-- -- -- 2,210 2,210 Rites Pennsylvania 641A NR
-- -- -- 1,815 1,815 Rites Pennsylvania 641B NR
-- -- -- 3,810 3,810 Encinitas California Union School District Cap Aaa
Apprec
-- -- -- 5,000 5,000 Foothill/Eastern Transportation Corridor Agency Aaa
California Toll Road Revenue
-- -- -- 6,000 6,000 Long Beach Aquarium of the Pacific Rev., Ser. A, BBB*
A.M.T.
-- -- -- 4,000 4,000 Long Beach Ca Hbr Rev Aaa
-- -- -- 1,000 1,000 Los Angeles California Unified School District Aaa
Ser A
Pittsburg California Redevelopment Agency Tax
Allocation
-- -- -- 2,000 2,000 Los Medanos Community Development Project Aaa
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.40% 4/1/01 $ -- $ -- $ -- $ 778,736 $ 778,736
7.875% 8/1/14 -- -- -- 2,796,773 2,796,773
7.25% 7/15/10 -- -- -- 1,888,575 1,888,575
7.5% 7/1/10 -- -- -- 3,584,700 3,584,700
7.375% 7/1/11 -- -- -- 1,193,030 1,193,030
7.375% 7/1/12 -- -- -- 1,318,196 1,318,196
6.2% 10/1/27 -- -- -- 1,008,924 1,008,924
9.208% 9/1/16 -- -- -- 2,789,882 2,789,882
9.208% 9/1/24 -- -- -- 2,096,452 2,096,452
Zero 8/1/21 -- -- -- 1,115,720 1,115,720
Zero 1/1/23 -- -- -- 1,348,250 1,348,250
6.125% 7/1/23 -- -- -- 5,558,520 5,558,520
6% 5/15/18 -- -- -- 4,234,840 4,234,840
6% 7/1/15 -- -- -- 1,090,270 1,090,270
Zero 8/1/25 -- -- -- 456,120 456,120
</TABLE>
F-1
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ 5,000 $ 5,000 Los Medanos Community Development Project Aaa
-- -- -- 10,000 10,000 San Joaquin Hills California Transportation Aaa
Corridor Agency Toll Road Revenue
-- -- -- 10,000 10,000 San Joaquin Hills Trans. Corr. Agcy., Toll Rd. Aaa
Rev.
Santa Margarita Ca/Dana Point
-- -- -- 810 810 Rites Pennsylvania 644D NR
-- -- -- 660 660 Rites Pennsylvania 644G NR
-- -- -- 665 665 Santa Margarita/Dana Point Rites Pennsylvania 644C NR
-- -- -- 1,600 1,600 West Contra Costa Sch. Dist., Cert. of Part. Baa3
COLORADO
-- -- -- 3,000 3,000 Arapahoe Cnty. Cap. Imprvmt. Trust Fund Hwy., Pub. Aaa
Hwy. Rev., Ser. E-470
Colorado Housing Finance Authority
-- -- -- 3,500 3,500 Amt Single Fam Pg Sr Ser C2 Aa2
-- -- -- 4,000 4,000 Amt Single Family Pg Senior Series C 2 Aa2
-- -- -- 1,710 1,710 Amt Single Family Program Senior A 2 Aa2
Colorado Hsg. Fin. Auth., A.M.T.,
-- -- -- 1,975 1,975 Singl. Fam. Prog., Aa2
-- -- -- 1,185 1,185 Singl. Fam. Proj., Ser. B-1, Aa2
-- -- -- 2,875 2,875 Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa
-- -- -- 7,960 7,960 Colorado Springs Arpt. Rev., A.M.T., Ser. A. Baa2
-- -- -- 4,000 4,000 Denver Company Health + Hospital Health Series A Baa2
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Zero 8/1/30 $ -- $ -- $ -- $ 844,350 $ 844,350
Zero 1/1/26 -- -- -- 2,269,800 2,269,800
Zero 1/1/25 -- -- -- 2,405,700 2,405,700
12.973% 8/1/10 -- -- -- 1,291,950 1,291,950
12.973% 8/1/14 -- -- -- 1,091,627 1,091,627
12.973% 8/1/09 1,034,906 1,034,906
7.125% 1/1/24 -- -- -- 1,664,080 1,664,080
7% 8/31/26 -- -- -- 3,364,590 3,364,590
6.875% 11/1/28 -- -- -- 3,660,545 3,660,545
7.05% 4/1/31 -- -- -- 4,355,520 4,355,520
7.05% 5/1/27 -- -- -- 1,823,800 1,823,800
8% 6/1/25 -- -- -- 2,090,775 2,090,775
7.9% 12/1/25 -- -- -- 1,232,542 1,232,542
7.65% 12/1/25 -- -- -- 3,009,723 3,009,723
7% 1/1/22 -- -- -- 8,251,018 8,251,018
5.375% 12/1/28 -- -- -- 3,107,840 3,107,840
</TABLE>
F-2
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONNECTICUT
$ -- $ -- $ -- $ 5,725 $ 5,725 Connecticut St Health And Educational Facilities Ba1
Authority Revenue
-- -- -- 1,000 1,000 Connecticut St. Spec. Tax Oblig. Rev., Aaa
Infrastructure, Ser. A.
-- -- -- 1,000 1,000 Dist. of Columbia Ref., Ser. B., M.B.I.A. Aaa
FLORIDA
-- -- -- 7,445 7,445 Broward Cnty. Res. Rec. Rev., Broward Co. L.P. A3
South Proj.,
-- -- -- 1,260 1,260 Florida St. Brd. of Ed., Admin. Cap. Outlay, Aa2
-- -- -- 5,000 5,000 Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Aa3
Rev., Tampa Elec. Proj., Ser. 92
GEORGIA
-- -- -- 557 557 Burke Cnty. Dev. Auth., Oglethorpe Pwr. Co., Aaa
M.B.I.A.
Burke Cnty. Dev. Auth., M.B.I.A.,
-- -- -- 500 500 Georgia Pwr. Plant Co., Vogtle Proj., Ser. 7 Aaa
-- -- -- 5,000 5,000 Oglethorpe Pwr. Corp. Aaa
-- -- -- 500 500 Forsyth Cnty. Sch. Dist. Dev. Rev., Ser. A Aa2
-- -- -- 750 750 Fulton Cnty. Sch. Dist. Rev., Lindbrook Square Aa2
Fndtn.
-- -- -- 5,000 5,000 Georgia Municipal Electric Authority Power Revenue Aaa
Linked Certificates Series B Mbia Ibc
-- -- -- 325 325 Green Cnty. Dev. Auth. Indl. Park Rev. NR
GUAM
-- 1,000 -- -- 1,000 Guam Airport Auth. Rev., Ser. B Ser. B BBB*
Guam Pwr. Auth. Rev.,
-- 250 -- 1,000 1,250 Ser. 1994 AAA*
-- 525 2,500 -- 3,025 Ser. A Ser. A AAA*
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
6.75% 7/1/12 $ -- $ -- $ -- $ 5,833,088 $ 5,833,088
7.125% 6/1/10 -- -- -- 1,144,490 1,144,490
6% 6/1/13 -- -- -- 1,057,150 1,057,150
7.95% 12/1/08 -- -- -- 7,683,166 7,683,166
9.125% 6/1/14 -- -- -- 1,675,031 1,675,031
8% 5/1/22 -- -- -- 5,409,450 5,409,450
7.5% 1/1/03 -- -- -- 577,247 577,247
6.625% 10/1/24 -- -- -- 510,075 510,075
8% 1/1/22 -- -- -- 5,513,850 5,513,850
6.75% 7/1/16 -- -- -- 568,595 568,595
6.375% 5/1/17 -- -- -- 826,620 826,620
6.375% 1/1/16 -- -- -- 5,490,950 5,490,950
6.875% 2/1/04 -- -- -- 333,378 333,378
6.6% 10/1/10 -- 1,039,150 -- 1,039,150
6.625% 10/1/14 -- 274,880 -- 1,099,520 1,374,400
6.75% 10/1/24 -- 579,763 2,760,775 3,340,538
</TABLE>
F-3
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
HAWAII
$ -- $ -- $ -- $ 500 $ 500 Hawaii St. Dept. Budget & Fin., Hawaiian Elec. Aaa
Co., Ser. C, M.B.I.A.
-- -- -- 500 500 Hawaii St. Harbor Cap. Impvt. Rev., F.G.I.C. Aaa
ILLINOIS
Chicago Illinois
-- -- -- 13,500 13,500 Capital Appreciation City Colleges Aaa
-- -- -- 5,000 5,000 Capital Appreciation City Colleges Aaa
-- -- -- 10,000 10,000 Capital Appreciation City Colleges Aaa
-- -- -- 5,000 5,000 Series A Aaa
Chicago Illinois Board Education
-- -- -- 2,000 2,000 Capital Appreciation School Reform B 1 Aaa
-- -- -- 1,500 1,500 Capital Appreciation School Reform Series A Aaa
-- -- -- 3,500 3,500 Chicago Illinois Single Family Mortgage Revenue AAA*
Series A
-- -- -- 3,035 3,035 Cook And Du Page Cntys Il Cap Apprec Aaa
-- -- -- 2,000 2,000 Illinois Development Finance Authority Revenue Ref BBB*
Cmnty Rehab Providers A
-- -- -- 12,910 12,910 Metropolitan Pier & Expo. Auth Hosp. Fac. Rev., Aaa
McCormick Place Convention
INDIANA
-- -- -- 2,000 2,000 Gary In Mortgage Revenue Gnma Lakeshore Dunes AAA*
Apts A
KENTUCKY
-- -- -- 6,000 6,000 Henderson Cnty. Solid Waste Disp. Rev., Macmillan A2
Bloedel Proj., A.M.T.
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
7.375% 12/1/20 $ -- $ -- $ -- $ 514,955 $ 514,955
6.25% 7/1/15 -- -- -- 515,350 515,350
Zero 1/1/16 -- -- -- 5,513,940 5,513,940
Zero 1/1/24 -- -- -- 1,212,450 1,212,450
Zero 1/1/25 -- -- -- 2,277,600 2,277,600
6.75% 1/1/35 -- -- -- 5,472,650 5,472,650
Zero 12/1/19 -- -- -- 628,560 628,560
Zero 12/1/12 -- -- -- 749,070 749,070
7.15% 9/1/31 -- -- -- 3,838,555 3,838,555
Zero 12/1/11 -- -- -- 1,635,137 1,635,137
6% 7/1/15 -- -- -- 1,764,480 1,764,480
7% 7/1/26 -- -- -- 14,929,898 14,929,898
6% 8/20/34 -- -- -- 1,946,080 1,946,080
7% 3/1/25 -- -- -- 6,102,840 6,102,840
</TABLE>
F-4
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ 6,250 $ 6,250 Kenton County Kentucky Airport Board Airport Aaa
Revenue Refunding Cincinnati Northern
Kentucky A
-- -- -- 3,000 3,000 Louisville And Jefferson County Kentucky Aaa
Metropolitan Sewer District Sewer And Drainage
Systems Revenue
LOUISIANA
-- -- -- 12,000 12,000 New Orleans Louisiana Refunding Aaa
-- -- -- 13,500 13,500 New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa
-- -- -- 5,780 5,780 Orleans Parish Sch. Brd., E.T.M. M.B.I.A. Aaa
-- -- -- 5,000 5,000 St. Charles Parish, Environ. Impt. Rev. Louisiana Baa2
Pwr. & Lt. Co., Ser. A, A.M.T.
MARYLAND
-- -- -- 1,000 1,000 Baltimore, Maryland Econ. Dev. Lease Rev., BBB+*
Armistead Partnership
-- -- -- 5,000 5,000 Maryland St Health And Higher Educational Baa1
Facilities Authority Revenue
-- -- -- 3,000 3,000 Maryland St. Hlth. & Higher Edl. Facs., Auth. Baa1
Rev., Doctor's Comn. Hosp.
-- -- -- 1,000 1,000 Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. BBB*
for Physics
-- -- -- 450 450 Montgomery Cnty., G.O., Cons. Pub. Impvt. Aaa
-- -- -- 1,000 1,000 Northeast Maryland Waste Disp. Auth., Solid Wste. A2
Rev., Montgomery Cnty. Res. Rec. Proj.
-- -- -- 3,446 3,446 Northeast Wste. Disp. Auth., Sludge Comp. Fac. NR
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
6.3% 3/1/15 $ -- $ -- $ -- $ 6,561,500 $ 6,561,500
5% 5/15/30 -- -- -- 2,637,930 2,637,930
5.5% 12/1/21 -- -- -- 11,675,760 11,675,760
Zero 9/1/09 -- -- -- 8,326,665 8,326,665
8.9% 2/1/07 -- -- -- 7,060,732 7,060,732
6.875% 7/1/24 -- -- -- 5,029,200 5,029,200
7% 8/1/11 -- -- -- 1,028,590 1,028,590
6.75% 7/1/30 -- -- -- 5,034,700 5,034,700
5.5% 7/1/24 -- -- -- 2,324,310 2,324,310
6.625% 1/1/17 -- -- -- 1,002,500 1,002,500
9.75% 6/1/01 -- -- -- 471,186 471,186
6% 7/1/07 -- -- -- 1,024,070 1,024,070
7.25% 7/1/07 -- -- -- 3,544,659 3,544,659
</TABLE>
F-5
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ 1,000 $ 1,000 Takoma Park Hosp. Facs. Rev., Washington Adventist Aaa
Hosp., F.S.A.
MASSACHUSETTS
1,500 -- -- -- 1,500 Boston Massachusetts Ind. Dev. Fin. Auth., Swr. Baa1
Fac. Rev., Harbor Elec. Energy Co. Proj., A.M.T.
1,030 -- -- -- 1,030 Brockton Massachusetts, Gen. Oblig., Ser. A, Aa3
F.G.I.C.
650 -- -- -- 650 Everett Massachusetts Aaa
700 -- -- -- 700 Holyoke Massachusetts, Gen. Oblig., School Proj., Aaa
M.B.I.A.
750 -- -- -- 750 Lowell Massachusetts, Gen. Oblig. Aaa
850 -- -- -- 850 Lynn Mass. Wtr. & Swr. Comn., Gen. Rev., Ser. A, Aaa
M.B.I.A.
700 -- -- -- 700 Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A Aaa
Mass. St. Gen. Oblig.,
1,000 -- -- -- 1,000 Ser. A, A.M.B.A.C. Aaa
1,250 -- -- -- 1,250 Ser. C, F.G.I.C. Aaa
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
1,500 -- -- -- 1,500 Beth Israel Hospital, A.M.B.A.C. Aaa
625 -- -- -- 625 Dana Farber Cancer Proj., Ser. G-1 A1
1,500 -- -- -- 1,500 Faulkner Hospital, Ser. C Baa1
550 -- -- -- 550 Holyoke Hospital, Ser. B Baa3
1,350 -- -- -- 1,350 Jordan Hospital, Ser. C BBB+*
-- -- -- 1,500 1,500 Mass. Inst. of Tech. Ser. I-1 Aaa
1,000 -- -- -- 1,000 Med. Academic & Scientific A BBB-*
825 -- -- -- 825 Valley Regional Hlth. Sys. AAA*
1,000 -- -- -- 1,000 Winchester Hospital, Ser. D AAA*
1,000 -- -- -- 1,000 Mass. St. Ind. Fin. Agcy. Rev., Phillips Academy Aaa
1,000 -- -- -- 1,000 Mass. St. Port Auth. Rev., Ser. B, A.M.T. Aa3
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
6.5% 9/1/12 $ -- $ -- $ -- $ 1,113,180 $ 1,113,180
7.375% 5/15/15 1,541,250 -- -- -- 1,541,250
6.125% 6/15/18 1,048,200 -- -- -- 1,048,200
5.75% 12/15/19 655,954 -- -- -- 655,954
8.1% 6/15/05 764,267 -- -- -- 764,267
7.625% 2/15/10 787,140 -- -- -- 787,140
7.25% 12/1/10 876,800 -- -- -- 876,800
5.5% 3/1/15 709,814 -- -- -- 709,814
5% 7/1/12 978,810 -- -- -- 978,810
6% 8/1/09 1,343,150 -- -- -- 1,343,150
7.255% 7/1/25 1,483,125 -- -- -- 1,483,125
6.25% 12/1/22 607,369 -- -- -- 607,369
6% 7/1/23 1,568,925 -- -- -- 1,568,925
6.5% 7/1/15 503,503 -- -- -- 503,503
6.875% 10/1/22 1,431,634 -- -- -- 1,431,634
5.2% 1/1/28 -- -- -- 1,394,505 1,394,505
6.625% 1/1/15 1,004,230 -- -- -- 1,004,230
7% 7/1/10 935,550 -- -- -- 935,550
5.75% 7/1/24 968,410 -- -- -- 968,410
5.375% 9/1/23 942,480 -- -- -- 942,480
5% 7/1/18 907,190 -- -- -- 907,190
</TABLE>
F-6
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,000 $ -- $ -- $ -- $ 2,000 Mass. St. Tpk. Auth. Cap. Apprec. Ser. C Aaa
1,000 -- -- -- 1,000 Mass. St. Water Poll. Abatement Trust Rev., Aa3
Ser. A
500 -- -- -- 500 Mass. St. Water Res. Auth. Ref. Gen., Ser. D Aaa
750 -- -- -- 750 Mass. St. Water Res. Auth. Rev., Ser. B, M.B.I.A. Aaa
2,250 -- -- -- 2,250 Massachusetts St College Building Authority Aaa
Project Revenue
750 -- -- -- 750 Massachusetts St Development Finance Agency Ba2
Revenue Concord Assabet Family Services
Massachusetts St Health And Educational Facilities
Authority
1,000 -- -- -- 1,000 Revenue Aaa
500 -- -- -- 500 Revenue Aaa
500 -- -- -- 500 Revenue Aaa
500 -- -- -- 500 Massachusetts St Housing Finance Agency Housing Aaa
Revenue Amt Single Family Ser 59
Massachusetts St Port Authority Revenue
1,000 -- -- -- 1,000 Amt Series D Aa3
600 -- -- -- 600 Series 1999A Baa3
Massachusetts St Turnpike Authority Metropolitan
Highway Systems
-- -- -- 9,000 9,000 Revenue Aaa
750 -- -- -- 750 Revenue Aaa
500 -- -- -- 500 Massachusetts St Water Pollution Abatement Trust Aaa
500 -- -- -- 500 Massachusetts Str Development Finance Agency Aa1
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Zero 1/1/17 $ 779,740 $ -- $ -- $ -- $ 779,740
6.375% 2/1/15 1,057,610 1,057,610
6% 8/1/13 534,660 -- -- -- 534,660
6.25% 12/1/11 821,198 -- -- -- 821,198
Zero 5/1/22 617,490 -- -- -- 617,490
6% 11/1/28 592,395 -- -- -- 592,395
6.05% 10/1/20 1,032,870 -- -- -- 1,032,870
5.875% 10/1/29 500,560 -- -- -- 500,560
6% 7/1/35 513,080 -- -- -- 513,080
5.4% 6/1/20 460,580 -- -- -- 460,580
6.25% 7/1/17 1,051,090 -- -- -- 1,051,090
Zero 10/1/29 589,836 -- -- -- 589,836
5% 1/1/37 -- -- 7,767,630 7,767,630
5% 1/1/39 644,775 -- -- -- 644,775
5.5% 8/1/29 478,335 -- -- -- 478,335
5.75% 7/1/29 495,815 -- -- -- 495,815
</TABLE>
F-7
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Massachusetts Str Industrial Finance Agency
$ 1,000 $ -- $ -- $ -- $ 1,000 BRADFORD COLLEGE CCC*
700 -- -- -- 700 CAMBRIDGE FRIENDS SCHOOL BBB*
500 -- -- -- 500 Plymouth County Corr. Facs. Proj., Cert. of Part., Aaa
Ser. A
2,500 -- -- -- 2,500 Rail Connections Incorporated Massachusetts A*
Revenue Capital Appreciation Rte 128 B Aca Cbi
MICHIGAN
-- -- -- 920 920 Detroit Econ. Dev. Corp., Res. Rec. Rev., Aaa
Ser. 1991-A, F.S.A./A.M.T.
Detroit Michigan Sewage Disposal Revenue
-- -- -- 800 800 Prerefunded Inflos Aaa
-- -- -- 200 200 Unrefunded Balance Inflos Aaa
-- -- -- 1,000 1,000 Detroit Wtr. Supply Sys. Rev., Ser. B, M.B.I.A. Aaa
-- -- -- 10,000 10,000 Dexter Michigan Community Schs Aaa
-- -- -- 1,000 1,000 Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1
-- -- -- 3,500 3,500 Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa
-- -- -- 1,000 1,000 Kalamazoo Econ. Dev. Corp. Rev., Friendship BBB*
Village, Ltd. Oblig.
-- -- -- 155 155 Michigan Higher Ed. Student Loan Auth. Rev., Aaa
Ser. XIII-A, M.B.I.A./ A.M.T
-- -- -- 500 500 Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj., Aaa
M.B.I.A.
Michigan St. Hosp. Fin. Auth. Rev.,
-- -- -- 1,920 1,920 Bay Med. Ctr., Ser. A A3
-- -- -- 1,000 1,000 Hosp. Genesys Hlth. Sys. Aaa
-- -- -- 500 500 Hosp. Genesys Hlth. Sys. AAA*
-- -- -- 800 800 Presbyterian Village oblig. NR
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.625% 11/1/28 $ 784,780 $ -- $ -- $ -- $ 784,780
5.8% 9/1/28 630,917 -- -- -- 630,917
7% 4/1/22 534,045 -- -- -- 534,045
Zero 7/1/21 647,750 -- -- -- 647,750
6.875% 5/1/09 -- -- -- 952,504 952,504
6.655% 7/1/23 -- -- -- 849,000 849,000
6.655% 7/1/23 -- -- -- 185,500 185,500
5.55% 7/1/12 -- -- -- 1,031,860 1,031,860
5.1% 5/1/28 -- -- -- 9,108,500 9,108,500
8% 11/1/14 -- -- -- 1,128,770 1,128,770
Zero 5/1/10 -- -- -- 2,072,280 2,072,280
6.125% 5/15/17 -- -- -- 887,380 887,380
7.55% 10/1/08 -- -- -- 158,825 158,825
7.4% 12/1/02 -- -- -- 518,555 518,555
8.25% 7/1/12 -- -- -- 1,958,573 1,958,573
8.125% 10/1/21 -- -- -- 1,165,700 1,165,700
7.5% 10/1/27 -- -- -- 560,495 560,495
6.375% 1/1/25 -- -- -- 711,560 711,560
</TABLE>
F-8
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Michigan St. Hsg. Dev. Auth. Rev.,
$ -- $ -- $ -- $ 140 $ 140 Multi-family Mtge. Insured Hsg., Ser. A AA-*
-- -- -- 500 500 Multi-family Mtge. Insured Hsg., Ser. A AA-*
-- -- -- 1,000 1,000 Rental Hsg. Rev., Ser. B AA-*
-- -- -- 2,905 2,905 Sngl. Fam. Mtge., Ser. A. AA+*
-- -- -- 1,500 1,500 Michigan St. Strategic Fund Ltd. Oblig. Rev., Ba1
Waste Mgmt. Inc. Proj., A.M.T
-- -- -- 2,000 2,000 Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co. Aaa
Proj. 1, F.G.I.C./A.M.T. F.G.I.C./A.M.T.
Oak Park, A.M.B.A.C.
-- -- -- 375 375 Gen. Oblig., Aaa
-- -- -- 400 400 Gen. Oblig., Aaa
Okemos Pub. Sch. Dist., M.B.I.A.,
-- -- -- 1,100 1,100 Cnty. of Ingham Aaa
-- -- -- 1,000 1,000 Cnty. of Ingham Aaa
-- -- -- 1,250 1,250 Wayne Cnty. Bldg. Auth., Ser. A A3
-- -- -- 2,000 2,000 Wyandotte Elec. Rev., M.B.I.A. Aaa
MINNESOTA
-- -- -- 9,085 9,085 Minneapolis And St Paul Minnesota Metropolitan Aaa
Arpts Commission Airport Revenue
-- -- -- 570 570 Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. AAA*
Fam. Mtge., G.N.M.A., A.M.T.
-- -- -- 7,000 7,000 Minnesota Agricultural + Economic Development A2
Fairview Health Care Systems Series A
-- -- -- 315 315 St. Paul Science Museum, Cert. of Part., E.T.M. AAA*
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
7.15% 4/1/10 $ -- $ -- $ -- $ 145,642 $ 145,642
7.7% 4/1/23 -- -- -- 516,485 516,485
7.55% 4/1/23 -- -- -- 1,032,030 1,032,030
7.5% 6/1/15 -- -- -- 2,966,354 2,966,354
6.625% 12/1/12 -- -- -- 1,464,630 1,464,630
7.65% 9/1/20 -- -- -- 2,048,700 2,048,700
7% 5/1/11 -- -- -- 395,749 395,749
7% 5/1/12 -- -- -- 422,132 422,132
Zero 5/1/12 -- -- -- 576,092 576,092
Zero 5/1/13 -- -- -- 490,320 490,320
8% 3/1/17 -- -- -- 1,338,287 1,338,287
6.25% 10/1/08 -- -- -- 2,132,660 2,132,660
5% 1/1/22 -- -- -- 8,188,038 8,188,038
7.3% 8/1/31 -- -- -- 581,565 581,565
6.375% 11/15/22 -- -- -- 6,945,820 6,945,820
7.5% 12/15/01 -- -- -- 323,971 323,971
</TABLE>
F-9
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
MISSOURI
$ -- $ -- $ -- $ 3,610 $ 3,610 Missouri St. Hsg. Dev. Comm. Mtge Rev., Single AAA*
Family Loan Ser. A, G.N.M.A., A.M.T.
NEVADA
-- -- -- 10,000 10,000 Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Baa2
Ser. A
NEW HAMPSHIRE
Manchester New Hampshire Housing And Redevelopment
Authority Revenue
-- -- -- 4,740 4,740 Capital Appreciation Series B A*
-- -- -- 4,140 4,140 Capital Appreciation Series B A*
-- -- -- 4,640 4,640 Capital Appreciation Series B A*
-- -- -- 3,000 3,000 New Hampshire Health And Education Facilities BBB-*
Authority Revenue New Hampshire College Issue
New Hampshire Higher Educational And Health
Facilities
-- -- -- 500 500 Authority Revenue BBB-*
-- -- -- 2,000 2,000 Authority Revenue BBB-*
-- -- -- 3,420 3,420 New Hampshire St. Ind. Dev. Auth., Poll. Ctrl. Ba3
Rev., Proj. A
NEW JERSEY
-- -- -- 8,000 8,000 New Jersey Health Care Facilities Financing A3
Authority Revenue
NEW YORK
-- -- -- 2,500 2,500 Metropolitan Trans. Auth. Trans. Facs., Ser. A, Aaa
F.S.A.
New York City
-- -- -- 45 45 Unrefunded Balance A2
-- -- -- 30 30 Unrefunded Balance Ser. D A2
-- -- -- 10,565 10,565 New York City Mun Wtr Fin Auth Unrefunded Bal Fgic Aaa
Tcrs
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
7.2% 9/1/26 $ -- $ -- $ -- $ 3,772,992 $ 3,772,992
6.5% 12/1/33 -- -- -- 9,479,600 9,479,600
Zero 1/1/24 -- -- -- 951,555 951,555
Zero 1/1/27 -- -- -- 673,619 673,619
Zero 1/1/30 -- -- -- 611,227 611,227
7.5% 1/1/31 -- -- -- 3,007,230 3,007,230
6.3% 1/1/16 -- -- -- 476,365 476,365
6.375% 1/1/27 -- -- -- 1,840,140 1,840,140
7.65% 5/1/21 -- -- -- 3,500,165 3,500,165
6% 1/1/34 -- -- -- 7,863,920 7,863,920
6% 7/1/16 -- -- -- 2,581,675 2,581,675
7.65% 2/1/07 -- -- -- 47,439 47,439
8% 8/1/04 -- -- -- 31,457 31,457
6.75% 6/15/16 -- -- -- 10,861,454 10,861,454
</TABLE>
F-10
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ 70 $ 70 New York City, Gen. Oblig., Ser. D A2
New York New York
-- -- -- 6,430 6,430 Series A Fsa Credit Aaa
-- -- -- 15 15 Unrefunded Balance Ser A A2
-- -- -- 815 815 Unrefunded Balance Ser F A2
-- -- -- 2,000 2,000 New York New York City Industrial Development Baa3
Agency Industrial Development Revenue
-- -- -- 10,000 10,000 New York New York City Municipal Water Finance Aa3
Authority Water And Sewer Systems Revenue
New York St Dormitory Authority Revenues
-- -- -- 5,000 5,000 City University 3Rd General 2 Fsa Credit Aaa
-- -- -- 4,000 4,000 Memorial Sloan Kettering Cancer C Aaa
-- -- -- 1,280 1,280 New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa
-- -- -- 3,000 3,000 New York St. Urban Dev. Corp. Rev., F.S.A., Aaa
Correctional Facs.
New York, Gen. Oblig.,
-- -- -- 1,500 1,500 Ser. B A2
-- -- -- 3,500 3,500 Ser. B A2
NORTH CAROLINA
Charlotte Mecklenberg Hosp.,
-- 430 -- -- 430 Hlth. Care Sys. Rev. Aa3
-- 320 -- -- 320 Hlth. Care Sys. Rev. Aa3
-- 500 -- -- 500 Hlth. Care Sys. Rev., Aa3
Charlotte North Carolina Airport Revenue
-- 1,000 -- -- 1,000 Amt Series B Aaa
-- 500 -- -- 500 Amt Series B Aaa
-- 500 -- -- 500 Charlotte North Carolina Storm Water Fee Revenue Aa2
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
8% 8/1/03 $ -- $ -- $ -- $ 73,401 $ 73,401
6% 5/15/30 -- -- -- 6,566,445 6,566,445
7.75% 8/15/04 -- -- -- 15,664 15,664
8.25% 11/15/02 -- -- -- 862,995 862,995
5.65% 10/1/28 -- -- -- 1,730,520 1,730,520
6% 6/15/33 -- -- -- 10,152,100 10,152,100
5% 7/1/28 -- -- -- 4,407,450 4,407,450
5.5% 7/1/23 -- -- -- 3,893,160 3,893,160
5.8% 1/15/14 -- -- -- 1,318,848 1,318,848
6.5% 1/1/09 -- -- -- 3,289,020 3,289,020
8.25% 6/1/06 -- -- -- 1,743,540 1,743,540
7.25% 8/15/07 -- -- -- 3,947,895 3,947,895
6.25% 1/1/20 -- 447,837 -- -- 447,837
6.25% 1/1/20 -- 324,102 -- -- 324,102
5.875% 1/15/26 -- 495,090 -- -- 495,090
6% 7/1/24 -- 1,008,810 -- -- 1,008,810
6% 7/1/28 -- 503,400 -- -- 503,400
6% 6/1/25 -- 512,450 -- -- 512,450
</TABLE>
F-11
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 500 $ -- $ -- $ 500 Charlotte North Carolina Water And Sewer Systems Aa1
Revenue
-- 1,500 -- -- 1,500 Charlotte Wtr. & Swr. Aaa
-- 1,000 -- -- 1,000 Charlotte Wtr. & Swr. Aaa
-- 1,000 -- -- 1,000 Columbus Ind. Fac. & Poll. Fin. Auth., Intl. Paper Baa1
Co. Proj.,
-- 1,000 -- -- 1,000 Concord Util. Sys. Rev., M.B.I.A. Aaa
-- 500 -- -- 500 Cumberland County North Carolina Hospital A3
Facilities Revenue Cumberland County Hospital
Systems Incorporated
-- 1,000 -- -- 1,000 Halifax County North Carolina Industrial Baa1
Facilities And Pollution Control Financing
Authority Environmental Improvement Revenue
-- 500 -- -- 500 Lincoln Cnty. Gen. Oblig., Ref., F.G.I.C. Aaa
No. Carolina Eastn. Mun. Pwr. Agcy.,
-- 1,995 -- -- 1,995 Pwr. E.T.M., Ser. A Aaa
-- 650 -- -- 650 Pwr. Sys. Rev., Ser. B Aaa
-- 1,000 -- -- 1,000 Pwr. Sys. Rev., A.M.B.A.C. Aaa
-- 1,005 -- -- 1,005 Pwr. Sys. Rev., M.B.I.A. Ser. A Aaa
-- 1,000 -- -- 1,000 Pwr. Sys. Rev., Ser. A Ser. A Baa3
No. Carolina Med. Care Comn., Hosp. Rev.,
-- 1,000 -- -- 1,000 Annie Pen Mem. Hosp. Proj. Baa3
-- 1,750 -- -- 1,750 Rex Hosp. Proj. Aaa
No. Carolina Mun. Pwr. Agcy.,
-- 1,250 -- -- 1,250 No. 1 Catawba Elec. Rev., M.B.I.A. Aaa
-- 2,000 -- -- 2,000 No. 1 Catawba Elec. Rev., M.B.I.A. Aaa
-- 1,000 -- -- 1,000 North Carolina Housing Finance Agency Amt Home Aa2
Ownership Series 6 A
-- 400 -- -- 400 North Carolina Med Care Commission Nc Housing A*
Foundation Incorporated
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.25% 6/1/24 $ -- $ 469,550 $ -- $ -- $ 469,550
6.2% 6/1/17 -- 1,570,185 -- -- 1,570,185
5.9% 2/1/19 -- 1,054,020 -- -- 1,054,020
6.15% 4/1/21 -- 965,820 -- -- 965,820
5.5% 12/1/14 -- 1,009,040 -- -- 1,009,040
5.25% 10/1/29 -- 414,650 -- -- 414,650
5.45% 11/1/33 -- 828,370 -- -- 828,370
5.1% 6/1/09 -- 505,585 -- -- 505,585
6.5% 1/1/18 -- 2,210,240 -- -- 2,210,240
6% 1/1/26 -- 678,112 -- -- 678,112
6% 1/1/18 -- 1,048,830 -- -- 1,048,830
6.5% 1/1/18 -- 1,109,842 -- -- 1,109,842
6.4% 1/1/21 -- 1,079,780 -- -- 1,079,780
7.5% 8/15/21 -- 1,060,000 -- -- 1,060,000
6.25% 6/1/17 -- 1,851,202 -- -- 1,851,202
6% 1/1/10 -- 1,325,200 -- -- 1,325,200
6.22% 1/1/12 -- 2,007,500 -- -- 2,007,500
6.2% 1/1/29 -- 1,006,850 -- -- 1,006,850
6.625% 8/15/30 -- 405,284 -- -- 405,284
</TABLE>
F-12
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ 500 $ -- $ -- $ 500 North Carolina Medical Care Commission Health Care NR
Facilities Revenue
-- 1,500 -- -- 1,500 Northern Hosp. Dist. Surry Cnty., Hlth. Care Facs. Ba1
Rev.,
-- 1,000 -- -- 1,000 Piedmont Triad Airport Authority North Carolina Aaa
Airport Revenue Amt Series B
-- 1,000 -- -- 1,000 Pitt Cnty, Cert. of Part., Pub. Facs., Ser. A, Aaa
M.B.I.A. Ser. A, M.B.I.A
-- 700 -- -- 700 Pitt Cnty. Cert. of Part., Pub. Facs., Ser. B, Aaa
M.B.I.A. Ser. B, M.B.I.A.
-- 1,000 -- -- 1,000 Pitt Cnty. Rev., Pitt Cnty. Mem. Hosp. Aaa
-- 500 -- -- 500 Randolph County North Carolina Certificates Aaa
Participation
-- 2,715 -- -- 2,715 University No. Carolina Chapel Hill Hosp. Rev. Aa2
-- 1,000 -- -- 1,000 Wake Cnty. Hosp. Rev., E.T.M., M.B.I.A. Aaa
-- 235 -- -- 235 Winston Salem, Sngl. Fam. Mtge. Rev., A.M.T. A1
NORTH DAKOTA
-- -- -- 9,000 9,000 Mercer Cnty., Antelope Valley Station, A.M.B.A.C Aaa
OHIO
-- -- 200 -- 200 Akron, Gen. Oblig., A1
-- -- 1,000 -- 1,000 Brecksville Broadview Heights City Sch. Dist., Aaa
F.G.I.C.
-- -- 700 -- 700 Canton Water Works Sys., Gen. Oblig., A.M.B.A.C. Aaa
-- -- 845 -- 845 Clear Fork Valley Ohio Local School District Aaa
Richland County
-- -- 650 -- 650 Cleveland Arpt. Spl. Rev., Ref. Continental Ba2
Airlines, Inc.
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
6.3% 10/1/29 $ -- $ 443,120 $ -- $ -- $ 443,120
7.875% 10/1/21 -- 1,503,315 -- -- 1,503,315
6% 7/1/21 -- 1,009,620 -- -- 1,009,620
5.55% 4/1/12 -- 1,022,160 -- -- 1,022,160
5.4% 4/1/08 -- 718,207 -- -- 718,207
5.25% 12/1/21 -- 945,870 -- -- 945,870
5.75% 6/1/22 -- 498,735 -- -- 498,735
Zero 8/1/19 -- 889,977 -- -- 889,977
5.125% 10/1/26 -- 932,430 -- -- 932,430
8% 9/1/07 -- 239,355 -- -- 239,355
7.2% 6/30/13 -- -- -- 10,447,920 10,447,920
10.5% 12/1/04 -- -- 244,764 -- 244,764
6.5% 12/1/16 -- -- 1,083,430 -- 1,083,430
5.85% 12/1/15 -- -- 719,355 -- 719,355
Zero 12/1/24 -- -- 197,409 -- 197,409
5.7% 12/1/19 -- -- 547,274 -- 547,274
</TABLE>
F-13
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Cleveland City Sch. Dist., Gen. Oblig.,
$ -- $ -- $ 315 $ -- $ 315 Sch. Impvt., Ser. B, F.G.I.C. Aaa
-- -- 550 -- 550 Sch. Impvt., Ser. B, F.G.I.C. Aaa
-- -- 980 -- 980 Cleveland Cuyahoga County Ohio Port Authority NR
Revenue
-- -- 1,000 -- 1,000 Cleveland Ohio Aaa
Cleveland Ohio
-- -- 1,000 -- 1,000 Refunding Aaa
-- -- 1,850 -- 1,850 Columbus Citation Hsg. Dev. Corp., Mtge. Rev., AA*
F.H.A.
-- -- 435 -- 435 Columbus, Gen. Oblig., Mun. Arpt. No. 32 Aaa
-- -- 1,500 -- 1,500 Cuyahoga Cnty. Hosp. Rev., Meridia Health Sys. A1
-- -- 480 -- 480 Dayton, Gen. Oblig., M.B.I.A. Aaa
-- -- 1,000 -- 1,000 Dover Mun. Elec. Sys. Rev., F.G.I.C. Aaa
-- -- 1,000 5,000 6,000 Franklin Cnty. Hosp. Rev., Senior Doctors Hlth. Baa3
Corp. A
-- -- 2,200 -- 2,200 Franklin Cnty. Pub. Impvt., Ser. 93 Aaa
-- -- 1,000 -- 1,000 Greene County Ohio Water Systems Revenue Series A Aaa
Hilliard Ohio School District
-- -- 1,720 -- 1,720 Capital Appreciation School Improvement Aaa
-- -- 1,720 -- 1,720 Capital Appreciation School Improvement Aaa
-- -- 2,000 -- 2,000 Hilliard Sch. Dist., Cap Apprec. Impvt., Ser. A, Aaa
F.G.I.C.
-- -- 1,000 -- 1,000 Huber Heights Ohio Water Systems Revenue Cap Aaa
Apprec
-- -- 555 -- 555 Hudson City Ohio Park Improvement Aa2
-- -- 2,000 -- 2,000 Lorain County Ohio Hospital Revenue Refunding BBB+*
Mortgage Elyria United Methodist
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Zero 6/1/07 $ -- $ -- $ 220,973 $ -- $ 220,973
Zero 12/1/08 -- -- 355,817 -- 355,817
5.375% 5/15/19 -- -- 818,094 -- 818,094
5.75% 8/1/15 -- -- 1,042,050 -- 1,042,050
5.75% 8/1/14 -- -- 1,044,210 -- 1,044,210
7.625% 1/1/22 -- -- 2,193,933 -- 2,193,933
7.15% 7/15/06 -- -- 445,871 -- 445,871
6.25% 8/15/24 -- -- 1,617,645 -- 1,617,645
7% 12/1/07 -- -- 541,090 -- 541,090
5.95% 12/1/14 -- -- 1,033,720 -- 1,033,720
5.6% 12/1/28 -- -- 718,510 3,592,550 4,311,060
5.375% 12/1/20 -- -- 2,129,732 -- 2,129,732
6.125% 12/1/21 -- -- 1,031,320 -- 1,031,320
Zero 12/1/18 -- -- 587,260 -- 587,260
Zero 12/1/19 -- -- 548,783 -- 548,783
Zero 12/1/09 -- -- 1,221,920 -- 1,221,920
Zero 12/1/23 -- -- 251,020 -- 251,020
6.125% 12/1/19 -- -- 577,766 -- 577,766
6.875% 6/1/22 -- -- 1,940,480 -- 1,940,480
</TABLE>
F-14
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ 2,500 $ -- $ 2,500 Lucas Cnty. Hosp. Rev., Promedica Healthcare Aaa
Oblig., Ser. 96 M.B.I.A.
-- -- 1,750 -- 1,750 Lucas County Ohio Health Facilities Revenue NR
Refunding Ohio Presbyterian A
-- -- 865 -- 865 Marysville Village Sch. Dist., Gen. Oblig., Sch. Aaa
Impvt., M.B.I.A.
-- -- 750 -- 750 Miami Cnty. Hosp. Fac. Rev., Ref. & Impvt., Upper Baa2
Valley Med. Ctr.
-- -- 1,000 -- 1,000 Montgomery Cnty. Swr. Sys. Rev., Greater Moraine, Aaa
Beaver Creek, F.G.I.C.
-- -- 1,750 -- 1,750 Montgomery County Ohio Health Systems Revenue Ref Baa2
Franciscan Med Ctr Dayton
-- -- 1,000 -- 1,000 Morgan Ohio Local School District Fsa Credit Aaa
-- -- 500 -- 500 Mount Vernon City Sch. Dist., Gen. Oblig., Aaa
F.G.I.C.
-- -- 805 -- 805 Newark, Ltd. Tax Gen. Oblig., Wtr. Impvt., Aaa
A.M.B.A.C.
-- -- 1,000 -- 1,000 Ohio Housing Finance Agency Mortgage Revenue Aaa
Residential Mortgage Bkd Series A 1
-- -- 1,000 -- 1,000 Ohio St Environmental Improvement Revenue Baa2
Refunding Usx Corporation Project
-- -- 1,000 -- 1,000 Ohio St Solid Waste Disposal Revenue Usg BBB+*
Corporation Project
-- -- 5,000 -- 5,000 Ohio St Turnpike Commission Turnpike Revenue Aaa
Refunding Series A
-- -- 1,000 -- 1,000 Ohio St University General Rcpts Series A Aa2
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.75% 11/15/09 $ -- $ -- $ 2,616,400 $ -- $ 2,616,400
6.625% 7/1/14 -- -- 1,681,487 -- 1,681,487
Zero 12/1/15 -- -- 360,904 -- 360,904
6.375% 5/15/26 -- -- 666,585 -- 666,585
Zero 9/1/05 -- -- 771,570 -- 771,570
5.5% 7/1/18 -- -- 1,790,057 -- 1,790,057
5.75% 12/1/22 -- -- 1,004,020 -- 1,004,020
7.5% 12/1/14 -- -- 551,545 -- 551,545
Zero 12/1/06 -- -- 581,540 -- 581,540
6.35% 9/1/31 -- -- 1,017,390 -- 1,017,390
5.625% 5/1/29 -- -- 868,900 -- 868,900
6.05% 8/1/34 -- -- 909,470 -- 909,470
5.5% 2/15/24 -- -- 4,902,500 -- 4,902,500
6% 12/1/16 -- -- 1,048,340 -- 1,048,340
</TABLE>
F-15
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ 1,250 $ -- $ 1,250 Ohio St Water Development Authority Pollution Ba3
Control Facilities Revenue
-- -- 1,000 -- 1,000 Ohio St. Air Quality Dev. Auth. Ref., Amt. Coll. Ba1
Poll. Ctrl., Ser. A
-- -- 2,500 -- 2,500 Ohio St. Air Quality Dev. Auth. Rev., Poll. Ctrl., Aaa
Cleveland Elec. Co., Proj., F.G.I.C.
-- -- 615 -- 615 Ohio St. Bldg. Auth., Das Data Ctr. Proj., Aa2
-- -- 750 -- 750 Ohio St. Higher Edl. Fac. Comn. Rev., Case Western Aa2
Resv. Univ., Ser. B
-- -- 500 -- 500 Ohio St. Solid Wste. Rev., Cscltd. Proj. NR
-- -- -- 11,825 11,825 Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Aaa
Buckeye Pwr. Inc. Proj., A.M.B.A.C.
Pickerington Local Sch. Dist.,
-- -- 890 -- 890 Gen. Oblig., A.M.B.A.C. Aaa
-- -- 525 -- 525 Gen. Oblig., A.M.B.A.C. Aaa
-- -- 1,250 -- 1,250 Trumbull Cnty., Correctional Facs., Cap. Apprec., Aaa
A.M.B.A.C.
OKLAHOMA
-- -- -- 7,000 7,000 Mcgee Creek Auth. Wtr. Rev., M.B.I.A. Aaa
-- -- -- 10,000 10,000 Tulsa Mun. Arpt. Trust Rev., American Airlines, Baa1
Inc., A.M.T.
PENNSYLVANIA
-- -- -- 5,000 5,000 Beaver County Pennsylvania Industrial Development Baa3
Authority Pollution Control Revenue
-- -- -- 685 685 Clarion Cnty. Hosp. Auth. Rev., Ref. Clarion Hosp. BBB-*
Proj.
-- -- -- 3,000 3,000 Delaware County Pennsylvania Industrial B2
Development Authority Revenue Ref Res Recovery
Fac Ser A
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.25% 9/1/33 $ -- $ -- $ 1,227,612 $ -- $ 1,227,612
6.1% 8/1/20 -- -- 912,660 -- 912,660
8% 12/1/13 -- -- 2,702,500 -- 2,702,500
6% 10/1/08 -- -- 657,829 -- 657,829
6.5% 10/1/20 -- -- 830,078 -- 830,078
8.5% 8/1/22 -- -- 364,990 -- 364,990
7.8% 11/1/14 -- -- -- 13,207,579 13,207,579
Zero 12/1/08 -- -- 575,777 -- 575,777
Zero 12/1/13 -- -- 250,519 -- 250,519
Zero 12/1/09 -- -- 763,700 -- 763,700
6% 1/1/23 -- -- -- 7,311,500 7,311,500
7.375% 12/1/20 -- -- -- 10,165,000 10,165,000
4.65% 6/1/33 -- -- -- 4,770,450 4,770,450
5.6% 7/1/10 -- -- -- 628,885 628,885
6.2% 7/1/19 -- -- -- 2,616,540 2,616,540
</TABLE>
F-16
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ 2,000 $ 2,000 Montgomery County Pennsylvania Industrial A-*
Development Authority Retirement Community
Revenue
-- -- -- 1,000 1,000 Philadelphia Hosp. Auth. & Higher Edl. Auth., A+*
Childrens Seashore House, Ser. A
-- -- -- 7,500 7,500 Philadelphia Pennsylvania Aaa
-- -- -- 3,000 3,000 Philadelphia, Gen. Oblig., M.B.I.A. Aaa
-- -- -- 7,000 7,000 Westmoreland County Pennsylvania Industrial BBB*
Development Authority Revenue Revenue Guaranteed
Valley Landfill Project
PUERTO RICO
Puerto Rico Commonwealth
2,000 -- -- -- 2,000 Public Improvement Aaa
500 -- -- -- 500 Rites Pennsylvania 625 NR
-- -- 1,000 -- 1,000 Rites Pennsylvania 642B NR
-- -- 750 -- 750 Puerto Rico Commonwealth Highway And Aaa
Transportation Authority Transportation Revenue
-- -- -- 3,000 3,000 Puerto Rico Comnwlth. Gen. Oblig., M.B.I.A. Baa1
Puerto Rico Comnwlth.,
-- 2,150 -- -- 2,150 Gen. Oblig. Baa1
-- 1,240 -- -- 1,240 Gen. Oblig., Ser. A, M.B.I.A. Aaa
-- 2,500 2,500 Puerto Rico Comwlth Hwy Ser A Aaa
1,000 -- -- -- 1,000 Puerto Rico Electric Pwr. Auth. Rev., Ser. T Baa1
-- 575 1,000 -- 1,575 Puerto Rico Industrial Tourist Educational Cogen Baa2
Facility Aes Puerto Rico Project
-- -- 3,000 -- 3,000 Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Baa1
Hlth. Facs.,
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.25% 11/15/28 $ -- $ -- $ -- $ 1,562,900 $ 1,562,900
7% 8/15/03 -- -- -- 1,033,180 1,033,180
5% 3/15/28 -- -- -- 6,567,075 6,567,075
5% 5/15/25 -- -- -- 2,653,470 2,653,470
5.1% 5/1/18 -- -- -- 6,096,090 6,096,090
Zero 7/1/19 682,320 -- -- -- 682,320
9.554% 7/1/10 667,945 -- -- -- 667,945
7.074% 7/1/12 -- -- 1,123,020 -- 1,123,020
5% 7/1/38 -- -- 658,328 -- 658,328
6.5% 7/1/13 -- -- -- 3,368,280 3,368,280
Zero 7/1/15 -- 911,815 -- -- 911,815
6.25% 7/1/10 -- 1,288,211 -- -- 1,288,211
Zero 7/1/18 -- -- -- 910,500 910,500
6.375% 7/1/24 1,089,340 -- -- -- 1,089,340
6.625% 6/1/26 -- 585,465 1,018,200 -- 1,603,665
Zero 7/1/06 -- -- 2,219,940 -- 2,219,940
</TABLE>
F-17
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Puerto Rico Tel. Auth. Rev.,
$ -- $ 1,000 $ -- $ 4,100 $ 5,100 Ser. I, M.B.I.A. Aaa
-- -- -- 7,150 7,150 Ser. I, M.B.I.A. Aaa
-- -- 4,245 -- 4,245 Univ. of Puerto Rico Revs., Cap. Apprec. Ref. Aaa
Ser. N, M.B.I.A.
SOUTH CAROLINA
-- -- -- 7,415 7,415 Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa
-- -- -- 11,415 11,415 Piedmont Municipal Power Agency South Carolina Aaa
Electric Revenue Unrefunded Balance
TENNESSEE
-- -- -- 5,000 5,000 Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Aaa
Hosp., F.G.I.C.
-- -- -- 5,000 5,000 Mcminn Cnty. Ind. Dev. Brd. Solid Waste Rev., Baa3
Calhoun Nwsprnt. Recycling Fac., A.M.T.
-- -- -- 5,000 5,000 Shelby County Tennessee Health Educational + AA*
Housing Str Judes Childrens Research
TEXAS
-- -- -- 5,695 5,695 Bexar County Texas Health Facilities Development Aaa
Corporation Revenue Ref Baptist Hlth Sys Ser A
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
-- -- -- 3,500 3,500 Ser. A Aaa
-- -- -- 3,500 3,500 Ser. A Aaa
-- -- -- 20,000 20,000 Harris County Texas Refunding Toll Road Aaa
Subordinated Lien
-- -- -- 3,970 3,970 Keller Texas Independent School District Ref Aaa
-- -- -- 1,425 1,425 Lakeway Municipal Utility District Texas Capital Aaa
Appreciation Refunding Senior A
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
6.16% 1/25/07 $ -- $ 1,040,000 $ -- $ 4,264,000 $ 5,304,000
6.715% 1/16/15 -- -- -- 7,570,063 7,570,063
Zero 6/1/13 -- -- 2,127,254 -- 2,127,254
10.375% 1/1/10 -- -- -- 9,476,518 9,476,518
5.375% 1/1/25 -- -- -- 10,827,470 10,827,470
6.75% 9/1/10 -- -- -- 5,593,050 5,593,050
7.4% 12/1/22 -- -- -- 5,143,100 5,143,100
5.375% 7/1/29 -- -- -- 4,516,000 4,516,000
6% 11/15/14 -- -- -- 5,992,336 5,992,336
7.375% 11/1/08 -- -- -- 3,853,535 3,853,535
7.375% 11/1/09 -- -- -- 3,853,535 3,853,535
6% 8/1/13 -- -- -- 21,078,200 21,078,200
6% 8/15/23 -- -- -- 4,132,095 4,132,095
Zero 9/1/11 -- -- -- 778,207 778,207
</TABLE>
F-18
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ 2,340 $ 2,340 Matagorda County Texas Navigation District Number Aaa
1 Revenue Houton Lighting Power Company
New Braunfels Indpt. Sch. Dist., P.S.F.G.,
-- -- -- 2,335 2,335 Cap. Apprec. Aaa
-- -- -- 2,365 2,365 Cap. Apprec., P.S.F.G. Aaa
Panhandle Texas Regional Housing Finance
Corporation
-- -- -- 1,000 1,000 Multifamily Housing Revenue A3
-- -- -- 4,000 4,000 Multifamily Housing Revenue A3
-- -- -- 2,000 2,000 Port Corpus Christi Auth. Rev., Baa2
VIRGIN ISLANDS
-- -- 1,000 -- 1,000 Virgin Islands Pub. Fin. Auth. Rev., Ref. Matching AAA*
Loan Notes, Ser. A
500 500 500 -- 1,500 Virgin Islands Public Finance Authority Revenue BBB-*
Gross Rcpts Taxws Loan Note Series A
-- 305 305 -- 610 Virgin Islands Terr., Hugo Ins. Claims Fund Proj., NR
Ser. 91
-- -- 830 -- 830 Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., NR
Ser. A
UTAH
-- -- -- 1,000 1,000 Utah St. Brd. of Regents, Student Loan Rev., Aaa
Ser. F, A.M.B.A.C.
WASHINGTON
Washington St. Pub. Pwr. Supply Sys. Rev.,
-- -- -- 4,000 4,000 Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa
-- -- -- 5,400 5,400 Nuclear Proj. No. 2 Aaa
-- -- -- 3,000 3,000 Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa
WEST VIRGINIA
-- -- -- 2,000 2,000 West Virginia St Hospital Finance Authority A2
Hospital Revenue Oak Hill Hospital Series B
------- ------- ------- -------- --------
40,580 40,995 70,030 609,678 761,283 TOTAL LONG-TERM INVESTMENTS (COST $666,679,875)
------- ------- ------- -------- --------
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
5.125% 11/1/28 $ -- $ -- $ -- $ 2,080,470 $ 2,080,470
Zero 2/1/10 -- -- -- 1,397,147 1,397,147
Zero 2/1/11 -- -- -- 1,333,009 1,333,009
6.625% 3/1/20 -- -- -- 973,660 973,660
6.75% 3/1/31 -- -- -- 3,898,520 3,898,520
7.5% 8/1/12 -- -- -- 2,061,580 2,061,580
7.25% 10/1/18 -- -- 1,080,780 -- 1,080,780
6.5% 10/1/24 506,305 506,305 506,305 -- 1,518,915
7.75% 10/1/06 -- 320,366 320,366 -- 640,732
7.4% 7/1/11 -- -- 862,146 -- 862,146
7% 11/1/01 -- -- -- 1,027,740 1,027,740
7% 7/1/08 -- -- -- 4,485,920 4,485,920
5.4% 7/1/12 -- -- -- 5,376,456 5,376,456
Zero 7/1/06 -- -- -- 2,200,530 2,200,530
6.75% 9/1/30 -- -- -- 1,992,080 1,992,080
----------- ----------- ----------- ------------ ------------
34,771,237 38,640,493 60,845,913 546,974,039 681,231,682
----------- ----------- ----------- ------------ ------------
</TABLE>
F-19
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS
GEORGIA
$ -- $ -- $ -- $ 5,000 $ 5,000 Bartow County Georgia Development Authority VMIG1
Pollution Control Revenue Adjustment Adjusted
Georgia Power Company Bowen 2Nd Series
ILLINOIS
-- -- -- 200 200 Madison County Illinois Enviromental Improvement A1+*
Revenue Variable Shell Wood River Refining
KANSAS
-- -- -- 800 800 Butler County Kansas Solid Waste Disposal And VMIG1
Cogeneration Revenue
MARYLAND
-- -- -- 200 200 Maryland St Energy Financing Administration Solid VMIG1
Waste Disposal Revenue
MASSACHUSETTS
100 -- -- -- 100 Mass. St. Ind. Fin. Agcy. Ind. Rev., Showa Women's VMIG1
Inst., Ser. 94, F.R.W.D.
MICHIGAN
-- -- -- 1,100 1,100 Michigan St Strategic Fund Limited Obligation A1
Revenue Dow Chemical Cp Project
NEW MEXICO
-- -- -- 2,500 2,500 Farmington Nm Pollution Control Revenue Merlots VMIG1
Series Dd
OHIO
-- -- 300 -- 300 Ohio St Air Quality Development Authority Revenue VMIG1
Adjustment Adjusted Refunding Cincinnati
Gas+Elec B
PENNSYLVANIA
-- -- -- 7,500 7,500 Emmaus Pennsylvania General Authority Revenue Aaa
Pennsylvania Loan Program Series A
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
4.8% 7/3/00 $ -- $ -- $ -- $ 5,000,000 $ 5,000,000
4.7% 7/3/00 -- -- -- 200,000 200,000
4.75% 7/3/00 -- -- -- 800,000 800,000
4.7% 7/3/00 -- -- -- 200,000 200,000
4.75% 7/3/00 100,000 -- -- 100,000
4.75% 7/3/00 -- -- -- 1,100,000 1,100,000
4.89% 7/5/00 -- -- -- 2,500,000 2,500,000
4.5% 7/3/00 -- -- 300,000 300,000
4.85% 7/7/00 -- -- -- 7,500,000 7,500,000
</TABLE>
F-20
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
PRO-FORMA PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/PAR (000) PRO-FORMA
------------------------------------------- COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPAL MUNICIPALS(1) DESCRIPTION RATING
------------- -------- ------- --------- ------------- -------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SOUTH CAROLINA
$ -- $ -- $ -- $ 600 $ 600 Berkeley County Sc Exempt Facility Variable Amoco A1+*
Chemical Company Project
TEXAS
-- -- -- 500 500 Brazos River Auth. Poll. Ctrl. Rev., Texas Util. VMIG1
Elec. Co., F.R.D.D., Ser. 95A
-- -- -- 4,600 4,600 Brazos River Harbor Nav. Dist. Rev., Dow Chemical NR
Co., F.R.D.D., A.M.T., Ser. 97
-- -- -- 900 900 Brazos River Harbor Nav. Dist., Dow Chemical Co., A1
Proj., F.R.D.D., Ser. 93
-- -- -- 600 600 Brazos Rvr. Auth. Tx., Poll. Ctrl. Rev., F.R.D.D, VMIG1
Ser. 96C,
-- -- -- 500 500 Gulf Coast Industrial Development Authority Texas VMIG1
Environmental Facilities Revenue
VIRGINIA
-- -- -- 1,800 1,800 Campbell Cnty. Ind. Dev. Auth. Rev., Hadson Pwr., Aa2
F.R.D.D., A.M.T., Ser. 90A
------- ------- ------- -------- --------
100 0 300 26,800 27,200 TOTAL SHORT-TERM INVESTMENTS (COST $27,200,000)
------- ------- ------- -------- --------
40,680 40,995 70,330 636,478 788,483 TOTAL INVESTMENTS (COST $693,879,875)
======= ======= ======= ======== ========
OTHER ASSETS (LIABILITIES) IN EXCESS OF
LIABILITIES (ASSETS)
NET ASSETS
<CAPTION>
VALUE PRO-FORMA
----------------------------------------------------- COMBINED
INTEREST MATURITY NORTH NATIONAL NATIONAL
RATE DATE MASSACHUSETTS CAROLINA OHIO MUNICIPALS MUNICIPALS(1)
-------- -------- ------------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
4.7% 7/3/00 $ -- $ -- $ -- $ 600,000 $ 600,000
4.7% 7/3/00 -- -- -- 500,000 500,000
4.75% 7/3/00 -- -- -- 4,600,000 4,600,000
4.75% 7/3/00 -- -- -- 900,000 900,000
4.7% 7/3/00 -- -- -- 600,000 600,000
4.75% 7/3/00 -- -- -- 500,000 500,000
4.7% 7/3/00 -- -- -- 1,800,000 1,800,000
----------- ----------- ----------- ------------ ------------
100,000 0 300,000 26,800,000 27,200,000
----------- ----------- ----------- ------------ ------------
34,871,237 38,640,493 61,145,913 573,774,039 708,431,682
455,177 744,380 848,979 (20,692,224) (18,643,688)
----------- ----------- ----------- ------------ ------------
$35,326,414 $39,384,873 $61,994,892 $553,081,815 $689,787,994
=========== =========== =========== ============ ============
</TABLE>
(1) After the proposed merger, it is expected that the combined fund will be
managed according to the investment objective and policies of National
Municipals Fund. Prudential Investments Fund Management does not anticipate
having to sell any securities to meet the investment objective and policies
of National Municipals Fund.
* Standard & Poor's rating
F-21
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL MUNICIPAL SERIES PRO FORMA
----------------------------------------- PRUDENTIAL COMBINED
NORTH NATIONAL NATIONAL
MASSACHUSETTS CAROLINA OHIO MUNICIPALS PRO FORMA MUNICIPALS
SERIES SERIES SERIES FUND, INC. ADJUSTMENTS FUND
------------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments............................ $34,871,237 $38,640,493 $61,145,913 $573,774,039 $708,431,682
Cash................................... 30,932 112,292 -- -- 143,224
Receivable for Fund and Series shares
sold, respectively................... 1,052 256 37,781 1,151,093 1,190,182
Receivable for investments sold........ -- -- 238,921 8,982,790 9,221,711
Interest receivable.................... 608,597 761,597 804,199 8,725,082 10,899,475
Unrealized appreciation on interest
rate swaps........................... -- -- -- 10,063 10,063
Due from broker-variation margin....... -- -- -- 4,376 4,376
Other assets........................... 668 875 1,420 12,012 14,975
----------- ----------- ----------- ------------ ------------
Total assets......................... 35,512,486 39,515,513 62,228,234 592,659,455 729,915,688
----------- ----------- ----------- ------------ ------------
LIABILITIES
Bank Overdraft......................... -- -- 414 3,904,120 3,904,534
Payable for Investments purchased...... -- -- -- 32,847,074 32,847,074
Payable for Fund and Series shares
reacquired, respectively............. 51,513 81 65,841 1,839,271 1,956,706
Accrued expenses and other
liabilities.......................... 90,048 75,728 84,539 273,839 524,154
Dividends payable...................... 20,885 28,535 40,709 380,127 470,256
Management fee payable................. 14,473 16,103 25,491 203,993 260,060
Distribution fee payable............... 9,153 10,193 16,348 129,216 164,910
----------- ----------- ----------- ------------ ------------
Total liabilities.................... 186,072 130,640 233,342 39,577,640 40,127,694
----------- ----------- ----------- ------------ ------------
NET ASSETS............................. $35,326,414 $39,384,873 $61,994,892 $553,081,815 $689,787,994
=========== =========== =========== ============ ============
Net assets were comprised of:
Common stock/shares of beneficial
interest at par.................... $ 32,556 $ 36,600 $ 56,034 $ 372,232 $ (81,595) $ 415,827
Paid in capital in excess of par..... 34,621,213 38,934,931 60,678,614 545,803,556 81,595 680,119,909
----------- ----------- ----------- ------------ ------------
34,653,769 38,971,531 60,734,648 546,175,788 680,535,736
Distributions in excess of net
investment income.................... -- -- (31,000) -- (31,000)
Accumulated net realized gain (loss) on
investments.......................... (464,501) (499,265) (99,301) (4,191,920) (5,254,987)
Net unrealized appreciation of
investments.......................... 1,137,146 912,607 1,390,545 11,097,947 14,538,245
----------- ----------- ----------- ------------ ------------
Net assets, June 30, 2000.............. $35,326,414 $39,384,873 $61,994,892 $553,081,815 $689,787,994
=========== =========== =========== ============ ============
Cost of investments.................... $33,734,091 $37,727,886 $59,755,368 $562,662,530 $693,879,875
----------- ----------- ----------- ------------ ------------
Class A:
Net assets........................... $26,416,305 $29,493,176 $45,199,456 $480,871,402 $35,523,366 (a) $617,503,705
Shares of common stock issued and
outstanding........................ 2,434,131 2,741,025 4,086,090 32,373,177 (51,682)(b) 41,582,741
----------- ----------- ----------- ------------ ------------
Net asset value and redemption price
per share.......................... $ 10.85 $ 10.76 $ 11.06 $ 14.85 $ 14.85
Maximum sales charge (3%, 3%, 3% and
3% of offering price,
respectively)...................... 0.34 0.33 0.34 0.46 0.46
----------- ----------- ----------- ------------ ------------
Maximum offering price............... $ 11.19 $ 11.09 $ 11.40 $ 15.31 $ 15.31
=========== =========== =========== ============ ============
Class B:
Net assets........................... $ 8,587,276 $ 9,862,116 $16,621,694 $ 69,185,928 $(35,071,086)(a) $ 69,185,928
Shares of common stock issued and
outstanding........................ 791,719 916,222 1,501,603 4,646,776 (3,209,544)(b) 4,646,776
----------- ----------- ----------- ------------ ------------
Net asset value, offering price and
redemption price per share......... $ 10.85 $ 10.76 $ 11.07 $ 14.89 $ 14.89
=========== =========== =========== ============ ============
Class C:
Net assets........................... $ 248,957 $ 29,581 $ 173,742 $ 2,261,519 $ (452,280)(a) $ 2,261,519
Shares of common stock issued and
outstanding........................ 22,949 2,748 15,696 151,895 (41,393)(b) 151,895
----------- ----------- ----------- ------------ ------------
Net asset value and redemption price
per share.......................... $ 10.85 $ 10.76 $ 11.07 $ 14.89 $ 14.89
Maximum sales charge (1%, 1%, 1% and
1% of offering price,
respectively)...................... 0.11 0.11 0.11 0.15 0.15
----------- ----------- ----------- ------------ ------------
Maximum offering price............... $ 10.96 $ 10.87 $ 11.18 $ 15.04 $ 15.04
=========== =========== =========== ============ ============
Class Z:
Net assets........................... $ 73,876 N/A N/A $ 762,966 $ 836,842
Shares of common stock issued and
outstanding........................ 6,813 N/A N/A 51,385 (1,838)(b) 56,360
----------- ----------- ----------- ------------ ------------
Net asset value, offering price and
redemption price per share......... $ 10.84 N/A N/A $ 14.85 $ 14.85
=========== =========== =========== ============ ============
</TABLE>
----------------------------------
(a) Represents the total net assets for Class B and Class C shares of
Massachusetts Series, North Carolina Series and Ohio Series to be redeemed
for Class A shares of Prudential National Municipal Fund.
(b) Represents the difference between total additional shares to be issued (see
Note 2) and current Prudential National Municipal Fund shares outstanding
F-22
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA STATEMENT OF OPERATIONS
FOR YEAR ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRUDENTIAL MUNICIPAL SERIES PRO FORMA
----------------------------------------- COMBINED
NORTH NATIONAL
MASSACHUSETTS CAROLINA OHIO NATIONAL PRO FORMA MUNICPALS
SERIES SERIES SERIES MUNICIPAL ADJUSTMENTS FUND
------------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Income
Interest................. $ 2,323,480 $ 2,517,414 $ 4,051,245 $ 35,502,429 $ 44,394,568
----------- ----------- ----------- ------------ ------------
Expenses:
Management Fee........... 186,754 207,314 334,105 2,881,536 (211,294)(a) 3,398,415
Distribution
Fee--Class A........... 59,932 71,065 114,406 1,250,541 67,290 (a) 1,563,234
Distribution
Fee--Class B........... 52,607 65,041 104,281 474,369 (284,333)(a) 411,965
Distribution Fee--Class
C...................... 1,751 215 1,519 19,313 (4,183)(a) 18,615
Transfer agent fees and
expenses............... 17,680 12,890 42,784 391,000 (37,354)(b) 427,000
Reports to
shareholders........... 39,336 34,594 55,829 140,000 (96,759)(b) 173,000
Custodian's fees and
expenses............... 73,693 76,176 82,564 153,000 (197,433)(b) 188,000
Registration fees........ 31,352 22,105 36,789 54,000 (76,246)(b) 68,000
Legal fees and
expenses............... 10,154 5,566 14,419 41,000 (30,139)(b) 41,000
Audit fees and
expenses............... 10,006 10,006 10,831 40,000 (30,843)(b) 40,000
Directors'/Trustees fees
and expenses........... 6,115 3,472 4,607 42,000 (14,194)(b) 42,000
Miscellaneous............ 3,026 635 9,172 24,941 (7,833)(b) 29,941
----------- ----------- ----------- ------------ --------- ------------
Total expenses......... 492,406 509,079 811,306 5,511,700 (923,321) 6,401,170
Less: Custodian fee
credit................. (339) (272) (1,371) (3,732) -- (5,714)
----------- ----------- ----------- ------------ --------- ------------
Net expenses........... 492,067 508,807 809,935 5,507,968 (923,321) 6,395,456
----------- ----------- ----------- ------------ --------- ------------
Net investment income...... 1,831,413 2,008,607 3,241,310 29,994,461 37,999,112
----------- ----------- ----------- ------------ ------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss)
on:
Investment
transactions........... (400,677) (510,233) (523,731) (4,744,629) (6,179,270)
Financial futures
transactions........... 1,187 9,759 222,024 (480,998) (248,028)
----------- ----------- ----------- ------------ ------------
(399,490) (500,474) (301,707) (5,225,627) (6,427,298)
----------- ----------- ----------- ------------ ------------
Net change in unrealized
appreciation on:
Investments.............. (1,261,255) (1,124,492) (2,164,509) (17,764,304) (22,314,560)
Financial futures
contracts.............. -- 1,125 26,812 (234,562) (206,625)
----------- ----------- ----------- ------------ ------------
(1,261,255) (1,123,367) (2,137,697) (17,998,866) (22,521,185)
----------- ----------- ----------- ------------ ------------
Net gain (loss) on
investments.............. (1,660,745) (1,623,841) (2,439,404) (23,224,493) (28,948,483)
----------- ----------- ----------- ------------ --------- ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... $ 170,668 $ 384,766 $ 801,906 $ 6,769,968 $(923,321) $ 9,050,629
=========== =========== =========== ============ ========= ============
</TABLE>
--------------------------
(a) Reflects adjustments to investment management fees and plan of distribution
fees based on the surviving Fund's fee schedule.
(b) Reflects the elimination of duplicate services or fees.
F-23
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION--The Pro-Forma Statement of Assets and Liabilities,
including the Portfolio of Investments at June 30, 2000 and the related
Statement of Operations ("Pro Forma Statements") for the twelve months ended
June 30, 2000, reflect the accounts of Prudential Municipal Series Fund--
Massachusetts Series ("Massachusetts Series"), Prudential Municipal Series
Fund--North Carolina Series ("North Carolina Series"), Prudential Municipal
Series Fund--Ohio Series ("Ohio Series") and Prudential National Municipals
Fund, Inc. ("National Municipals").
The cost of the merger will be allocated to Massachusetts Series, North
Carolina Series and Ohio Series based on relative net assets of each series.
The Pro Forma Statements give effect to the proposed transfer of all assets
and liabilities of Massachusetts Series, North Carolina Series and Ohio
Series in exchange for shares in National Municipals. The Pro Forma
Statements should be read in conjunction with the historical financial
statements of each Fund included in its Statement of Additional Information.
2. SHARES OF COMMON STOCK--The pro-forma net asset value per share assumes the
issuance of additional Class A and Class Z shares of National Municipals
which would have been issued on June 30, 2000 in connection with the
proposed reorganization. Shareholders of Massachusetts Series, North
Carolina Series and Ohio Series would become shareholders of National
Municipals receiving shares of National Municipals equal to the value of
their holdings in Massachusetts Series, North Carolina Series and Ohio
Series. The Amount of additional shares assumed to be issued was calculated
based on the June 30, 2000 net assets of Massachusetts Series, North
Carolina Series and Ohio Series and the net asset value per share of
National Municipals as follows:
<TABLE>
<CAPTION>
NET ASSET VALUE
NATIONAL MUNICIPALS NET ASSETS PER SHARE
ADDITIONAL SHARES ISSUED 6/30/00 6/30/00
------------------------ ------------ ---------------
<S> <C> <C> <C>
Class A 9,209,564 $136,632,303 $14.85
Class Z 4,975 $ 73,876 $14.85
</TABLE>
3. PRO FORMA OPERATIONS--The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund.
Accordingly, the combined gross investment income is equal to the sum of
each Fund's gross investment income. Certain expenses have been adjusted to
reflect the expected expenses of the combined entity. The pro-forma
investment management fees and plan of distribution fees of the combined
Fund are based on the fee schedule in effect for National Municipals at the
combined level of average net assets for the twelve months ended June 30,
2000. The Pro Forma Statement of Operations does not include the effect of
any realized gains or losses, or transaction fees incurred in connection
with the realignment of the portfolio.
F-24
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Additional Information
March 3, 2000
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. The Fund
seeks to achieve this objective by investing substantially all of its total
assets in long-term Municipal Bonds of medium quality, that is, 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 and to increase the return on its
securities portfolio. There can be no assurance that the Fund's investment
objective will be achieved. See "Description of the Fund, Its Investments and
Risks."
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 3, 2000, a copy of
which may be obtained from the Fund upon request at the address or telephone
noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-13
Management of the Fund.................................................... B-14
Control Persons and Principal Holders of Securities....................... B-16
Investment Advisory and Other Services.................................... B-17
Year 2000 Readiness Disclosure............................................ B-21
Brokerage Allocation and Other Practices.................................. B-21
Capital Shares, Other Securities and Organization......................... B-23
Purchase, Redemption and Pricing of Fund Shares........................... B-23
Shareholder Investment Account............................................ B-32
Net Asset Value........................................................... B-35
Taxes, Dividends and Distributions........................................ B-36
Performance Information................................................... B-39
Financial Statements...................................................... B-41
Report of Independent Accountants......................................... B-63
Appendix I--Description of Tax-Exempt Security Ratings.................... I-1
Appendix II--General Investment Information............................... II-1
Appendix III--Historical Performance Data................................. III-1
</TABLE>
--------------------------------------------------------------------------------
MF104B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on January 9, 1980.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a diversified, open-end management investment
company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS.
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 "Fund Distributions and Tax Issues" in the
Prospectus. The Fund expects that normally it will not invest 25% or more of
its total assets in a single industry. While the principal investment policies
and strategies for seeking to achieve this objective are described in the
Fund's Prospectus, the Fund may from time to time also use the securities,
instruments, policies and principal and non-principal strategies described
below in seeking to achieve its objective. There can be no assurance that the
Fund's investment objective will be achieved and you could lose money.
MUNICIPAL NOTES
For liquidity purposes, pending investment in Municipal Bonds, or on a
temporary or defensive basis due to adverse market, economic or political
conditions, the Fund may invest in 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 generally 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 that are guaranteed
by the U.S. Government, its agents or instrumentalities (the interest on which
may not be exempt from federal income taxes).
MUNICIPAL BONDS
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 and A and BBB by S&P or comparably rated by any other
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.
The Fund may also acquire Municipal Bonds which have been rated below medium
quality by the rating services, that is, high yield or "junk" bonds, 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
B-2
<PAGE>
bonds of higher quality. In addition, obligations with longer maturities (for
example, 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.
Municipal Bonds include debt obligations of a state, a territory, or a
possession of the United States, or any political subdivision thereof (for
example, 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.
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 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. For
further discussion, see "Floating Rate and Variable Rate Municipal Bonds,"
below.
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: (1) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (2) 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, (3) 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, (4) 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, (5) 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 (2) above.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT-
GRADE (JUNK BONDS)
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). Lower rated or unrated securities
(that is, high yield or high risk securities commonly referred to as junk
bonds) 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. Fluctuations in the prices
B-3
<PAGE>
of portfolio securities subsequent to their acquisition will not affect cash
income from such securities but will be reflected in the Fund's net asset
value. The investment adviser considers both credit risk and market risk in
making investment decisions for the Fund. 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 investing.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition to the risk of default, there
are the related costs of recovery on defaulted issues. 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 and, from time to time, it may be more difficult
to value high-yield securities than 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 Fund's NAV.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund 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 debt portion of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high-yield
securities. Since investors generally perceive that there are greater risks
associated with the medium to lower rated securities of the type in which the
Fund may invest, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more
pronounced manner than do changes in higher quality segments of the fixed-
income securities which fluctuate in response to the general level of interest
rates.
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.
RISK MANAGEMENT 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 and regulatory limits and
there can be no assurance that any of these strategies will succeed. 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.
FINANCIAL FUTURES CONTRACTS
The Fund will engage in transactions in financial futures contracts for
return enhancement and risk management purposes as well as to hedge against
interest rate related fluctuations in the value of securities which are held
in the Fund's portfolio or which the Fund intends to purchase. The Fund will
engage in such transactions consistent with the Fund's investment objective. A
clearing
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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.
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 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. 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 1 1/2% to 5% of the contract amount, called initial margin.
Thereafter, the futures contract will be valued daily and the payment in cash
of maintenance or variation margin may be required, resulting in the Fund
paying or receiving cash that reflects any decline or increase in the
contract's value, a process known as 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.
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.) Duration is described in Appendix II under "Duration."
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. If
it 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 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 (that is, sell) covered put
and call options on future 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 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.
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.
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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.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED
OPTIONS
CFTC LIMITS. Under regulations of the Commodity Exchange Act, as amended
(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. 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.
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 insures 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. 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.
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 above
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).
INTEREST RATE SWAP TRANSACTIONS
The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities. Under normal circumstances, the Fund will enter into interest
rate swaps on a net basis, that is, the two payment streams netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each interest rate swap will be accrued
on a daily basis and an amount of cash or liquid assets having an aggregate
net asset value at least equal to the accrued excess will be maintained in a
segregated account by a custodian that satisfies the requirements of the
Investment Company Act. To the extent that the Fund enters into interest rate
swaps on other than a net basis, the amount maintained in a segregated account
will be the full amount of the Fund's obligations, if any, with respect to
such interest rate swaps, accrued on a daily basis. Inasmuch as segregated
accounts are established for these hedging transactions the investment adviser
and the Fund believe such obligations do not constitute senior securities. If
there is a default by the other party to such a transaction, the Fund will
have contractual remedies pursuant to the agreement related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. The Fund will enter into interest rate
swaps only with parties meeting creditworthiness standards approved by the
Fund's Board of Directors. The investment adviser will monitor the
crediworthiness of such parties under the supervision of the Board of
Directors.
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The use of interest rate swaps is highly speculative activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the investment adviser is incorrect in
its forecast of market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared to what it
would have been if this investment technique was never used.
The Fund may enter into interest rate swaps traded on an exchange or in the
over-the-counter market. The Fund may only enter into interest rate swaps to
hedge its portfolio. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rates swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the
other party to an interest rate swap defaults, the Fund's risk of loss
consists of the net amount of interest payments that the Fund is contractually
entitled to receive. Since interest rate swaps are individually negotiated,
the Fund expects to achieve an acceptable degree of correlation between its
rights to receive interest on its portfolio securities and its rights and
obligations to receive and pay interest pursuant to interest rate swaps.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets involves Investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. The Fund, and thus its investors, may lose money through the
unsuccessful use of these strategies. If the investment adviser's predictions
of movements in the direction of the securities and interest rate markets are
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
options and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements
in the direction of interest rates and securities prices (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies 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.
The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio
may decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by
a reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Fund's portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the
changes in prevailing interest rates against which the Fund seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between
a contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
There may exist an imperfect corelation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if transactions due
to the resultant reduction in the liquidity of the futures market. In
addition, due to the fact that, from the point of view of speculators, the
deposit requirement in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures markets could cause temporary price distortions. Due to the
possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities (or
currencies) and movements in the prices of futures contracts, a correct
forecast of interest rate trends by the investment adviser may still not
result in a successful hedging transaction.
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.
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Pursuant to the requirements of the Commodity Exchange Act, all futures
contract and options thereon must be traded on an exchange. 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. 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 exchanges. 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 underlying securities until the option expired or
was exercised or, in the case or a purchased option, exercise the option and
comply with the margin requirements for the underlying futures contract to
realize any profit. 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
was closed. 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.
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.
As described above, under regulations of the Commodity Exchange Act,
investment companies registered under the Investment Company Act are exempt
from the definition of commodity pool operator, subject to compliance with
certain conditions. The Fund may enter into futures or related options
contracts for return enhancement purposes if the aggregate initial margin and
option premiums do not exceed 5% of the liquidation value of the Fund's total
assets, after taking into account unrealized profits and unrealized losses on
any such contracts, provided, however, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such 5%.
The above restriction does not apply to the purchase and sale of futures and
related options contracts for bona fide hedging purchases within the meaning
of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either:
(1) a substantial majority (that is, approximately 75%) of all anticipatory
hedge transactions (transactions in which the Fund does not own at the time of
the transaction, but expects to acquire, the securities underlying the
relevant futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities, which are the subject of the hedge,
or (2) the underlying value of all long positions in futures contracts will
not exceed the total value of (a) all short-term debt obligations held by the
Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund on
investments within thirty days; (d) the margin deposited on the contracts; and
(e) any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a
position may also be covered by owning the securities underlying the futures
contract, or by holding a call option permitting the Fund to purchase the same
contract at a price no higher than the price at which the short position was
established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or
higher than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then
it may prove impossible to liquidate a futures position until the daily limit
moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Fund has insufficient cash,
it may be disadvantageous to do so. In addition, the Fund may be required to
take or make delivery of the instruments underlying futures contracts it holds
at a time when it is disadvantageous to do so. The ability to close out
options and futures positions could also have and adverse impact on the Fund's
ability to hedge effectively its portfolio.
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In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the investment adviser.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts 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
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not
result in a loss, as in the instance where there is no movement in the prices
of the futures contracts or underlying securities. An option position may be
closed out only on an exchange which provides a secondary market for an option
of the same series. As described above, although the Fund generally will
purchase only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time, and for some
options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; ((5) the
facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (6) 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.
FLOATING RATE AND VARIABLE RATE MUNICIPAL BONDS
The Fund may invest in floating rate and variable rate securities, including
participation interests therein. The Fund may invest in inverse floaters and
secondary inverse floaters. Floating 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. The interest rate on floating rate securities changes whenever there is
a change in the designated base interest rate. Variable rate securities
provide for a specific periodic adjustment in the interest rate based on
prevailing market rates and generally would allow the Fund 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 Fund paid for them.
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. A secondary inverse floater is an asset
backed security, generally evidenced by a trust or custodial receipt, the
interest rate on which 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
such instruments. Generally, income from inverse floating rate bonds will
decrease when short-term interest rates increase, and will increase when
short-term interest rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates
at a rate that is a multiple (typically two) of the rate at which fixed-rate,
long-term, tax-exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities generally will be
more volatile than the market values of fixed-rate tax-exempt securities. To
seek to limit the volatility of these securities, the Fund may, but is not
required to, purchase inverse floating obligations with shorter-term
maturities or which contain limitations on the extent to which the interest
rate may vary. Inverse floaters represent a flexible portfolio management
instrument that allows us to vary the degree of investment leverage relatively
efficiently under different market conditions. The market for inverse floaters
is relatively new.
The Fund may invest in participation interests in variable rate tax-exempt
securities (such as certain IDBs) owned by banks. A participation interest
gives the Fund an undivided interest in the tax-exempt security in the
proportion that the Fund's participation
B-10
<PAGE>
interest bears to the total principal amount of the tax-exempt security and
generally provides that the holder may demand repurchase within one to seven
days. Participation interests frequently are backed by an irrevocable letter
of credit or guarantee of a bank that the investment adviser under the
supervision of the Directors has determined meets the prescribed quality
standards for the Fund. The Fund generally has the right to sell the
instrument back to the bank and draw on the letter of credit on demand, on
seven days' notice, for all or any part of the Fund's participation interest
in the par value of the tax-exempt security, plus accrued interest. The Fund
intends to exercise the demand under the letter of credit only (1) upon a
default under the terms of the documents of the tax-exempt security, (2) as
needed to provide liquidity in order to meet redemptions or (3) to maintain a
high quality investment portfolio. Banks will retain a service and letter of
credit fee and a fee for issuing repurchase commitments in an amount equal to
the excess of the interest paid by the issuer on the tax-exempt securities
over the negotiated yield at which the instruments were purchased from the
bank by the Fund. The investment adviser will monitor the pricing, quality and
liquidity of the variable rate demand instruments held by the Fund, including
the IDB's supported by bank letters of credit or guarantees, on the basis of
published financial information, reports of rating agencies and other bank
analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place a month or more after the date of the
transaction. The purchase price and the interest rate payable on the
securities are fixed on the transaction date. The securities so purchased are
subject to market fluctuation, and no interest accrues to the Fund until
delivery and payment take place. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction and thereafter reflect the value of such securities in
determining its NAV each day. The Fund will segregate cash or other liquid
assets, marked-to-market daily, having a value equal to or greater than such
commitments. If the Fund chooses to dispose of the right to acquire a when-
issued security prior to its acquisition, it could, as with the disposition of
any other portfolio security, incur a gain or loss due to market fluctuations.
At the time of delivery of the securities, the value may be more or less than
the purchase price, and an increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued or delayed-delivery
basis may increase the volatility of the Fund's net asset value.
MUNICIPAL LEASE OBLIGATIONS
The Fund 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 (for example, 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 Directors.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in illiquid
securities. If the Fund were to exceed this limit, the investment adviser
would take prompt action to reduce the Fund's holdings in illiquid securities
to no more than 15% of its net assets, as required by applicable law. Illiquid
securities include repurchase agreements which have a maturity of longer than
seven days or other illiquid securities, including securities that are
illiquid by virtue of the absence of a readily available market, such as
certain securities subject to contractual restrictions on resale (restricted
securities). 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 and certain other securities for which there is
a readily available market will not be considered illiquid for purposes of the
Fund's 15% limitation on illiquid securities only when deemed liquid under
procedures established by the Directors. 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 (for
example, 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
B-11
<PAGE>
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 (a) whether the lease can be cancelled; (b) if
applicable, what assurance there is that the assets represented by the lease
can be sold; (c) the strength of the lessee's general credit (for example, its
debt, administrative, economic and financial characteristics); (d) 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 (for example, the potential for an event of
nonappropriation); (e) 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.
MUNICIPAL ASSET BACKED SECURITIES
The Fund may invest in municipal asset backed securities. A municipal asset
backed security is a debt or equity interest in a trust, special purpose
corporation or other pass-through structure, the interest or income on which
generally is eligible for exclusion from federal income taxation based upon
the income from an underlying pool of municipal bonds.
ZERO COUPON MUNICIPAL BONDS
The Fund may invest in zero coupon municipal bonds. Zero coupon municipal
bonds 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 municipal bonds 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. Because the Fund
accrues income which may not be represented by cash, the Fund may be required
to sell other securities in order to satisfy the distribution requirements
applicable to the Fund. Zero coupon municipal bonds may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
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 33 1/3% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 33 1/3% of its total assets to secure these borrowings.
However, the Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of the Fund's total assets.
(D) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS. As described
above, in response to adverse market, economic or political conditions, or for
liquidity purposes, pending investment in municipal bonds, the Fund may take a
temporary defensive position and invest up to 100% of the Fund's assets in
Municipal Notes. Investing heavily in these securities can limit our ability
to achieve our investment objective of a high level of current income exempt
from federal income taxes, but can help to preserve the Fund's assets.
SEGREGATED ASSETS
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. Such hedging transactions may
involve when-issued and delayed securities, futures contracts, written options
and options on futures contracts (unless otherwise covered). If collateralized
or otherwise covered, in accordance with Commission guidelines, these will not
be deemed to be senior securities.
B-12
<PAGE>
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 (1) 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 (2) more than 50% of
the outstanding voting shares.
The Fund may not:
(1) With respect to 75% of its total assets, invest more than 5% of the
market or other fair value of its total assets in the securities of any one
issuer (other than obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities). It is the current policy (but not a
fundamental policy) of the Fund not to invest more than 5% of the market or
other fair value of its total assets in the securities of any one issuer.
(2) Make short sales of securities.
(3) Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of purchases and sales of portfolio securities and
margin payments in connection with transactions in financial futures
contracts.
(4) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 33 1/3% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions. The Fund may pledge up to 33 1/3% of the
value of its total assets to secure such borrowings. Secured borrowings may
take the form of reverse repurchase agreements, pursuant to which the Fund
would sell portfolio securities for cash and simultaneously agree to
repurchase them at a specified date for the same amount of cash plus an
interest component. The Fund would maintain, in a segregated account with its
Custodian, liquid assets equal in value to the amount owed. For purposes of
this restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements, the purchase and sale of securities on a when-
issued or delayed delivery basis, the purchase and sale of financial futures
contracts and options and collateral arrangements with respect to margins for
financial futures contracts and with respect to options are not deemed to be
the issuance of a senior security or a pledge of assets.
(5) Engage in the underwriting of securities or purchase any securities as
to which registration under the Securities Act of 1933 would be required for
resale of such securities to the public.
(6) Purchase or sell real estate or real estate mortgage loans, although it
may purchase Municipal Bonds or Notes secured by interests in real estate.
(7) Make loans of money or securities except through the purchase of debt
obligations or repurchase agreements.
(8) Purchase securities of other investment companies, except in the open
market involving any customary brokerage commissions and as a result of which
not more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.
(9) Invest for the purpose of exercising control or management of another
company.
(10) Purchase industrial revenue bonds if, as a result of such purchase,
more than 5% of total Fund assets would be invested in industrial revenue
bonds where payment of principal and interest are the responsibility of
companies with less than three years of operating history.
(11) Purchase or sell commodities or commodities futures contracts except
financial futures contracts and options thereon.
(12) Invest more than 25% of the value of its total assets in securities
whose issuers are located in any one state.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
B-13
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(/1/) AND (AGE) POSITION WITH FUND DURING PAST 5 YEARS
---------------------------- ------------------ ---------------------
<C> <C> <S>
Eugene C. Dorsey (72) Director Retired President, Chief
Executive Officer and
Trustee of the Gannett
Foundation (now Freedom
Forum); former Publisher of
four Gannett newspapers and
Vice President of Gannett
Company; past Chairman of
Independent Sector (national
coalition of philanthropic
organizations); former
Chairman of the American
Council for the Arts; former
Director of the Advisory
Board of Chase Manhattan
Bank of Rochester.
Delayne Dedrick Gold (61) Director Marketing and Management
Consultant.
*Robert F. Gunia (53) Vice President Executive Vice President and
and Director Chief Administrative Officer
(since June 1999) of
Prudential Investments;
Corporate Vice President
(September 1997-March 1999)
of The Prudential Insurance
Company of America
(Prudential); Executive Vice
President and Treasurer
(since December 1996) of
Prudential Investments Fund
Management LLC (PIFM);
President (since April 1999)
of Prudential Investment
Management Services LLC
(PIMS); former Senior Vice
President (March 1987-May
1999) and former Chief
Administrative Officer (July
1990-September 1996) of
Prudential Securities
Incorporated (Prudential
Securities); Director
(January 1989-September
1996), Executive Vice
President, Treasurer and
Chief Financial Officer
(June 1987-December 1996) of
Prudential Mutual Fund
Management, Inc. (PMF); and
Vice President and Director
(since May 1989) of The Asia
Pacific Fund, Inc.
Thomas T. Mooney (58) Director President of the Greater
Rochester Metro Chamber of
Commerce; former Rochester
City Manager; former Deputy
Monroe County Executive;
Trustee of Center for
Governmental Research, Inc.;
Director of Blue Cross of
Rochester, Monroe County
Water Authority, and
Executive Service Corps of
Rochester.
Stephen P. Munn (57) Director Chairman (since January
1994), Director and
President (since 1988) and
Chief Executive Officer
(since 1988) of Carlisle
Companies Incorporated
(manufacturer of industrial
products).
*David R. Odenath, Jr. (42) Director Officer in Charge, President,
Chief Executive Officer and
Chief Operating Officer
(since June 1999) of PIFM;
Senior Vice President (since
June 1999) of Prudential;
and Senior Vice President
(August 1993-May 1999),
PaineWebber Group, Inc.
Richard A. Redeker (56) Director Former employee of Prudential
Investments (October 1996-
December 1998); prior
thereto, President, Chief
Executive Officer and
Director (October 1993-
September 1996) of
Prudential Mutual Fund
Management, Inc.; Executive
Vice President, Director and
Member of Operating
Committee (October 1993-
September 1996) of
Prudential Securities;
Director (October 1993-
September 1996) of
Prudential Securities Group,
Inc.; Executive Vice
President, The Prudential
Investment Corporation (July
1994-September 1996);
Director (January 1994-
September 1996) of
Prudential Mutual Fund
Distributors, Inc. and
Prudential Mutual Fund
Services, Inc.; and former
Senior Executive Vice
President and Director of
Kemper Financial Services,
Inc. (September 1978-
September 1993).
*John R. Strangfeld, Jr. (45) President Chief Executive Officer,
and Director Chairman, President and
Director (since January
1990) of The Prudential
Investment Corporation;
Executive Vice President
(since February 1998),
Prudential Global Asset
Management Group of
Prudential, and Chairman
(since August 1989) of
Pricoa Capital Group;
formerly various positions
to Chief Executive Officer
(November 1994-December
1998) of Private Asset
Management Group of
Prudential; and Senior Vice
President (January 1986-
August 1989) of Prudential
Capital Group, a unit of
Prudential.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS(/1/) AND PRINCIPAL OCCUPATIONS
(AGE) POSITION WITH FUND DURING PAST 5 YEARS
---------------------- ------------------ ---------------------
<C> <C> <S>
Nancy H. Teeters (69) Director Economist; former Vice President
and Chief Economist (March 1986-
June 1990) of International
Business Machines Corporation;
former Governor of Federal
Reserve System (1978-1984); and
former Director of Inland Steel
Industries (July 1991-1999).
Louis A. Weil, III (58) Director Chairman (since January 1999),
President 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.; former
Publisher of Time Magazine (May
1989-March 1991); former
President, Publisher and Chief
Executive Officer of The Detroit
News (February 1986-August
1989); and member of the
Advisory Board, Chase Manhattan
Bank--Westchester.
Grace C. Torres (40) Treasurer and First Vice President (since
Principal Financial December 1996) of PIFM; former
and Accounting First Vice President (March
Officer 1993-May 1999) of Prudential
Securities; and First Vice
President (March 1994-September
1996) of Prudential Mutual Fund
Management, Inc.
Stephen M. Ungerman (46) Assistant Tax Director of Prudential
Treasurer Investments (since March 1966);
former First Vice President of
Prudential Mutual Fund
Management, Inc. (February 1993-
September 1996).
Deborah A. Docs (42) Secretary Vice President (since December
1996) of PIFM; former Vice
President and Associate General
Counsel (June 1991-May 1999) of
Prudential Securities; and Vice
President and Associate General
Counsel (June 1991-September
1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>
- ---------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, Prudential Securities or PIFM.
(/1/)The address of the Directors and officers is c/o: Prudential Investments
Fund Management LLC, Gateway Center Three, 100 Mulberry Street, 9th Floor,
Newark, New Jersey 07102-4077.
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Investment Adviser and Distributor, decide upon matters of
general policy. The Directors also review the actions of the Fund's officers
and supervise the daily business operations of the Fund.
Directors and officers of the Fund are also Trustees, Directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
The officers conduct and supervise the daily business operations of the
Company, while the Directors, in addition to their functions set forth under
"Management of the Fund" and "Investment Advisory and Other Services," 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 $3,000, 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 a Commission exemptive
order of the Commission, at the daily rate of return of the Fund (the Fund
rate). Payment of the interest so accrued is also deferred and accruals become
payable at the option of the Director. The Fund's obligation to make payments
of deferred Directors' fees, together with interest thereon, is a general
obligation of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 75.
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.
B-15
<PAGE>
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, 1999 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), including the Fund, for the calendar year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
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 $142,500 (43/70)*
Eugene C. Dorsey--
Director** $4,500 None N/A $ 81,000 (17/48)*
Delayne Dedrick Gold--
Director $4,600 None N/A $144,500 (43/70)*
Robert F. Gunia--Vice
President and
Director(/1/) -- -- -- --
Thomas T. Mooney--
Director** $4,500 None N/A $ 29,500 (35/75)*
Stephen P. Munn--
Director $ 750 None N/A $ 62,250 (29/53)*
David R. Odenath, Jr.--
Director(/1/) -- -- -- --
Thomas H. O'Brien--
Director@ $4,500 None N/A $ 47,500 (11/26)*
Richard A. Redeker--
Director $4,500 None N/A $ 95,000 (29/53)*
John R. Strangfeld,
Jr.--President and
Director(/1/) -- -- -- --
Nancy H. Teeters--
Director $4,500 None N/A $ 97,000 (25/43)*
Louis A. Weil, III--
Director $4,550 None N/A $ 96,000 (29/53)*
</TABLE>
- ---------
@ Former Director, retired on December 31, 1999.
*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
or any fund in the Fund complex.
** Total compensation from all of the funds in the Fund complex for the
calendar year ended December 31, 1999, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $103,574 and
$135,102 for Messrs. Dorsey and Mooney, respectively.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited
group of investors.
As of February 4, 2000, the Directors and officers of the Fund, as a group,
owned less than 1% of each class of the outstanding shares of the Fund. As of
February 4, 2000, each of the following entities owned more than 5% of the
outstanding shares of each of the classes indicated: Mrs. Christine Doyle, 58
Remington Rd., Ridgefield, CT 06877-4326, who held 20,106 Class C shares of
the Fund (approximately 11.3% of the outstanding Class C shares); Katz-
Ridgefield Investment Partnership LP, 473 Ridgeburry Rd., Ridgefield, CT
06877-1214, who held 21,242 Class C shares of the Fund (approximately 11.9% of
the outstanding Class C shares); Worldwide Forwarders Inc., Richard H.
Panadero, 9706 SW 155 CT, Miami, FL 33196, who held 35,857 Class C shares of
the Fund (approximately 20.1% of the outstanding Class C shares); Theresa C.
Peterson, 20 Maolis Rd., Nahant, MA 01908-1213, who held 5,232 Class Z shares
of the Fund (approximately 9.3% of the outstanding Class Z shares); Lisa G.
Brooks, 2390 Sandy Creek Farm Rd., Alpharetta, GA 30004-3621, who held 4,936
Class Z shares of the Fund (approximately 8.7% of the outstanding Class Z
shares); Mr. Paul L. Pahmier & Mrs. Helen A. Pahmier, 3120 S. Broadway,
Yorktown, IN 47396-9647, who held 3,355 Class Z shares of the Fund
(approximately 5.9% of the outstanding Class Z shares); Thomas A. Barnum,
Liesa M. Barnum, Community Property, 3840 Valley Quail Dr., Loomis, CA 95650-
9747, who held 4,758 Class Z shares of the Fund (approximately 8.4% of the
outstanding Class Z shares); Martha L. Hugon, Revocable Trust, 2304 W. Christy
Ln., Muncie, IN 47304-1770, who held 3,481 Class Z shares of the Fund
(approximately 6.2% of the outstanding Class Z shares).
As of February 4, 2000, Prudential Securities was the record holder for
other beneficial owners of 11,738,282 Class A shares (approximately 35.3% of
such shares outstanding), 2,429,652 Class B shares (approximately 39.8% of
such shares outstanding), 105,157 Class C shares (approximately 59.1% of such
shares outstanding) and 56,497 Class Z shares (approximately 99.9% of such
shares outstanding). In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to
beneficial owners for which it is the record holder.
B-16
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
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--Manager" in the Prospectus. As of
December 31, 1999, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $75.6 billion.
According to the Investment Company Institute, as of September 30, 1999, the
Prudential mutual funds were the 20th 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 and dividend
distribution agent for the Prudential mutual funds and, in addition, provides
customer service, record keeping and management and administration services to
qualified plans.
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 has hired The Prudential Investment Corporation, doing business
as Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to 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 PIFM 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, 1999. No jurisdiction currently limits the Fund's expenses.
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and subsidies will increase the Fund's total return. These voluntary waivers
may be terminated at any time without notice.
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 Subadviser, 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 Subadviser, (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
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<PAGE>
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.
For the fiscal years ended December 31, 1999, 1998, and 1997, the Fund paid
PIFM management fees of $3,129,064, $2,961,791, and $2,869,410 (net of waiver
of $215,979), respectively.
PIFM has entered into the Subadvisory Agreement with PI, 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. Effective January 1,
2000, PI is paid by PIFM at an annual rate of .250 of 1% of the Fund's average
daily net assets up to and including $250 million, .226 of 1% of the next $250
million, .203 of 1% of the next $500 million, .181 of 1% of the next $250
million, .160 of 1% of the next $250 million and .141 of 1% of over $1.5
billion of the Fund's average daily net assets. The fee is computed daily and
payable monthly.
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.
Prudential Investment's Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the
sector team described in the prospectus (assets under management are as of
December 31, 1999):
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $36.0 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and tax-
exempt instruments.
INVESTMENT APPROACH: Focus is on safety of principal, liquidity and controlled
risk.
CODE OF ETHICS
The Board of Directors/Trustees of the Fund, or the Duly Appointed Officer-
in-Charge of each of the Fund, Manager, Subadviser and Distributor, has
adopted a Code of Ethics under Rule 17j-1 of the Investment Company Act of
1940, (the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Manager, Subadviser and Distributor and as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all access persons of the Manager, Subadviser and
Distributor preclear any personal securities investments (with limited
exceptions, such as unit investment trusts). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all investment personnel of the Manager, Subadviser and
Distributor include a ban on acquiring any securities in an initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no access person may purchase
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or sell any security which at the time is being purchased or sold (as the case
may be), or to the knowledge of the access person is being considered for
purchase or sale, by any fund advised by the Subadviser. Furthermore, the Code
provides for trading "blackout periods" which prohibit trading by investment
personnel of a Fund within 7 days of trading by the Fund in the same (or
equivalent) security. The Codes are on public file with, and are available
from, the Commission.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary
of Prudential.
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.
The expenses incurred under the Plans include commissions and accounting
servicing fees paid to or on account of brokers or financial institutions
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. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
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 brokers in consideration for the
distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
CLASS A PLAN. 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 net assets of the Class A
shares. The Class A Plan provides that (1) 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 (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable under the Class A Plan to .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending December 31, 2000.
Fee waivers will increase the Fund's total return.
For the fiscal year ended December 31, 1999, the Distributor received
payments of $1,329,006 under the Class A Plan. The amount was primarily
expanded for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. The Distributor also received approximately
$64,200, in initial sales charges attributable to Class A shares.
CLASS B AND CLASS C PLANS. 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 asset of the Class B and Class C shares,
respectively. The Class B Plan provides for the payment to the Distributor of
(1) an asset-based sales charge of up to .50 of 1% of the average daily net
assets of the Class B shares, and (2) 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 (1) an asset-based sales charge of up to
.75 of 1% of the average daily net assets of the Class C shares, and (2) 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 contractually 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. The Distributor
also receives contingent deferred sales charges from certain redeeming
shareholders and, with respect to Class C shares, initial sales charges. Fee
waivers will increase the Fund's total return.
CLASS B PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $590,221 from the Fund under the Class B Plan. It is estimated that
the Distributor spent approximately $607,200 in distributing the Fund's Class
B shares, on behalf of the Fund during the year ended December 31, 1999. It is
estimated that of this amount approximately 2.5% ($15,200) was spent on
printing and mailing of prospectuses to other than current shareholders; 27.0%
($164,000) on compensation to Prusec, an affiliated broker-dealer, for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch
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office distribution-related expenses, incurred by it for distribution of Fund
shares; and 70.5% ($428,000) on the aggregate of (1) payments of commissions
to financial advisers 51.2% ($310,800) and (2) an allocation on account of
overhead and other branch office distribution-related expenses 19.3%
($117,200). 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 "How to Buy, Sell and Exchange Shares of the Fund--How to Sell
Your Shares--Contingent Deferred Sales Charge (CDSC)" in the Prospectus. For
the fiscal year ended December 31, 1999, the Distributor received
approximately $142,600, in contingent deferred sales charges with respect to
Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1999 the Distributor
received $19,821, from the Fund under the Class C Plan and spent approximately
$23,100 in distributing the Fund's Class C shares. It is estimated that of the
latter amount approximately 1.7% ($400) was spent on printing and mailing of
prospectus to other than current shareholders; .4% ($100) on compensation to
Pruco Securities Corporation, 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; 97.9% ($22,600) on the aggregate of (i) payments
of commission and account servicing fees to financial advisers (70.2% or
$16,200) and (ii) an allocation of overhead and other branch office
distribution-related expenses (27.7% or $6,400). 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, communication 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 an initial sales charge and the proceeds of
CDSCs paid by holders of Class C shares upon certain redemptions of Class C
shares. For the year ended December 31, 1999, the Distributor received
approximately $1,400 in CDSCs with respect to Class C shares. For the fiscal
year ended December 31, 1999, the Distributor also received approximately
$9,400 in initial sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are 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 Fund 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.
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 directors who are not
interested persons of the Fund and have no direct or indirect financial
interest in the Class A, Class B or Class C Plans or in any agreement related
to the Plans (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.
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 to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
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<PAGE>
The Distributor has waived a portion of its distribution fees for the Class
A and Class C shares as described above. Fee waivers and subsidies will
increase the Fund's total return. These voluntary waivers may be terminated at
any time without notice. See "Performance Information" below.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its
distribution and service (12b-1) fees for the Class A and Class C shares as
described above. Fee waivers and subsidies will increase the Fund's total
return.
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 each class of 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.
(C) OTHER SERVICE PROVIDERS
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. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, serves as the transfer and dividend disbursing agent of the
Fund. PMFS 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, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $13.00
per shareholder account and a new account set-up fee of $2.00 for each
manually established shareholder account. PMFS is also reimbursed for its out-
of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.
PricewaterhouseCoopers 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.
YEAR 2000 READINESS DISCLOSURE
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.
Although the Fund has not experienced any material problems with the services
provided by the Manager, Distributor, Transfer Agent or the Custodian as a
result of the change from 1999 to 2000, there remains a possibility that
computer software systems in use might be impaired or unavailable because of
the way dates are encoded and calculated. Such an 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 future adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised
the Fund that they have completed necessary changes to their computer systems
in connection with the year 2000. The Fund's service providers (or other
securities market participants) may experience future material problems in
connection with the year 2000. The Fund and its Board have instructed the
Fund's principal service providers to monitor and report year 2000 problems.
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues at some later time which,
if material and not resolved, could have an adverse impact on securities
markets and/or a specific issuer's performance and could result in a decline
in the value of the securities held by the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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
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<PAGE>
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.
The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1997, 1998 and 1999.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at December 31, 1999. As of December 31, 1999, the Fund
did not hold any securities of its regular brokers and dealers.
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<PAGE>
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to offer 1 billion shares of common stock, $.01 par
value per share, divided into four classes of shares, designated Class A,
Class B, Class C and Class Z shares, 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 (1) 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, (2) 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, (3) each class has a different exchange
privilege, (4) only Class B shares have a conversion feature and (5) Class Z
shares are offered exclusively for sale to a limited group of investors. 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 and to Class Z shareholders,
whose shares are not subject to any distribution and/or service fee. In
accordance with the Fund's Articles of Incorporation, the Board of Directors
may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Directors may determine. Currently, the Fund is offering four
classes, designated Class A, Class B, Class C and Class Z shares.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of 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. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares (with the
exception of Class Z shares, which are not subject to any distribution and/or
service fees). Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled
to its portion of all of the Fund's assets after all debts 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 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 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.
PURCHASE, REDEMPTION AND PRICING 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 (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charges. See "How to Buy, Sell and Exchange Shares of the
Fund--How to Buy Shares" in the Prospectus.
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, fund and 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, specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
investing (Class A, Class B, Class C or Class Z 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.
In making a subsequent purchase order by wire, you should wire State Street
directly and should by sure that the wire specifies Prudential National
Municipals Fund, 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 using federal funds. The minimum amount which may be invested
by wire is $1,000.
B-23
<PAGE>
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) 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%, Class C* shares are sold with a 1% sales charge and Class B* and Class Z
shares of the Fund are sold at NAV. Using the Fund's NAV at December 31, 1999,
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........................ $14.72
Maximum sales charge (3% of offering price)....................... .46
------
Offering price to public.......................................... $15.18
======
<CAPTION>
CLASS B
<S> <C>
NAV, offering price and redemption price per Class B share*....... $14.75
======
<CAPTION>
CLASS C
<S> <C>
NAV, offering price and redemption price per Class C share*....... $14.75
Sales charge (1% of offering price)............................... .15
------
Offering price to public.......................................... $14.90
======
<CAPTION>
CLASS Z
<S> <C>
NAV, offering price and redemption price per Class Z share........ $14.71
======
</TABLE>
---------
*Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determine which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Funds.
If you intend to hold your investment in a Fund for less than 3 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 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 3 years, but more than 4
years, or for more than 5 years, but less than 6 years, you should consider
purchasing Class A shares because that maximum 3% initial sales charge plus
the cumulative annual distribution-related fee on Class A shares would be
lower than: (i) the contingent deferred sales charge plus the cumulative
annual distribution-related fee on Class B shares; and (ii) the 1% initial
sales charge plus the cumulative annual distribution-related fee on Class C
shares.
If you intend to hold your investment for more than 4 years, but less than 5
years, you may consider purchasing Class A or Class B shares because: (i) the
maximum 3% initial sales charge plus the cumulative annual distribution-
related fee on Class A shares and (ii) the contingent deferred sales charge
plus the cumulative annual distribution-related fee on Class B shares would be
lower than the 1% initial sales charge plus the cumulative annual
distribution-related fee on Class C shares.
If you intend to hold your investment for more than 6 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 shares,
B-24
<PAGE>
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
3 years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C 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 on the return on the investment over this
period of time or redemptions when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
Class A shares may be purchased at NAV, through the Distributor or the
Transfer Agent, by:
. officers of the Prudential Mutual Funds (including the Fund)
. employees of the Distributor, Prudential Securities, 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
. employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer
. 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
. members of the Board of Directors of Prudential
. real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the
Transfer Agent
. registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer
. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) 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, (2) 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 (3) the financial adviser served as the client's broker on the
previous purchase
. orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (for
example, mutual fund "wrap" or asset allocation programs)
. orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring fee-
based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one
class of shares in the Fund in connection with different pricing options for
their programs. Investors should consider carefully any separate transaction
and other fees charged by these programs in connection with investing in each
available share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
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.
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
B-25
<PAGE>
take advantage of the reduced sales charges applicable to larger purchases.
See "How to Buy, Sell and Exchange Shares of the Fund--How to Buy Shares--Step
2: Choose a Share Class--Reducing or Waiving Class A's Initial Sales Charge"
in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
. an individual
. the individual's spouse, their children and their parents
. the individual's and spouse's Individual Retirement Account (IRA)
. 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)
. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
. 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 Transfer Agent, the Distributor or your broker 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.
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 (Investment Letter of
Intent).
For purposes of the Investment Letter of Intent, 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
or its affiliates, and through your broker will not be aggregated to determine
the reduced sales charge.
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.
An Investment Letter of Intent permits an investor 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
investor. The effective date of an Investment 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 investor's cost, can be applied to the fulfillment of
the Letter of Intent goal.
The Investment 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 investor 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
B-26
<PAGE>
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.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See
"Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell 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 sales commissions from the combination
of the CDSC and the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
Investment of Redemption Proceeds from Other Investment Companies. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec; and (3)
investors purchasing shares through other brokers. This waiver is not
available to investors who purchase shares directly from the Transfer Agent.
You must notify your broker if you are entitled to this waiver and provide the
Transfer Agent with such supporting documents as it may deem appropriate.
CLASS Z SHARES
Mutual Fund Programs. Class Z shares can be purchased by participants in any
fee-based program or trust program sponsored by Prudential or an affiliate
that includes mutual funds as investment options and the Fund as an available
option. Class Z shares can also be purchased by investors in certain programs
sponsored by broker-dealers, investment advisers and financial planners who
have agreements with Prudential Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services
. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Class Z shares are also available for purchase by
the following categories of investors:
. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
. Prudential, with an investment of $10 million or more.
B-27
<PAGE>
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 net asset value of shares sold by such persons.
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 shares of the Fund and
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. Rights of accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of shares held directly
with the Transfer Agent and through your broker will not be aggregated to
determine the reduced sales charge. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the
maximum offering price (net asset value plus maximum sales charge) as of the
previous business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The
reduced sales charge 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.
SALE OF 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 (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for the day (that is,
4:15 p.m., New York time) in order to receive that day's NAV. Your broker 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.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates,
the certificates must be received by the Transfer Agent, the Distributor or
your broker 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, the Distributor or to
your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary, the
signature(s) on the redemption request, or stock power must be signature
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. In the case of
redemptions from a PruArray Plan, if the proceeds of the redemption are
invested in another investment option of the plan in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the written request, and certificates, if issued, except as indicated
below. If you hold shares through a broker, payment for shares presented for
redemption will be credited to your account at your broker unless you indicate
otherwise. Such payment may be postponed or the right of redemption suspended
at times (1) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (2) when trading on such Exchange is
restricted, (3) 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 (4) 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 (2), (3) or (4) exist.
B-28
<PAGE>
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, which may take 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 a regular redemption. 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 day--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 back into your
account any portion or all of the proceeds of such redemption in shares of the
same 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 broker, 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 Charge" below. Exercise of the
repurchase privilege may affect the federal tax treatment of the redemption.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of
shares purchased prior to November 2, 1998) 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 reduced 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 18 months, in the case of Class C
shares (one year for Class C shares purchased before November 2, 1998). 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.
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 as money
market fund. See "Shareholder Investment Account--Exchange Privilege" below.
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 SHARES 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>
B-29
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in 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 CHARGE--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 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
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, 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.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certifi-
cate or, in the case of a trust, a copy of
the grantor's death certificate, plus a
copy of the trust agreement identifying the
grantor.
Disability--An individual will be
considered disabled if he or she A copy of the Social Security Administra-
is unable to engage in any tion award letter or a letter from a physi-
substantial gainful activity by cian on the physician's letterhead stating
reason of any medically determin- that the shareholder (or, in the case of a
able physical or mental impair- trust, the grantor) (a copy of the trust
ment which can be expected to agreement identifying the grantor will be
result in death or to be of long- required as well) is permanently disabled.
continued and indefinite duration. The letter must also indicate the date of
disability.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions effected through the 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.
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
B-30
<PAGE>
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.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $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.
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 would 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 (1) 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 Service Code and (2) 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.
B-31
<PAGE>
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 by the record date, cash
payment will be made directly to the broker. Any shareholder who receives
dividends or distributions in cash may subsequently reinvest any such dividend
distribution at NAV by returning the check to the Transfer Agent within 30
days after the payment date. Such reinvestment will be made at the NAV per
share next determined after receipt of the check by the Transfer Agent. Shares
purchased with reinvested dividends and/or distributions will not be subject
to CDSC upon redemption.
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. An exchange is treated as a redemption and purchase for federal income
tax purposes. 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.
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 8:00 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.
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 must be returned in order for the
shares to be exchanged.
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.
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.
B-32
<PAGE>
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market mutual 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
an eligible 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 fund 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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. 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 and Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B and 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 broker that they are eligible for this special exchange privilege.
B-33
<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
net asset value.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. 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 goals/2/.
<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................. $ 105 $ 158 $ 210 $ 263
20 Years............................. 170 255 340 424
15 Years............................. 289 433 578 722
10 Years............................. 547 820 1,093 1,366
5 Years............................. 1,361 2,041 2,721 3,402
</TABLE>
See "Automatic Investment Plan" below.
- ---------
/1/Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, 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 brokerage account (including a Prudential Securities COMMAND Account) to be
debited to invest specified dollar amounts for subsequent investment into the
Fund. The investor's bank must be a member of the Automatic Clearing House
System. Share certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders having shares of
the Fund held through the Transfer Agent, the Distributor or your broker. Such
withdrawal plan provides for monthly, quarterly, semi-annual or annual
redemption checks in any amount, except as provided below, up to the value of
the shares in the shareholder's account. Systematic withdrawals of Class B or
Class C shares may be subject to a CDSC.
B-34
<PAGE>
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) systematic withdrawals may not be for less than
$100 and (3) all dividends and/or distributions must be automatically
reinvested in additional full and fractional shares of the Fund in order for
the shareholder to participate in the plan. See "Automatic Reinvestment of
Dividends and/or Distributions" above.
The Transfer Agent, the Distributor or your broker acts as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic 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 systematic 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 and Class C shares and (ii) the redemption 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, such as pursuit of 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.
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 Year's 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 not 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 Subadviser, (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or
Subadviser. 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.
B-35
<PAGE>
As long as the Fund declares dividends daily, the net asset value of the
Class A, Class B, Class C and Class Z shares of the Fund will generally be the
same. It is expected, however, that the dividends, if any, will differ by
approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund will declare a dividend immediately prior to 4:15 p.m., New York
time, 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 elect to receive dividends in cash each 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. Capital gains, if
any, of the Fund will be distributed at least annually.
The Fund is qualified as, intends to remain qualified as, and has elected to
be treated 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 of the Fund as a
regulated investment company under the Internal Revenue Code generally
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 stock, securities or foreign currencies or other income
(including gains from options, futures and forward contracts) derived with
respect to its business of investing in stocks, securities and currencies; (b)
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) and (c)
the Fund distribute to its shareholders at least 90% of its net investment
income and net short-term capital gains (that is, the excess of net short-term
capital gains over net long-term capital losses) and 90% of its net tax-exempt
interest income in each year. 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 is subject to a nondeductible 4% excise tax if it does not
distribute 98% of its ordinary taxable income on a calendar year basis and 98%
of its capital gains on an October 31 year-end basis. The Fund intends to
distribute its income and capital gains in the manner necessary to avoid
imposition of the 4% excise tax. Dividends and distributions generally are
taxable to shareholders in the year in which they are received or accrued;
however, dividends declared in October, November and December payable to
shareholders of record on a specified date in October, November and December
and paid in the following January will be treated as having been paid by the
Fund and received by shareholders in such prior year. Under this rule, a
shareholder may be taxed in one year on dividends or distributions actually
received in January of the following year.
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
B-36
<PAGE>
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.
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.
The Fund may purchase debt securities that contain original issue discount.
Original Issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements
of the Internal Revenue Code. Because the original Issue discount income
earned by the Fund in a taxable year may not be represented by cash income,
the Fund may have to dispose of other securities and use the proceeds to make
distributions to satisfy the Internal Revenue Code's distribution
requirements. Debt securities acquired by the Fund also may be subject to the
market discount rules.
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 taxable
ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Fund for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Fund at its original issue.
If any net capital gains from the sale of assets held for more than 12
months in excess of net short-term capital losses are retained by the Fund for
investment, requiring federal income taxes to be paid thereon by the Fund, the
Fund will elect to treat such capital gains as having been distributed to
shareholders. As a result, shareholders will be taxed on such amounts as
capital gains, will be able to claim their proportionate share of the federal
income taxes paid by the Fund on such gains as a credit against their own
federal income tax liabilities, and will be entitled to increase the adjusted
tax basis of their shares by the differences between their pro rata share of
such gains and their tax credit.
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to 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 or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to share holders of tax-exempt interest earned by the Fund for
the taxable year are not subject to federal income tax (except for possible
application of the alternative minimum tax). Interest from certain private
activity and other bonds is treated as an item of tax preference for purposes
of the alternative minimum tax on individuals and the alternative minimum tax
on corporations. To the extent interest on such bonds is distributed to
shareholders of the Fund, shareholders will be subject to the alternative
minimum tax on such distributions. 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. 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.
Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.
Any net capital gains (that is, 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
B-37
<PAGE>
and regardless of the length of time a shareholder has owned his or her
shares. The maximum capital gains rate for individuals with respect to asset
gains recognized by the Fund is 20%. The maximum capital gains rate for
corporate shareholders currently is the same as the maximum tax rate for
ordinary income.
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.
Any gain or loss realized upon a sale or redemption of shares of the Fund by
a shareholder who is not a dealer in securities will be treated as capital
gain or loss. Any such capital gain or loss be treated as a long-term capital
gain or loss if the shares were held for more than 12 months. 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
exempt-interest 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.
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.
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 certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. Such proposals, if enacted,
may further limit the availability of state or municipal obligations for
investment by the Fund and the value of portfolio securities held by the Fund
may be adversely affected.
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-38
<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, Class C
and Class Z 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) to the sixth power -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, 1999 for the Fund's Class
A, Class B, Class C and Class Z shares was 4.76%, 4.66%, 4.36% and 5.16%,
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, Class C and Class Z 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, 1999 for
the Fund's Class A, Class B, Class C and Class Z shares was 7.88%, 7.72%,
7.22% and 8.54%, 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, Class C and Class Z shares. See "Risk/Return
Summary--Evaluating 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.
B-39
<PAGE>
Below are the average annual total returns for the Fund's share classes
(except for Class Z shares, the inception date of which was January 22, 1999)
for the periods ended December 31, 1999.
<TABLE>
<CAPTION>
5 YEARS 10 YEARS SINCE INCEPTION
(% WITHOUT WAIVERS (% WITHOUT WAIVERS (% WITHOUT WAIVERS
1 YEAR OR SUBSIDIES) OR SUBSIDIES) OR SUBSIDIES) INCEPTION DATE
------ ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C>
Class A................. -6.58% 5.35% (5.32%) N/A 6.12% (6.10%) 1-22-90
Class B................. -8.98% 5.44% (5.41%) 5.94% (5.93%) 7.89% (7.89%) 4-25-80
Class C................. -6.18% 5.13% (5.10%) N/A 4.21% (4.19%) 8-1-94
Class Z................. N/A N/A N/A N/A 1-22-99
</TABLE>
PIFM eliminated its management fee waiver of .05 of 1%, effective September
1, 1997.
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 "Risk/Return Summary--Evaluating
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.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1999.
<TABLE>
<CAPTION>
5 YEARS 10 YEARS SINCE INCEPTION
(% WITHOUT WAIVERS (% WITHOUT WAIVERS (% WITHOUT WAIVERS
1 YEAR OR SUBSIDIES) OR SUBSIDIES) OR SUBSIDIES) INCEPTION DATE
------ ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C>
Class A................. -3.69% 33.79% (33.61%) N/A 86.02% (85.77%) 1-22-90
Class B................. -3.98% 31.33% (31.15%) 78.15% (77.91%) 346.03% (345.42%) 4-25-80
Class C................. -4.22% 29.72% (29.55%) N/A 26.31% (26.14%) 8-1-94
Class Z................. N/A N/A N/A -4.22% 1-22-99
</TABLE>
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to
the approximate number of Fund interest holders and may refer to Lipper
rankings or Morningstar ratings, other related analyses supporting those
ratings, other industry publications, business periodicals and market indices.
In addition, advertising materials may reference studies or analyses performed
by the Manager or its affiliates. Advertising materials for sector funds,
funds that focus on market capitalizations, index funds and
international/global funds may discuss the potential benefits and risks of
that investment style. Advertising materials for fixed income funds may
discuss the benefits and risks of investing in the bond market including
discussions of credit quality, duration and maturity.
B-40
<PAGE>
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/
Performance Comparison of Different Types of Investments
Over The Long Term (12/31/25 - 12/31/99)
[BAR CHART]
Common Stocks 11.4%
Long-Term Gov't Bonds 5.1%
Inflation 3.1%
/1/ Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price 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-41
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--95.0% -
------------------------------------------------------------------------------------------------------------------------------
Alaska--1.9%
Alaska Ind. Dev. & Expt. Auth. Rev., Revolving Fd. A2 5.40% 4/01/01 $870 $ 875,873
Anchorage Elec. Util. Rev.,
M.B.I.A. Aaa 6.50 12/01/12 3,400 3,747,718
M.B.I.A. Aaa 6.50 12/01/13 2,500 2,745,900
M.B.I.A. Aaa 6.50 12/01/14 3,455 3,770,096
------------
11,139,587
-
------------------------------------------------------------------------------------------------------------------------------
Arizona--3.7%
Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25,
B.I.G. Aaa 7.875 8/01/14 2,250 2,740,185
Maricopa Cnty. Sch. Dist., A.M.B.A.C.,
No. 3 Tempe Elem. Aaa Zero 7/01/09 1,500 900,000
No. 3 Tempe Elem. Aaa Zero 7/01/14 1,500 646,455
Maricopa Cnty. Uni. Sch. Dist.,
No. 80 Chandler, F.G.I.C. Aaa Zero 7/01/09 1,330 798,000
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/10 1,050 591,559
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/11 1,200 635,112
No. 80 Chandler, F.G.I.C., E.T.M. Aaa 6.25 7/01/11 375 407,745
No. 80 Chandler, F.G.I.C. Aaa 6.25 7/01/11 625 672,850
Phoenix Str. & Hwy. User Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 2,500 1,239,825
Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 1,790 1,912,293
Pima Cnty. Uni. Sch. Dist., Gen. Oblig., F.G.I.C., Aaa 7.50 7/01/10 3,000(f) 3,536,910
Tucson Cnty. Gen. Oblig.,
Ser. A Aa3 7.375 7/01/11 1,000 1,176,980
Ser. A Aa3 7.375 7/01/12 1,100 1,298,946
Ser. A Aa3 7.375 7/01/13 4,500 5,310,855
------------
21,867,715
-
------------------------------------------------------------------------------------------------------------------------------
California--9.1%
Abag Fin. Auth. for Nonprofit Corps., Cert. of Part.,
Amer. Baptist Homes., Ser. A BBB(d) 6.20 10/01/27 1,200 1,102,848
Anaheim Pub. Fin. Auth. Lease Rev., F.S.A.,
Sr. Pub. Impvts. Proj., Ser. A Aaa 6.00 9/01/24 5,500 5,570,455
Sub. Pub. Impvts. Proj., Ser. C Aaa 6.00 9/01/16 6,690 6,954,790
California Hlth. Facs. Fin. Auth. Rev., Ser. A A2 6.125 12/01/30 6,000 5,786,340
Encinitas Union Sch. Dist., Gen. Oblig., M.B.I.A Aaa Zero 8/01/21 3,810 1,019,975
Kern High Sch. Dist., Ser. A, M.B.I.A. Aaa 6.30 2/01/10 2,490 2,731,381
Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125 7/01/23 6,000 5,601,240
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Financial Statements. B-42
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND,
INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Long Beach Harbor Rev., Ser. A, F.G.I.C., A.M.T. Aaa 6.00% 5/15/18 $4,000 $ 4,084,800
Los Angeles Uni. Sch. Distr., Ser. A, F.G.I.C. Aaa 6.00 7/01/15 1,000 1,040,030
Pittsburg Redev. Agy., Tax Alloc.,
Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/25 2,000 410,140
Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/30 5,000 745,650
San Joaquin Hills Trans. Corr. Agy., Toll Rd. Rev. Aaa Zero 1/15/32 15,000 2,058,450
San Jose Redev. Agcy. Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 3,000 3,214,830
Santa Cruz Cnty. Pub. Fin. Auth. Rev., Ser. B A-(d) 6.20 9/01/23 2,000 1,990,460
Santa Margarita Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/09 2,000 2,319,200
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/10 2,450 2,878,750
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/14 2,000 2,347,780
So. Orange Cnty. Pub. Fin. Auth. Rev., Ser. C, F.G.I.C. Aaa 6.50 8/15/10 2,000 2,227,300
So. Whittier Elem. Sch. Dist., Gen. Oblig., Ser. A,
F.G.I.C. Aaa Zero 8/01/12 810 404,255
West Contra Costa Sch. Dist., Cert. of Part. Baa3 7.125 1/01/24 1,600 1,684,560
------------
54,173,234
-
------------------------------------------------------------------------------------------------------------------------------
Colorado--4.8%
Arapahoe Cnty. Cap. Impvt. Trust Fund, Hwy. Rev., Ser.
E-470 Aaa 7.00 8/31/26 3,000(b) 3,376,590
Colorado Hsg. Fin. Auth., A.M.T.
Singl. Fam. Proj. Aa2 8.00 6/01/25 2,145 2,230,800
Singl. Fam. Proj., Ser. A-2 Aa2 7.25 5/01/27 2,000 2,126,600
Singl. Fam. Proj., Ser. B-1 Aa2 7.90 12/01/25 1,320 1,389,933
Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa 7.65 12/01/25 3,195 3,435,360
Singl. Fam. Proj., Ser. C-2 Aa2 6.875 11/01/28 3,500 3,664,115
Singl. Fam. Proj., Ser. C-2 Aa2 7.05 4/01/31 4,000 4,296,240
Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB(d) 7.00 1/01/22 7,960(f) 8,250,938
------------
28,770,576
-
------------------------------------------------------------------------------------------------------------------------------
Connecticut--2.2%
Connecticut St. Hlth. & Edu. Facs. Auth. Rev.,
St. Mary's Hosp. Issue, Ser. E A3 5.50 7/01/20 5,650 4,761,763
St. Mary's Hosp. Issue, Ser. E A3 5.875 7/01/22 1,750 1,529,990
Univ. of Hartford, Ser. D Ba1 6.75 7/01/12 5,725 5,800,055
Connecticut St. Spec. Tax Oblig. Rev., Trans.
Infrastructure, Ser. A A1 7.125 6/01/10 1,000 1,132,830
------------
13,224,638
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Financial Statements. B-43
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.0%
Dist. of Columbia, M.B.I.A,
Gen. Oblig., Ser. B Aaa 6.00% 6/01/13 $1,000 $ 1,040,200
Gen. Oblig., Ser. B Aaa 6.00 6/01/21 5,000 4,993,700
------------
6,033,900
-
------------------------------------------------------------------------------------------------------------------------------
Florida--2.5%
Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South
Proj. A3 7.95 12/01/08 7,445 7,685,027
Florida St. Brd. of Ed., Gen. Oblig. Aa2 9.125 6/01/14 1,260 1,662,053
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj. Aa3 8.00 5/01/22 5,000 5,476,000
------------
14,823,080
-
------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., Poll. Cntrl. Rev., M.B.I.A.,
Georgia Pwr. Co. Aaa 6.625 10/01/24 500 510,650
Oglethorpe Pwr. Co. Aaa 8.00 1/01/22 5,000(b) 5,588,700
Oglethorpe Pwr. Co., E.T.M. Aaa 7.50 1/01/03 557 578,896
Forsyth Cnty. Sch. Dist. Dev. Rev. Aa3 6.75 7/01/16 500 552,615
Fulton Cnty. Sch. Dist. Rev. Aa2 6.375 5/01/17 750 801,788
Georgia Mun. Elec. Auth. Pwr. Rev.,
Ser. B A3 6.25 1/01/17 475 486,528
Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000 5,329,450
Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 395 406,751
------------
14,255,378
-
------------------------------------------------------------------------------------------------------------------------------
Guam--0.2%
Guam Pwr. Auth. Rev., Ser. A BBB(d) 6.625 10/01/14 1,000(b) 1,097,940
-
------------------------------------------------------------------------------------------------------------------------------
Hawaii--0.4%
Hawaii St. Dept. Budget & Fin. Spl. Purp. Mtg. Rev.,
Hawaiian Elec. Co., Ser. C, M.B.I.A., A.M.T. Aaa 7.375 12/01/20 500 520,880
Kapiolani Hlth. Care Sys. A2 6.00 7/01/11 250 250,825
Hawaii St. Harbor Cap. Impvt. Rev., A.M.T.
F.G.I.C. Aaa 6.25 7/01/10 250 261,102
F.G.I.C. Aaa 6.25 7/01/15 500 506,645
Hawaii St., Gen. Oblig., Ser. CJ Aaa 6.25 1/01/15 650(b) 689,683
------------
2,229,135
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
Illinois--5.1%
Chicago Board of Ed.,
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/18 $3,400 $ 1,045,942
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/19 2,000 573,640
Chicago Brd. of Ed., Gen. Oblig., F.G.I.C.,
Sch. Reform, Ser. B-1 Aaa Zero 12/01/12 1,500 702,495
Sch. Reform, Ser. B-1 Aaa Zero 12/01/17 10,000 3,302,600
Chicago City Colleges,
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/24 5,000 1,105,000
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/25 10,000 2,070,200
Cook and Du Page Cntys., High Sch. Dist No. 210, Gen.
Oblig., F.S.A. Aaa Zero 12/01/11 3,035 1,555,225
Illinois Dev. Fin. Auth. Rev., Cmnty. Rehab. Providers,
Ser. A BBB(d) 6.00% 7/01/15 2,000 1,795,040
Illinois Hlth. Fac. Auth. Rev.,
M.B.I.A Aaa 6.00 7/01/14 800(b) 833,912
M.B.I.A Aaa 6.00 7/01/14 2,700 2,779,191
Metropolitan Pier & Expo. Auth., Hosptlty. Fac. Rev.,
McCormick Pl. Conv. BBB(d) 7.00 7/01/26 12,910 14,506,838
------------
30,270,083
-
------------------------------------------------------------------------------------------------------------------------------
Indiana--0.3%
Gary Ind. Mtge. Rev., Lakeshore Dunes Apts., Ser. A,
G.N.M.A. AAA(d) 6.00 8/20/34 2,000 1,875,760
-
------------------------------------------------------------------------------------------------------------------------------
Kentucky--1.0%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan
Bloedel Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,105,480
-
------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.4%
New Orleans, Gen. Oblig., A.M.B.A.C. Aaa Zero 9/01/09 13,500 8,005,095
Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90 2/01/07 5,780 7,076,338
St. Charles Parish, Env. Impt. Rev., Louisiana Pwr. &
Lt. Co. Proj., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,046,800
------------
20,128,233
-
------------------------------------------------------------------------------------------------------------------------------
Maryland--2.9%
Baltimore, Constr. Pub. Imprvt., Gen. Oblig., Ser. C,
F.G.I.C. Aaa 5.50 10/15/16 1,000 982,710
Baltimore, Econ. Dev. Lease Rev., Armistead Partnership,
Ser. A BBB(d) 7.00 8/01/11 1,000 1,033,780
Harford Cnty.,
Gen. Oblig. Aa2 5.50 3/01/0 180(b) 185,173
Gen. Oblig. Aa2 5.50 3/01/06 570 589,107
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
Maryland (cont'd.)
Maryland St. Hlth. & Higher Edu. Facs. Auth. Rev.,
Doctor's Cmnty. Hosp. Baa1 5.50% 7/01/24 $3,000 $ 2,446,290
Howard Cnty. Gen. Hosp., E.T.M. Aaa 5.50 7/01/21 500 483,185
Mercy Medical Center, F.S.A. Aaa 5.75 7/01/26 1,000 961,910
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr.
Physics Headqrtrs. BBB(d) 6.625 1/01/17 1,000 1,007,590
Maryland St. Trans. Auth. Rev., Balt. Int'l. Arpt.
Proj., Ser. A, A.M.T., F.G.I.C. Aaa 6.25 7/01/14 1,750 1,794,047
Montgomery Cnty., Gen. Oblig. Aaa 9.75 6/01/01 450 482,594
Northeast Waste Disp. Auth. Rev.,
Baltimore City Sludge Corp. Proj. NR 7.25 7/01/07 3,813 3,958,618
Montgomery Cnty. Res. Rec. Proj., Ser. A A2 6.00 7/01/07 1,000 1,028,540
Prince Georges Cnty., Poll. Cntrl. Rev., Potomac Elec.
Proj., M.B.I.A. Aaa 5.75 3/15/10 1,100 1,145,397
Takoma Park Hosp. Facs. Rev., Washington Adventist
Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,099,880
------------
17,198,821
-
------------------------------------------------------------------------------------------------------------------------------
Massachusetts--2.5%
Mass. Edu. Fin. Auth., Ed. Ln. Rev., Issue G., Ser. A.,
M.B.I.A., A.M.T. Aaa 5.10 12/01/13 1,000 934,450
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Mass. Inst. of
Tech. Ser. I-1 Aaa 5.20 1/01/28 1,500 1,326,585
Mass. St. Wtr. Res. Auth. Rev., M.B.I.A.,
Ser. B Aaa 6.25 12/01/11 6,720 7,296,912
Ser. B Aaa 6.25 12/01/12 5,000 5,420,400
------------
14,978,347
-
------------------------------------------------------------------------------------------------------------------------------
Michigan--6.8%
Brandon Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 5.875 5/01/26 1,310(b) 1,384,853
Breitung Twnshp. Sch. Dist. Ref., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 257,935
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A,
F.S.A., A.M.T. Aaa 6.875 5/01/09 920 959,247
Detroit Sewage. Disp. Rev.,
Prerefunded Inflos AAA(d) 7.263 7/01/23 800(b) 856,000
Unrefunded Balance Inflos AAA(d) 7.263 7/01/23 200 178,500
Detroit Wtr. Supply Sys. Rev., Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 1,015,330
Dexter Cmnty. Schs., Gen. Oblig., F.G.I.C. Aaa 5.10 5/01/28 10,000 8,681,400
Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,137,500
Holland Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 5/01/15 2,400 965,160
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 1,983,905
Kalamazoo Econ. Dev. Corp. Rev., Friendship Vlg., Ser. A BBB(d) 6.125 5/15/17 1,000 917,420
Lincoln Park Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.00 5/01/20 1,500(b) 1,674,315
Michigan Higher Ed. Rev., Ser. XIII-A, M.B.I.A., A.M.T. Aaa 7.55 10/01/08 155 160,689
Michigan Mun. Bd. Auth. Rev., Wayne Cnty. Proj.,
M.B.I.A., E.T.M. Aaa 7.40 12/01/02 500 524,555
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
Michigan (cont'd.)
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A A3 8.25% 7/01/12 $1,920 $ 1,994,707
Genesys Hlth. Sys., Ser. A Baa2 8.125 10/01/21 1,000(b) 1,171,960
Genesys Hlth. Sys., Ser. A Baa2 7.50 10/01/27 500(b) 563,340
Presbyterian Vlg. Oblig. NR 6.375 1/01/25 800 739,592
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg., Ser. B AA-(d) 7.55 4/01/23 1,000 1,039,790
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.15 4/01/10 140 146,532
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.70 4/01/23 500 520,660
Sngl. Fam. Mtge., Ser. A AA(d) 7.50 6/01/15 2,905 2,959,062
Michigan St. Strategic Fd., Ltd. Oblig. Rev.,
Waste Mgmt. Inc. Proj., A.M.T. Ba1 6.625 12/01/12 1,500 1,455,045
Worthington Armstrong Venture, A.M.T. A-(d) 5.75 10/01/22 1,000 943,080
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co. Proj.,
F.G.I.A., A.M.T. Aaa 7.65 9/01/20 2,000 2,076,600
Oak Park, A.M.B.A.C.,
Gen. Oblig. Aaa 7.00 5/01/12 400(b) 426,308
Gen. Oblig., Aaa 7.00 5/01/11 375(b) 399,664
Okemos Pub. Sch. Dist.,
M.B.I.A. Aaa Zero 5/01/12 1,100 548,009
M.B.I.A. Aaa Zero 5/01/13 1,000 464,770
Posen Cons. Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000(b)(f) 1,075,880
Wayne Cnty. Bldg. Auth., Ser. A A3 8.00 3/01/17 1,250(b) 1,356,163
Wyandotte Elec. Rev., Gen. Oblig., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,132,980
------------
40,710,951
-
------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.2%
Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam.
Mtge., G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 635 650,348
St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 413 426,869
------------
1,077,217
-
------------------------------------------------------------------------------------------------------------------------------
Missouri--0.7%
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 3,740 3,918,248
-
------------------------------------------------------------------------------------------------------------------------------
Nevada--2.2%
Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Ser.
A, A.M.T. Baa2 6.50 12/01/33 10,000 9,384,800
Nevada Hsg. Div. Multi Unit Hsg. Rev., F.N.M.A., A.M.T. AAA(d) 6.60 10/01/23 3,475 3,567,783
------------
12,952,583
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.0%
New Hampshire Higher Ed. & Hlth. Facs. Auth. Rev.,
New Hampshire College BBB-(d) 6.30% 1/01/16 $500 $ 483,115
New Hampshire College BBB-(d) 6.375 1/01/27 2,000 1,889,200
New Hampshire St. Ind. Dev. Auth., Poll. Ctrl. Rev.,
Proj. A Ba3 7.65 5/01/21 3,420 3,513,708
------------
5,886,023
-
------------------------------------------------------------------------------------------------------------------------------
New Jersey--2.3%
New Jersey Econ. Dev. Auth. Rev., Performing Arts Ctr.
Proj.,
Ser. A, A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,498,336
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 11,962,830
------------
13,461,166
-
------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.8%
New Mexico Mtge. Fin. Auth., Singl. Fam. Mtge., A.M.T. AAA(d) 6.30 7/01/28 4,965 4,972,001
-
------------------------------------------------------------------------------------------------------------------------------
New York--8.9%
Greece Central Sch. Dist.
F.G.I.C. Aaa 6.00 6/15/16 950 984,257
F.G.I.C. Aaa 6.00 6/15/17 950 979,099
F.G.I.C. Aaa 6.00 6/15/18 950 974,586
Metropolitan Trans. Auth., Trans. Facs. Rev.,
Ser. A, F.S.A. Aaa 5.75 7/01/11 675 690,937
Ser. A, F.S.A. Aaa 6.00 7/01/16 2,500 2,533,175
New York City Ind. Dev. Agcy., Spec. Fac. Rev., Terminal
One Group Assoc. Proj., A.M.T. A3 6.00 1/01/19 2,500 2,436,475
New York City Mun. Wtr. Fin. Auth. Rev., F.G.I.C. Aaa 6.75 6/15/16 10,565(f) 10,938,578
New York City, Gen. Oblig.,
Ser. A A3 7.75 8/15/04 15 15,818
Ser. B A3 8.25 6/01/06 1,500 1,738,560
Ser. B A3 7.25 8/15/07 3,500 3,916,150
Ser. D A3 8.00 8/01/03 70 74,324
Ser. D A3 8.00 8/01/04 30 31,853
Ser. D Aaa 7.65 2/01/07 4,955(b) 5,319,589
Ser. D A3 7.65 2/01/07 45 47,996
Ser. F A3 8.25 11/15/02 815 874,569
New York St. Dorm. Auth. Rev., Mem. Sloan Kettering
Cancer Ctr., M.B.I.A. Aaa 5.75 7/01/20 4,000 3,915,240
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,297,510
New York St. Local Gov't. Assist. Corp. Ref., Ser. E A3 6.00 4/01/14 2,000 2,083,620
New York St. Urban Dev. Corp. Rev. Ref., F.S.A.,
Correctional Facs. Aaa 6.50 1/01/09 3,000 3,268,500
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND,
INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
Suffolk Cnty., Gen. Oblig., Ser. A, F.G.I.C. Aaa 5.25% 8/01/13 $1,325 $ 1,293,531
Triborough Bridge & Tunl. Auth. Rev., Ser. X, M.B.I.A. Aaa 6.625 1/01/12 8,500 9,446,645
------------
52,861,012
-
------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.7%
Mercer Cnty. Poll. Ctrl. Rev., Antelope Valley Station,
A.M.B.A.C. Aaa 7.20 6/30/13 9,000 10,324,440
-
------------------------------------------------------------------------------------------------------------------------------
Ohio--2.9%
Franklin Cnty. Hosp. Rev., Doctors Ohio Hlth. Corp.,
Ser. A Baa3 5.60 12/01/28 5,000 4,065,650
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Buckeye
Pwr. Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 11,825 13,323,700
------------
17,389,350
-
------------------------------------------------------------------------------------------------------------------------------
Oklahoma--2.9%
McGee Creek Auth. Wtr. Rev., M.B.I.A. Aaa 6.00 1/01/23 7,000 7,063,210
Tulsa Mun. Arpt. Trust Rev., A.M.T. Baa2 7.375 12/01/20 10,000 10,305,500
------------
17,368,710
-
------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.3%
Beaver Cnty. Ind. Dev. Auth., Poll. Cntrl. Rev., Ohio
Edison Co. Proj., Ser. A Baa3 4.65 6/01/33 5,000 4,775,700
Clarion Cnty. Hosp. Auth. Rev., Clarion Hosp. Proj. BBB-(d) 5.60 7/01/10 685 642,667
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Fac.,
Ser. A B2 6.20 7/01/19 3,000 2,700,660
Montgomery Cnty. Ind. Dev. Auth., Retirement Cmnty. Rev. A-(d) 5.25 11/15/28 2,000 1,589,240
Pennsylvania St., Cert. of Part., F.S.A. Aaa 6.25 11/01/06 600 626,046
Pennylvania Econ. Dev. Fin. Auth., Solid Waste Disp.
Rev., A.M.T. Baa2 6.00 6/01/31 4,500 4,037,715
Philadelphia Hosp. & Higher Edl. Facs. Auth. Rev.,
Children's Seashore House, Ser. A A-(d) 7.00 8/15/03 1,000 1,042,250
Philadelphia Wtr. & Waste Auth. Rev., M.B.I.A. Aaa 6.25 8/01/11 2,500 2,692,250
Westmoreland Cnty., Pennsylvania Ind. Dev. Auth. Rev.,
Valley Landfill Proj. BBB(d) 5.10 5/01/18 2,000 1,724,040
------------
19,830,568
-
------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.7%
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.50 7/01/13 3,000 3,277,260
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev.,
Ser. A, A.M.B.A.C. Aaa Zero 7/01/18 2,500 846,525
Ser. V Baa1 6.375 7/01/08 500 522,000
Ser. V Baa1 6.625 7/01/12 4,000 4,156,160
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
Puerto Rico (cont'd.)
Puerto Rico Ind., Tourist Ed. Med. & Env. Ctrl. Facs.
Rev.,
Dr. Pila Hosp. Proj., F.H.A. AAA(d) 6.125% 8/01/25 $500 $ 499,645
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/16 500 517,440
Puerto Rico Mun. Fin. Agcy. Rev., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 267,243
Puerto Rico Tel. Auth. Rev.,
M.B.I.A. Aaa 6.363 1/25/07 4,100(b)(c) 4,294,750
M.B.I.A. Aaa 6.307 1/16/15 7,150(b)(c) 7,623,687
------------
22,004,710
-
------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.6%
Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 9,537,470
-
------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.8%
Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp.,
F.G.I.C. Aaa 6.75 9/01/10 5,000(f) 5,597,450
McMinn Cnty. Ind. Dev. Brd. Solid Waste Rev., Recycling
Fac., A.M.T. Baa1 7.40 12/01/22 5,000 5,285,750
------------
10,883,200
-
------------------------------------------------------------------------------------------------------------------------------
Texas--5.9%
Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., Baptist Hlth.
Sys., Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 5,870,121
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 3,885,140
Ser. A Aaa 7.375 11/01/09 3,500 3,885,140
Houston Indpt. Sch. Dist., Gen. Oblig., Ser. A Aaa 5.00 2/15/24 3,000 2,552,280
Houston Wtr. & Sew. Sys. Rev., Junior Lien, Ser. D,
M.B.I.A. Aaa 6.125 12/01/25 4,500 4,433,625
Keller Indpt. Sch. Dist. Rev. Aaa 6.00 8/15/23 3,970 3,994,694
Lakeway Mun. Util. Dist., Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 9/01/11 1,425 740,530
New Braunfels Indpt.,
Sch. Dist. Rev. Aaa Zero 2/01/10 2,335 1,336,601
Sch. Dist. Rev. Aaa Zero 2/01/11 2,365 1,269,910
Port Corpus Christi Auth. Rev. A2 7.50 8/01/12 2,000 2,077,180
San Antonio Elec. & Gas Rev., Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 3,057,150
Univ. of Texas, Rev., Ser. B Aa1 6.75 8/15/13 2,035 2,137,645
------------
35,240,016
-
------------------------------------------------------------------------------------------------------------------------------
Utah--0.2%
Utah St. Brd. of Regents, Student Ln. Rev., Ser. F,
A.M.B.A.C., A.M.T. Aaa 7.00 11/01/01 1,000(f) 1,041,340
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
Washington--3.5%
Washington St., Gen. Oblig., Ser. R-97A Aa1 Zero 7/01/16 $8,000 $ 2,954,080
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00% 7/01/08 4,000 4,477,960
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 5,712,400
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 5,400 5,221,422
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 3,000 2,131,230
------------
20,497,092
-
------------------------------------------------------------------------------------------------------------------------------
Wisconsin--1.2%
Wisconsin Hsg. & Econ. Dev. Auth., Home Ownership Rev.,
A.M.T. Aa2 6.20 3/01/27 2,100 2,059,239
Wisconsin St. Hlth. & Edu. Fac. Auth. Rev.,
Aurora Hlth. Care. Inc. Proj., Ser. A A-(d) 5.60 2/15/29 5,000 4,062,450
Aurora Hlth. Care. Inc. Proj., Ser. B A-(d) 5.625 2/15/29 1,000 816,160
------------
6,937,849
------------
Total long-term investments (cost $561,590,053) 565,065,853
------------
-
------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--3.5%
-
------------------------------------------------------------------------------------------------------------------------------
Alabama--0.6%
Decatur Ind. Dev. Bd., Solid Waste Disp. Rev.,Amoco
Chemical Co. Proj., F.R.D.D. VMIG1 5.40 1/03/00 3,600(e) 3,600,000
-
------------------------------------------------------------------------------------------------------------------------------
Illinois--0.3%
Madison Cnty Env. Impt. Rev., Ser. A, F.R.D.D. VMIG1 5.35 1/03/00 100(e) 100,000
Southwestern Dev. Auth., Solid Waste Disp. Rev., Shell
Oil Co. Proj., F.R.D.D. VMIG1 5.35 1/03/00 1,400(e) 1,400,000
------------
1,500,000
-
------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.1%
Calcasieu Parish Inc., Ind. Dev. Bd. Env. Rev., Citgo
Petroleum Corp., F.R.D.D. VMIG1 5.40 1/03/00 900(e) 900,000
-
------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.7%
Jackson Cnty, Ind. Ser. Facs. Rev., Chevron Inc. Proj.,
Ser. 94, F.R.D.D. VMIG1 5.40 1/03/00 4,300(e) 4,300,000
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
Moody's Principal
Rating Interest Maturity Amount Value
Description(a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
Nevada--0.3%
Washoe Cnty. Wtr. Facs. Rev., Sierra Pac. Pwr. Co.
Proj., F.R.D.D VMIG1 5.40% 1/03/00 $1,500(e) $ 1,500,000
-
------------------------------------------------------------------------------------------------------------------------------
Ohio--0.2%
Ohio St. Solid Waste Rev., F.R.D.D. VMIG1 5.35 1/03/00 900(e) 900,000
-
------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.1%
So. Carolina Jobs Econ. Dev. Auth. Rev., Wellman Inc.
Proj., F.R.D.D. Aa2 5.45 1/03/00 800(e) 800,000
-
------------------------------------------------------------------------------------------------------------------------------
Texas--1.2%
Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec.
Co.,
Ser. 95A, F.R.D.D. VMIG1 5.40 1/03/00 3,000(e) 3,000,000
Ser. 96C, F.R.D.D. VMIG1 5.40 1/03/00 3,300(e) 3,300,000
Brazos River Harbor Nav. Dist. Rev., Dow Chemical Co.
Proj.,
Ser. 93, F.R.D.D. VMIG1 5.45 1/03/00 800(e) 800,000
Gulf Coast Ind. Dev. Auth., Citgo Petro. Proj., F.R.D.D. VMIG1 5.40 1/03/00 200(e) 200,000
------------
7,300,000
------------
-
------------------------------------------------------------------------------------------------------------------------------
Number of
Contracts
---------
CALL OPTION PURCHASED
United States Treasury Bond Future
expires Mar. 2000 (cost $425,375) 400 25,000
------------
Total short-term investments (cost $21,225,375) 20,825,000
------------
Total Investments--98.5%
(cost $582,815,428, Note 4) 585,890,853
Other assets in excess of
liabilities--1.5% 8,659,204
------------
Net Assets--100% $594,550,057
============
</TABLE>
-------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments as of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
-
------------------------------------------------------------------------------------------------------------------------------
</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 Administration
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.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-53
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Assets and Liabilities PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
==============================================================================================================================
<S> <C>
Assets
December 31, 1999
Investments, at value (cost $582,815,428)............................................................... $585,890,853
Cash.................................................................................................... 94,113
Interest receivable..................................................................................... 10,282,287
Receivable for Fund shares sold......................................................................... 5 63,907
Receivable for investments sold......................................................................... 477,563
Deferred expenses and other assets...................................................................... 18,100
-----------------
Total assets......................................................................................... 597,326,823
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 1,703,058
Dividends payable....................................................................................... 402,145
Accrued expenses........................................................................................ 274,044
Management fee payable.................................................................................. 245,302
Distribution fee payable................................................................................ 149,092
Due from broker-variation margin........................................................................ 3,125
-----------------
Total liabilities....................................................................................... 2,776,766
-----------------
Net Assets.............................................................................................. $ 594,550,057
=================
Net assets were comprised of:
Common stock, at par................................................................................. $ 403,809
Paid-in capital in excess of par..................................................................... 592,263,617
-----------------
592,667,426
Accumulated net realized loss on investments......................................................... (1,252,169)
Net unrealized appreciation on investments........................................................... 3,134,800
-----------------
Net assets, December 31, 1999........................................................................... $ 594,550,057
=================
Class A:
Net asset value and redemption price per share
($498,428,421 3 33,865,243 shares of common stock issued and outstanding)......................... $14.72
Maximum sales charge (3% of offering price).......................................................... .46
-----------------
Maximum offering price to public..................................................................... $15.18
=================
Class B:
Net asset value, offering price and redemption price per share
($92,264,695 3 6,254,058 shares of common stock issued and outstanding)........................... $14.75
=================
Class C:
Net asset value and redemption price per share
($3,059,480 3 207,371 shares of common stock issued and outstanding).............................. $14.75
Sales charge (1% of offering price).................................................................. .15
-----------------
Offering price to public............................................................................. $14.90
=================
Class Z:
Net asset value, offering price and redemption price per share
($797,461 3 54,209 shares of common stock issued and outstanding)................................. $14.71
=================
</TABLE>
-------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>
<TABLE>
<CAPTION>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations
===============================================================================
Year Ended
Net Investment Income December 31, 1999
-----------------
<S> <C>
Income
Interest.............................. $ 37,520,953
-----------------
Expenses
Management fee........................ 3,129,064
Distribution fee--Class A............. 1,329,006
Distribution fee--Class B............. 590,221
Distribution fee--Class C............. 19,821
Transfer agent's fees and expenses.... 412,000
Custodian's fees and expenses......... 150,000
Reports to shareholders............... 118,000
Registration fees..................... 47,000
Legal fees and expenses............... 45,000
Directors' fees and expenses.......... 40,000
Audit fees and expenses............... 39,000
Insurance expense..................... 8,000
Miscellaneous......................... 424
-----------------
Total expenses..................... 5,927,536
Custodian fee credit.................. (7,711)
-----------------
Net expenses....................... 5,919,825
-----------------
Net investment income.................... 31,601,128
-----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... (671,635)
Financial futures contracts........... 298,219
-----------------
(373,416)
-----------------
Net change in unrealized appreciation
(depreciation) on:
Investments........................... (47,510,251)
Financial futures..................... 170,312
-----------------
(47,339,939)
-----------------
Net loss on investment transactions...... (47,713,355)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $ (16,112,227)
=============
</TABLE>
<TABLE>
<CAPTION>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets
================================================================================
Year Ended December 31,
Increase (Decrease) -----------------------
in Net Assets 1999 1998
---- ----
<S> <C> <C>
Operations
Net investment income....... $ 31,601,128 $ 29,590,250
Net realized gain (loss) on
investment
transactions............. (373,416) 2,809,051
Net change in unrealized
depreciation on
investments.............. (47,339,939) (619,579)
----------------- -------------
Net increase (decrease) in
net assets resulting from
operations............... (16,112,227) 31,779,722
----------------- -------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (25,956,731) (23,636,186)
Class B.................. (5,456,913) (5,888,290)
Class C.................. (116,079) (65,774)
Class Z.................. (71,405) --
----------------- -------------
(31,601,128) (29,590,250)
----------------- -------------
Distributions in excess of
net investment income
Class A.................. (100,946) (17,881)
Class B.................. (18,963) (4,429)
Class C.................. (619) (86)
Class Z.................. (176) --
----------------- -------------
(120,704) (22,396)
----------------- -------------
Distributions from net
realized capital gains
Class A.................. -- (3,635,575)
Class B.................. -- (906,642)
Class C.................. -- (16,469)
----------------- -------------
-- (4,558,686)
----------------- -------------
Fund share transactions (net of share
conversions) (Note 5 & 6):
Net proceeds from shares
sold..................... 280,554,937 76,423,080
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 19,573,958 21,262,728
Cost of shares reacquired... (261,665,210) (126,905,006)
----------------- -------------
Increase (decrease) in net
assets from Fund share
transactions............. 38,463,685 (29,219,198)
----------------- -------------
Total decrease................. (9,370,374) (31,610,808)
Net Assets
Beginning of year.............. 603,920,431 635,531,239
----------------- -------------
End of year.................... $ 594,550,057 $ 603,920,431
================= =============
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<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. 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 the 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.
Federal Income Taxes: It is the intent of the Fund to continue to meet the
requirements of the Internal Revenue Code applicable to regulated
--------------------------------------------------------------------------------
B-56
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants', 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 by $120,704,
increase accumulated net realized loss on investments by $149,567 and increase
paid in capital by $28,863, due to the sale of securities purchased with market
discount during the year ended December 31, 1999. Net investment income, net
realized gains and net assets were not affected by this change.
- ------------------------------------------------------------
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 has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, B, C and Z
shares of the Fund. The Fund compensates PIMS 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. No
distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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
.25 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, 1999.
PIMS has advised the Fund that it received approximately $64,200 and $9,400 in
front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the year ended December 31, 1999. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $142,600 and $1,400 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America.
As of March 11, 1999, the Company along with other unaffiliated registered
investment companies (the 'Funds'), entered into a syndicated agreement ('SCA')
with an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings outstanding will be at market rates. The Funds
pay a commitment fee at an annual rate of .065 of 1% on the unused portion of
the credit facility, which is accrued and paid quarterly on a pro rata basis by
the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds
had a credit agreement with a maximum commitment of $200,000,000. The commitment
fee was .055 of 1% on the unused portion of the credit facility. The Fund did
not borrow any amounts pursuant to either agreement during the year ended
December 31, 1999. The purpose of the agreements is to serve as an alternative
source of funding for capital share redemptions.
- ------------------------------------------------------------
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, 1999,
the Fund incurred fees of approximately $411,000 for
-------------------------------------------------------------------------------
B-57
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
the services of PMFS. As of December 31, 1999, approximately $32,800 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.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1999, were $216,669,330 and $195,715,557,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1999 was
$583,086,606 and, accordingly, net unrealized appreciation for federal income
tax purposes was $2,804,247 (gross unrealized appreciation--$17,324,536; gross
unrealized depreciation--$14,520,289).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1999 of approximately $922,000 which expires in 2007. Accordingly,
no capital gains distribution is expected to be paid until net gains have been
realized in excess of the carryforward.
During the year ended December 31, 1999, the Fund entered into financial futures
contracts. Details of open contracts at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade December 31, Unrealized
Contracts Type Date Date 1999 Appreciation
- --------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Long
Position:
U.S.
Treasury
100 Index Mar. 2000 $9,187,500 $9,246,875 $ 59,375
========
</TABLE>
- ------------------------------------------------------------
Note 5. Capital
The Fund 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%. 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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
There are 1 billion shares of common stock, $.01 par value per share, authorized
divided into four classes, designated Class A, Class B, Class C and Class Z
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, 1999:
Shares sold...................... 10,154,359 $ 150,151,142
Shares issued in connection with
reorganization (Note 6)........ 5,719,568 92,139,437
Shares issued in reinvestment of
dividends and distributions.... 1,049,415 16,182,668
Shares reacquired................ (13,662,479) (212,057,236)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 3,260,863 46,416,011
Shares issued upon conversion
from Class B................... 595,834 9,168,416
----------- -------------
Net increase in shares
outstanding.................... 3,856,697 $ 55,584,427
=========== =============
Year ended December 31, 1998:
Shares sold...................... 3,824,658 $ 61,874,353
Shares issued in reinvestment of
dividends and distributions.... 1,059,215 17,057,270
Shares reacquired................ (6,037,193) (97,515,280)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,153,320) (18,583,657)
Shares issued upon conversion
from Class B................... 573,854 9,271,697
----------- -------------
Net decrease in shares
outstanding.................... (579,466) $ (9,311,960)
=========== =============
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 826,622 $ 10,991,293
Shares issued in connection with
reorganization (Note 6)........ 1,236,086 19,953,535
Shares issued in reinvestment of
dividends and distributions.... 209,350 3,243,633
Shares reacquired................ (2,859,392) (44,047,247)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (587,334) (9,858,786)
Shares reacquired upon conversion
into Class A................... (594,471) (9,168,416)
----------- -------------
Net decrease in shares
outstanding.................... (1,181,805) $ (19,027,202)
=========== =============
</TABLE>
--------------------------------------------------------------------------------
B-58
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
---------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold...................... 797,807 $ 12,909,659
Shares issued in reinvestment of
dividends and distributions.... 256,538 4,140,932
Shares reacquired................ (1,803,505) (29,167,324)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (749,160) (12,116,733)
Shares reacquired upon conversion
into Class A................... (572,437) (9,271,697)
----------- -------------
Net decrease in shares
outstanding.................... (1,321,597) $ (21,388,430)
=========== =============
<CAPTION>
Class C
- ---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 91,530 $ 1,390,702
Shares issued in connection with
reorganization (Note 6)........ 29,355 473,862
Shares issued in reinvestment of
dividends and distributions.... 5,874 90,815
Shares reacquired................ (62,002) (958,956)
----------- -------------
Net increase in shares
outstanding.................... 64,757 $ 996,423
=========== =============
Year ended December 31, 1998:
Shares sold...................... 101,316 $ 1,639,068
Shares issued in reinvestment of
dividends and distributions.... 3,998 64,526
Shares reacquired................ (13,773) (222,402)
----------- -------------
Net increase in shares
outstanding.................... 91,541 $ 1,481,192
=========== =============
<CAPTION>
Class Z
- ---------------------------------
<S> <C> <C>
January 22, 1999(a) through
December 31, 1999:
Shares sold...................... 210,908 $ 3,262,799
Shares issued in connection with
reorganization (Note 6)........ 136,091 2,192,167
Shares issued in reinvestment of
dividends and distributions.... 3,661 56,842
Shares reacquired................ (296,451) (4,601,771)
----------- -------------
Net increase in shares
outstanding.................... 54,209 $ 910,037
=========== =============
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 6. Reorganization
On August 26, 1998, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization (the 'Plan') which provided for the transfer of all of
the assets of the Prudential Municipal Series Fund Maryland Series ('Maryland
Series') and the Prudential Municipal Series Fund Michigan Series ('Michigan
Series') in exchange for Class A shares of the Fund and the Fund's assumption of
the liabilities of the Maryland and Michigan Series. The Plan also provided for
the transfer of all of the assets of the Class A, B, C and Z shares of the
Prudential Municipal Bond Fund--Intermediate Series ('Intermediate Series') in
exchange for like shares of the Fund and the Fund's assumption of the
liabilities of the Intermediate Series.
The Plan was approved by the shareholders of the Maryland, Michigan and
Intermediate Series at a shareholder meeting held on January 14, 1999. The
reorganization took place on January 22, 1999. The Maryland, Michigan and
Intermediate Series and the Fund incurred their pro rata share of the costs of
the reorganization, including the cost of proxy solicitation.
The acquisition was accomplished by a tax-free exchange of the following shares:
<TABLE>
<CAPTION>
National Municipals
Maryland Series: Fund Value
<S> <C> <C> <C> <C>
Class A 1,545,436 Class A 1,074,419 $17,304,069
B 930,543 A 647,510 10,432,984
C 11,019 A 7,667 123,541
<CAPTION>
Michigan Series:
<S> <C> <C> <C> <C>
Class A 2,459,122 A 1,845,487 29,729,243
B 1,640,985 A 1,230,484 19,826,554
C 43,799 A 32,842 529,193
<CAPTION>
Intermediate Series:
<S> <C> <C> <C> <C>
Class A 1,302,336 A 881,159 14,193,853
B 1,830,315 B 1,236,086 19,953,535
C 43,467 C 29,355 473,862
Z 201,141 Z 136,091 2,192,167
</TABLE>
The aggregate net assets and unrealized appreciation of the funds immediately
before the acquisition were:
<TABLE>
<CAPTION>
Unrealized
Net Assets Appreciation
----------- -------------
<S> <C> <C>
Maryland Series $27,860,594 $ 2,342,040
Michigan Series 50,084,990 4,856,230
Intermediate Series 36,813,417 1,858,582
</TABLE>
The aggregate net assets of the National Municipals Fund immediately before the
acquisition was $607,552,044.
--------------------------------------------------------------------------------
B-59
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 16.06 $ 16.12 $ 15.56 $ 15.98 $ 14.42
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .76 .79 .81(b) .82(b) .81(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (1.34) .06 .67 (.42) 1.57
-------- -------- -------- -------- --------
Total from investment operations........... (.58) .85 1.48 .40 2.38
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.76) (.79) (.81) (.82) (.81)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01)
Distributions from net realized gains......... -- (.12) (.10) -- --
-------- -------- -------- -------- --------
Total distributions........................ (.76) (.91) (.92) (.82) (.82)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.72 $ 16.06 $ 16.12 $ 15.56 $ 15.98
======== ======== ======== ======== ========
TOTAL RETURN(a):.............................. (3.69)% 5.41% 9.80% 2.66% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $498,428 $481,926 $493,178 $502,739 $538,145
Average net assets (000)...................... $531,603 $483,759 $491,279 $508,159 $446,350
Ratios to average net assets:
Expenses, including distribution fees...... .86% .73% .70%(b) .68%(b) .75%(b)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b)
Net investment income...................... 4.88% 4.89% 5.15%(b) 5.31%(b) 5.34%(b)
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 30% 23% 38% 46% 98%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............ $ 16.10 $ 16.16 $ 15.60 $ 16.02 $ 14.45
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .73 .73 .75(b) .76(b) .76(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (1.35) .06 .67 (.42) 1.58
-------- -------- -------- -------- --------
Total from investment operations........... (.62) .79 1.42 .34 2.34
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.73) (.73) (.75) (.76) (.76)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01)
Distributions from net realized gains......... -- (.12) (.10) -- --
-------- -------- -------- -------- --------
Total distributions........................ (.73) (.85) (.86) (.76) (.77)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.75 $ 16.10 $ 16.16 $ 15.60 $ 16.02
======== ======== ======== ======== ========
TOTAL RETURN(a):.............................. (3.98)% 4.99% 9.35% 2.26% 16.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $92,265 $119,698 $141,528 $168,185 $222,865
Average net assets (000)...................... $118,044 $131,195 $151,938 $193,312 $252,313
Ratios to average net assets:
Expenses, including distribution fees...... 1.11% 1.13% 1.10%(b) 1.08%(b) 1.15%(b)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b)
Net investment income...................... 4.62% 4.49% 4.75%(b) 4.91%(b) 4.96%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------- ------------
January 22,
1999(d)
Year Ended December 31, through
-------------------------------------------------- December 31,
1999 1998 1997 1996 1995 1999
------ ------ ------ ------ ------ ------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $16.10 $16.16 $15.60 $16.02 $14.44 $16.11
------ ------ ------ ------ ------ -----
Income from investment operations
Net investment income......................... .69 .69 .71(b) .72(b) .72(b) .73
Net realized and unrealized gain (loss) on
investment transactions.................... (1.35) .06 .67 (.42) 1.59 (1.40)
------ ------ ------ ------ ------ -----
Total from investment operations........... (.66) .75 1.38 .30 2.31 (.67)
------ ------ ------ ------ ------ -----
Less distributions
Dividends from net investment income.......... (.69) (.69) (.71) (.72) (.72) (.73)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01) --(c)
Distributions from net realized gains......... -- (.12) (.10) -- -- --
------ ------ ------ ------ ------ -----
Total distributions........................ (.69) (.81) (.82) (.72) (.73) (.73)
------ ------ ------ ------ ------ -----
Net asset value, end of period................ $14.75 $16.10 $16.16 $15.60 $16.02 $14.71
====== ====== ====== ====== ====== ======
TOTAL RETURN(a):.............................. (4.22)% 4.73% 9.08% 2.01% 16.22% (4.22)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,060 $2,296 $825 $772 $403 $797
Average net assets (000)...................... $2,643 $1,555 $758 $674 $247 $1,391
Ratios to average net assets:
Expenses, including distribution fees...... 1.36% 1.38% 1.35%(b) 1.33%(b) 1.40%(b) .64%(e)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b) .64%(e)
Net investment income...................... 4.39% 4.23% 4.50%(b) 4.67%(b) 4.66%(b) 5.45%(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 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) Commencement of offering of Class Z shares.
(e) Annualized
--------------------------------------------------------------------------------
See Notes to Financial Statements. B-62
<PAGE>
Report of Independent Accountants PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
================================================================================
To the Shareholders and Board of Directors 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, 1999, 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 accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 18, 2000
B-63
<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 and 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.
Value of $1.00 invested on 1/1/1926 through 12/31/1999
[LINE GRAPH]
Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $ 40.22
Treasury Bills $ 15.64
Inflation $ 9.40
Source: Ibbotson Associates. 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 1989 to September 1999. 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 "Risk/Return Summary--Fees and 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.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
Year 1989 1990 1991 1992 1993 1994
------------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)%
------------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)%
------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)%
------------------------------------------------------------
U.S. High Yield
Bonds/4/ 0.8% (9.6)% 46.2%15.8% 17.1% (1.0)%
------------------------------------------------------------
World Government
Bonds/5/ (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0%
------------------------------------------------------------
Difference between
highest and lowest 18.8% 24.9% 30.9% 11.0% 10.3% 9.9%
returns percent
Year 1995 1996 1997 1998 1999
-------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 18.4% 2.7% 9.6% 10.0% -2.56%
-------------------------------------------------------
U.S.Government
Mortgage
Securities/2/ 16.8% 5.4% 9.5% 7.0% 1.86%
-------------------------------------------------------
U.S. Investment Grad
Corporate Bonds/3/ 22.3% 3.3% 10.2% 8.6% -1.96%
-------------------------------------------------------
U.S. High Yield
Bonds/4/ 19.2% 11.4% 12.8% 1.6% 2.39%
-------------------------------------------------------
World Government
Bonds/5/ 19.6% 4.1% (4.3)% 5.3% -5.07%
--------------------------------------------------------
Difference between
highest and lowest 5.5% 8.7% 17.1% 8.4% 7.46%
returns percent
--------------------------------------------------------
/1/LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Governmental National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Source: Lipper Inc.
/4/LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/SALOMON SMITH BARNEY 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.
Long Term U.S. Treasury Bond Yield in Percent (1926-1999)
[LINE GRAPH]
YEAR-END
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1999. 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>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1999. It does not represent
the performance of any Prudential mutual fund.
Average Annual Total Returns of Major
World Stock Markets
(12/31/1985-12/31/1999)
(in U.S. dollars)
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
U.K. 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
Source: Morgan Stanley Capital International (MSCI), and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment
of all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
[LINE GRAPH]
Capital Appreciation and Reinvesting
Dividends - $474,094
Capital Appreciation only - $159,597
(1969-1999)
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock
total return is based on the Standard & Poor's 500 Composite Stock Price
Index, a market-value-weighted index made up of 500 of the largest stocks in
the U.S. based upon their stock market value. Investors cannot invest directly
in indexes.
III-4
<PAGE>
World Stock Market Capitalization by Region
World Total: 20.7 Trillion
[PIE CHART]
Canada 2.1%
Pacific Basin 16.4%
Europe 32.5%
U.S. 49.0%
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the
aggregate market value of the stock exchanges). This chart is for illustrative
purposes only and does not represent the allocation of any Prudential mutual
fund.
III-5
<PAGE>
PRUDENTIAL MUTUAL FUNDS
- ------------------------------------------------------------------------------
Prudential National Municipals Fund, Inc.
Supplement Dated August 31, 2000 to
Statement of Additional Information Dated March 3, 2000
The section in the Statement of Additional Information entitled 'Description
of the Fund, Its Investments and Risks--Investment Strategies, Policies and
Risks,' is amended to reflect the following:
As of August 31, 2000, the Fund is authorized to invest up to 15% of the
Fund's total assets in 'non-investment grade' or high yield obligations,
commonly known as 'junk bonds,' without the requirement that they have the
characteristics of medium rated securities. Non-investment grade securities are
rated below Baa by Moody's and below BBB by S&P, or comparably rated by another
major ratings service, and are considered speculative. These securities are
subject to a higher risk that they will lose value in the market than higher
rated securities. These securities are also subject to a higher risk of default
and tend to be less liquid than higher rated securities. Therefore, an
investment in the Fund may not be appropriate for short-term investing. The Fund
may invest in unrated obligations that the Fund determines are of comparable
quality to the rated debt obligations that are permissible investments. If the
rating of a debt obligation is downgraded after the Fund purchases it (or if the
debt obligation is no longer rated), the Fund will not have to sell the
obligation, but will take this into consideration in deciding whether the Fund
should continue to hold the obligation.
MF104C1
<PAGE>
[LOGO]
ANNUAL REPORT
DECEMBER 31, 1999
PRUDENTIAL
NATIONAL MUNICIPALS FUND, INC
(GRAPHIC)
<PAGE>
A Message from the Fund's President February 3, 2000
(PHOTO)
Dear Shareholder,
Prudential National Municipals Fund provided negative returns for 1999 as did
its benchmark, the Lipper General Municipal Average. The Fund's Class A shares
posted a negative return of 3.69% for the year, compared with a negative 4.63%
return for the Lipper Average. Prices of municipal bonds declined as investors
required higher yields on these bonds because the Federal Reserve had increased
a key short-term interest rate three times to rein in the rapidly expanding U.S.
economy. Under these difficult market conditions, the Fund performed somewhat
better than its benchmark Lipper Average primarily because we reduced its
exposure early on to certain municipal bonds that were more vulnerable to the
market sell-off.
The following report takes a closer look at developments in the municipal bond
market during 1999, and explains how the Fund was positioned accordingly.
New Portfolio Management
As a result of the restructuring of our Fixed Income Group that was discussed in
my previous letter to shareholders, Evan Lamp heads the Municipal Bond Sector
team, which is responsible for overseeing the day-to-day management of the Fund.
Evan and his team, who average 10 years of general investment experience, focus
on shifts in the relative value of different sectors of municipal bonds, credit
quality, and other factors to take advantage of changing investment
opportunities in the municipal bond market.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
John R. Strangfeld
President
Prudential National Municipals Fund, Inc.
<PAGE>
Performance Review
(PHOTO)
Evan Lamp (Municipal Bond [Sector] Team Leader)
Investment Goals and Style
We invest in carefully selected, medium- quality, long-term municipal bonds,
which offer a high level of current income that is exempt from federal income
taxes. These bonds are varied among the states, maturities, and types of
activity they support. There can be no assurance that the Fund will achieve its
investment objective.
A dismal year for municipal bonds During 1999, investors demanded higher yields
and lower prices on U.S. fixed-income securities, including municipal bonds, as
continued strong U.S. economic growth caused the Federal Reserve to raise
short-term interest rates. The Federal Reserve increased the federal funds rate
(what U.S. banks charge each other for overnight loans) by a quarter of a
percentage point on June 30, August 24, and November 16, 1999, which pushed the
rate from 4.75% to 5.50%. Hiking short-term interest rates is intended to slow
the U.S. economy's breakneck pace and help reduce the economic imbalances that
lead to higher inflation.
Although the Fed did not begin to apply its brakes to the economy until the end
of June 1999, U.S. bond markets began to sell off earlier in the year because
investors (including us) expected that the U.S. central bank would need to
tighten monetary policy. Bond prices continued to decline throughout the
remainder of 1999. This bearish trend caused the Lehman Brothers Municipal Bond
Index to post a negative return of 2.06% for 1999. Similarly, the Fund and its
benchmark Lipper Average also provided negative returns for the year.
Cutting the Fund's duration helped relative performance When bond markets sell
off, lowering a portfolio's duration (a measure of change in the prices of its
bonds for a change in interest rates) provides some degree of protection by
making the portfolio less sensitive to the rise in bond yields. The Fund
performed better than its benchmark Lipper Average largely because we cut its
duration to 7.8 years by the end of 1999 from 8.1 years at the close of 1998. We
accomplished this move by selling some of the Fund's noncallable bonds and
zero-coupon bonds, which are generally higher-duration securities.
In addition, we took short positions in futures contracts, expecting to be able
to book a profit by reversing the trade after prices of futures fell. We use
U.S. Treasury futures contracts, as well as municipal bond futures contracts,
which are based on the value of the Bond Buyer Index that consists of 40
actively traded municipal bonds. Any profits we made on our futures contracts
would help to offset some of the drop in the prices of the Fund's bonds.
<PAGE>
Focusing on "market-discount taxation" of munis helped the Fund As interest
rates climb beyond a certain point for every municipal bond, the "market
discount" on that bond will become subject to ordinary income taxation for a new
buyer. This reduces the value of that bond (and its price). We focused on
market-discount taxation, and sold certain municipal bonds before they became
subject to ordinary income taxation for new buyers.
We boosted our cash position Repeated changes in U.S. monetary policy were just
one of the problems that plagued the municipal bond market in the second half of
1999. When interest rates rise, investors can realize capital losses on selling
bonds or bond funds, and reinvest in new bonds or other bond funds with a lower
cost basis for tax purposes (due to the higher level of yields). This is called
"tax-loss swapping." In the municipal bond market, the capital loss is generally
deductible, while the higher yields on the new bonds or other funds are
generally tax-exempt.
<TABLE>
Performance at a Glance
<CAPTION>
Cumulative Total Returns1 As of 12/31/99
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -3.69% 33.79% (33.61) N/A 86.02% (85.77)
Class B -3.98 31.33 (31.15) 78.15% (77.91) 346.03 (345.42)
Class C -4.22 29.72 (29.55) N/A 26.31 (26.14)
Class Z N/A N/A N/A -4.22
Lipper Gen. Muni. Debt Fund Avg.3 -4.63 32.39 82.38 ***
</TABLE>
<TABLE>
Average Annual Total Returns1 As of 12/31/99
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -6.58% 5.35% (5.32) N/A 6.12% (6.10)
Class B -8.98 5.44 (5.41) 5.94% (5.93) 7.89 (7.89)
Class C -6.18 5.13 (5.10) N/A 4.21 (4.19)
Class Z N/A N/A N/A N/A
</TABLE>
<TABLE>
Distributions and Yields As of 12/31/99
<CAPTION>
Total Taxable Equivalent Yield
Distributions 30-Day at Tax Rates of
Paid for 12 Mos. SEC Yield 36% 39.6%
<S> <C> <C> <C> <C>
Class A $0.76 4.76% 7.44% 7.88%
Class B $0.73 4.66 7.28 7.72
Class C $0.69 4.36 6.81 7.22
Class Z $0.73 5.16 8.06 8.54
</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 LLC and Lipper Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 3% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of 5%,
4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert
to Class A shares, on a quarterly basis, approximately seven years after
purchase. Class C shares are subject to a front-end sales charge of 1% and a
CDSC of 1% for 18 months. Class Z shares are not subject to a sales charge or
distribution and service (12b-1) fees. Without waiver of management fees and/or
expense subsidization, the Fund's cumulative and average annual total returns
would have been lower, as indicated in parentheses ( ).
2 Inception dates: Class A, 1/22/90; Class B, 4/25/80; Class C, 8/1/94; and
Class Z 1/22/99.
3 Lipper average returns are for all funds in each share class for the one- ,
five- , and ten-year periods in the General Municipal Debt Fund category. The
Lipper average is unmanaged. General Municipal Debt funds invest at least 65% of
their assets in municipal debt issues in the top four credit ratings.
*** Lipper Since Inception returns are 84.57% for Class A, 380.95% for Class B,
28.61% for Class C, and -5.68% for Class Z, based on all funds in each share
class.
1
<PAGE>
Review Cont'd.
We took steps to make sure the Fund had enough cash available if "tax-loss
swapping" prompted shareholders to withdraw money toward the end of 1999. In
early December, we sold some of the Fund's shorter-term assets to boost its cash
position to 4.30% as of December 31, 1999, up from 0.15% as of November 30,
1999. We acted in early December because it can be difficult to sell assets at a
fair price in the final few weeks of the year. During that time, trading volume
dropped due to the holiday season, "tax-loss swapping" affected many funds, and
Wall Street dealers reduced trading and their bond inventories amid concerns
about potential year 2000 computer problems.
Looking Ahead
The Fund will maintain its heavy exposure to the municipal bonds of states with
higher taxes because there is usually strong demand for these debt securities
from investors who benefit from the higher tax-equivalent returns.
Strategically, it often benefits the Fund to hold bonds that can be easily
bought and sold.
In 1999, we reduced exposure to healthcare bonds due to concern that regulatory
changes could hurt the profitability of that industry. The healthcare sector of
the municipal bond market declined in price enough that we are now looking for
the stronger players in that industry to reestablish exposure to that sector.
Five Largest Issuers
Expressed as a percentage of net assets as of 12/31/99
WA State Public Power Supply 3.0%
CO Hsg. Fin. Authority 2.9
IL Metro Pier & Expo. Authority 2.4
OH State Water Dev. Authority 2.2
MA State Water Res. Authority 2.1
Portfolio Composition
Expressed as a percentage of total investmentsas of 12/31/99
General Obligation 22.0%
Utility 19.5
Other Revenue 18.1
Industrial Development 13.8
Transportation 11.4
Prerefunded 6.4
Miscellaneous 4.5
Cash Equivalents 4.3
Credit Quality
Expressed as a percentage of total investmentsas of 12/31/99
AAA 9.1%
AA 7.0
A 9.7
BBB 17.6
AAA Insured 50.7
Not Rated 5.9
2
<PAGE>
Portfolio of Investments as
of December 31, 1999 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--95.0%
------------------------------------------------------------------------------------------------------------------------------
Alaska--1.9%
Alaska Ind. Dev. & Expt. Auth. Rev., Revolving Fd. A2 5.40% 4/01/01 $ 870 $ 875,873
Anchorage Elec. Util. Rev.,
M.B.I.A. Aaa 6.50 12/01/12 3,400 3,747,718
M.B.I.A. Aaa 6.50 12/01/13 2,500 2,745,900
M.B.I.A. Aaa 6.50 12/01/14 3,455 3,770,096
------------
11,139,587
------------------------------------------------------------------------------------------------------------------------------
Arizona--3.7%
Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25,
B.I.G. Aaa 7.875 8/01/14 2,250 2,740,185
Maricopa Cnty. Sch. Dist., A.M.B.A.C.,
No. 3 Tempe Elem. Aaa Zero 7/01/09 1,500 900,000
No. 3 Tempe Elem. Aaa Zero 7/01/14 1,500 646,455
Maricopa Cnty. Uni. Sch. Dist.,
No. 80 Chandler, F.G.I.C. Aaa Zero 7/01/09 1,330 798,000
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/10 1,050 591,559
No. 80 Chandler, M.B.I.A. Aaa Zero 7/01/11 1,200 635,112
No. 80 Chandler, F.G.I.C., E.T.M. Aaa 6.25 7/01/11 375 407,745
No. 80 Chandler, F.G.I.C. Aaa 6.25 7/01/11 625 672,850
Phoenix Str. & Hwy. User Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 2,500 1,239,825
Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 1,790 1,912,293
Pima Cnty. Uni. Sch. Dist., Gen. Oblig., F.G.I.C., Aaa 7.50 7/01/10 3,000 (f) 3,536,910
Tucson Cnty. Gen. Oblig.,
Ser. A Aa3 7.375 7/01/11 1,000 1,176,980
Ser. A Aa3 7.375 7/01/12 1,100 1,298,946
Ser. A Aa3 7.375 7/01/13 4,500 5,310,855
------------
21,867,715
------------------------------------------------------------------------------------------------------------------------------
California--9.1%
Abag Fin. Auth. for Nonprofit Corps., Cert. of Part.,
Amer. Baptist Homes., Ser. A BBB(d) 6.20 10/01/27 1,200 1,102,848
Anaheim Pub. Fin. Auth. Lease Rev., F.S.A.,
Sr. Pub. Impvts. Proj., Ser. A Aaa 6.00 9/01/24 5,500 5,570,455
Sub. Pub. Impvts. Proj., Ser. C Aaa 6.00 9/01/16 6,690 6,954,790
California Hlth. Facs. Fin. Auth. Rev., Ser. A A2 6.125 12/01/30 6,000 5,786,340
Encinitas Union Sch. Dist., Gen. Oblig., M.B.I.A Aaa Zero 8/01/21 3,810 1,019,975
Kern High Sch. Dist., Ser. A, M.B.I.A. Aaa 6.30 2/01/10 2,490 2,731,381
Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125 7/01/23 6,000 5,601,240
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as
of December 31, 1999 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.)
Long Beach Harbor Rev., Ser. A, F.G.I.C., A.M.T. Aaa 6.00% 5/15/18 $ 4,000 $ 4,084,800
Los Angeles Uni. Sch. Distr., Ser. A, F.G.I.C. Aaa 6.00 7/01/15 1,000 1,040,030
Pittsburg Redev. Agy., Tax Alloc.,
Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/25 2,000 410,140
Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/30 5,000 745,650
San Joaquin Hills Trans. Corr. Agy., Toll Rd. Rev. Aaa Zero 1/15/32 15,000 2,058,450
San Jose Redev. Agcy. Tax Alloc., M.B.I.A. Aaa 6.00 8/01/11 3,000 3,214,830
Santa Cruz Cnty. Pub. Fin. Auth. Rev., Ser. B A-(d) 6.20 9/01/23 2,000 1,990,460
Santa Margarita Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/09 2,000 2,319,200
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/10 2,450 2,878,750
Impvt. Dists. 3-3A-4 & 4A, Ser. B Aaa 7.25 8/01/14 2,000 2,347,780
So. Orange Cnty. Pub. Fin. Auth. Rev., Ser. C, F.G.I.C. Aaa 6.50 8/15/10 2,000 2,227,300
So. Whittier Elem. Sch. Dist., Gen. Oblig., Ser. A,
F.G.I.C. Aaa Zero 8/01/12 810 404,255
West Contra Costa Sch. Dist., Cert. of Part. Baa3 7.125 1/01/24 1,600 1,684,560
------------
54,173,234
------------------------------------------------------------------------------------------------------------------------------
Colorado--4.8%
Arapahoe Cnty. Cap. Impvt. Trust Fund, Hwy. Rev., Ser.
E-470 Aaa 7.00 8/31/26 3,000 (b) 3,376,590
Colorado Hsg. Fin. Auth., A.M.T.
Singl. Fam. Proj. Aa2 8.00 6/01/25 2,145 2,230,800
Singl. Fam. Proj., Ser. A-2 Aa2 7.25 5/01/27 2,000 2,126,600
Singl. Fam. Proj., Ser. B-1 Aa2 7.90 12/01/25 1,320 1,389,933
Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa 7.65 12/01/25 3,195 3,435,360
Singl. Fam. Proj., Ser. C-2 Aa2 6.875 11/01/28 3,500 3,664,115
Singl. Fam. Proj., Ser. C-2 Aa2 7.05 4/01/31 4,000 4,296,240
Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB+(d) 7.00 1/01/22 7,960 (f) 8,250,938
------------
28,770,576
------------------------------------------------------------------------------------------------------------------------------
Connecticut--2.2%
Connecticut St. Hlth. & Edu. Facs. Auth. Rev.,
St. Mary's Hosp. Issue, Ser. E A3 5.50 7/01/20 5,650 4,761,763
St. Mary's Hosp. Issue, Ser. E A3 5.875 7/01/22 1,750 1,529,990
Univ. of Hartford, Ser. D Ba1 6.75 7/01/12 5,725 5,800,055
Connecticut St. Spec. Tax Oblig. Rev., Trans.
Infrastructure, Ser. A A1 7.125 6/01/10 1,000 1,132,830
------------
13,224,638
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as
of December 31, 1999 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>
------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.0%
Dist. of Columbia, M.B.I.A,
Gen. Oblig., Ser. B Aaa 6.00% 6/01/13 $ 1,000 $ 1,040,200
Gen. Oblig., Ser. B Aaa 6.00 6/01/21 5,000 4,993,700
------------
6,033,900
------------------------------------------------------------------------------------------------------------------------------
Florida--2.5%
Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South
Proj. A3 7.95 12/01/08 7,445 7,685,027
Florida St. Brd. of Ed., Gen. Oblig. Aa2 9.125 6/01/14 1,260 1,662,053
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj. Aa3 8.00 5/01/22 5,000 5,476,000
------------
14,823,080
------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., Poll. Cntrl. Rev., M.B.I.A.,
Georgia Pwr. Co. Aaa 6.625 10/01/24 500 510,650
Oglethorpe Pwr. Co. Aaa 8.00 1/01/22 5,000 (b) 5,588,700
Oglethorpe Pwr. Co., E.T.M. Aaa 7.50 1/01/03 557 578,896
Forsyth Cnty. Sch. Dist. Dev. Rev. Aa3 6.75 7/01/16 500 552,615
Fulton Cnty. Sch. Dist. Rev. Aa2 6.375 5/01/17 750 801,788
Georgia Mun. Elec. Auth. Pwr. Rev.,
Ser. B A3 6.25 1/01/17 475 486,528
Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000 5,329,450
Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 395 406,751
------------
14,255,378
------------------------------------------------------------------------------------------------------------------------------
Guam--0.2%
Guam Pwr. Auth. Rev., Ser. A BBB+(d) 6.625 10/01/14 1,000 (b) 1,097,940
------------------------------------------------------------------------------------------------------------------------------
Hawaii--0.4%
Hawaii St. Dept. Budget & Fin. Spl. Purp. Mtg. Rev.,
Hawaiian Elec. Co., Ser. C, M.B.I.A., A.M.T. Aaa 7.375 12/01/20 500 520,880
Kapiolani Hlth. Care Sys. A2 6.00 7/01/11 250 250,825
Hawaii St. Harbor Cap. Impvt. Rev., A.M.T.
F.G.I.C. Aaa 6.25 7/01/10 250 261,102
F.G.I.C. Aaa 6.25 7/01/15 500 506,645
Hawaii St., Gen. Oblig., Ser. CJ Aaa 6.25 1/01/15 650 (b) 689,683
------------
2,229,135
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as
of December 31, 1999 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--5.1%
Chicago Board of Ed.,
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/18 $ 3,400 $ 1,045,942
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/19 2,000 573,640
Chicago Brd. of Ed., Gen. Oblig., F.G.I.C.,
Sch. Reform, Ser. B-1 Aaa Zero 12/01/12 1,500 702,495
Sch. Reform, Ser. B-1 Aaa Zero 12/01/17 10,000 3,302,600
Chicago City Colleges,
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/24 5,000 1,105,000
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/25 10,000 2,070,200
Cook and Du Page Cntys., High Sch. Dist No. 210, Gen.
Oblig., F.S.A. Aaa Zero 12/01/11 3,035 1,555,225
Illinois Dev. Fin. Auth. Rev., Cmnty. Rehab. Providers,
Ser. A BBB(d) 6.00% 7/01/15 2,000 1,795,040
Illinois Hlth. Fac. Auth. Rev.,
M.B.I.A Aaa 6.00 7/01/14 800 (b) 833,912
M.B.I.A Aaa 6.00 7/01/14 2,700 2,779,191
Metropolitan Pier & Expo. Auth., Hosptlty. Fac. Rev.,
McCormick Pl. Conv. BBB+(d) 7.00 7/01/26 12,910 14,506,838
------------
30,270,083
------------------------------------------------------------------------------------------------------------------------------
Indiana--0.3%
Gary Ind. Mtge. Rev., Lakeshore Dunes Apts., Ser. A,
G.N.M.A. AAA(d) 6.00 8/20/34 2,000 1,875,760
------------------------------------------------------------------------------------------------------------------------------
Kentucky--1.0%
Henderson Cnty. Solid Waste Disp. Rev., Macmillan
Bloedel Proj., A.M.T. Baa2 7.00 3/01/25 6,000 6,105,480
------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.4%
New Orleans, Gen. Oblig., A.M.B.A.C. Aaa Zero 9/01/09 13,500 8,005,095
Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90 2/01/07 5,780 7,076,338
St. Charles Parish, Env. Impt. Rev., Louisiana Pwr. &
Lt. Co. Proj., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,046,800
------------
20,128,233
------------------------------------------------------------------------------------------------------------------------------
Maryland--2.9%
Baltimore, Constr. Pub. Imprvt., Gen. Oblig., Ser. C,
F.G.I.C. Aaa 5.50 10/15/16 1,000 982,710
Baltimore, Econ. Dev. Lease Rev., Armistead Partnership,
Ser. A BBB+(d) 7.00 8/01/11 1,000 1,033,780
Harford Cnty.,
Gen. Oblig. Aa2 5.50 3/01/06 180 (b) 185,173
Gen. Oblig. Aa2 5.50 3/01/06 570 589,107
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
Portfolio of Investments as
of December 31, 1999 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>
------------------------------------------------------------------------------------------------------------------------------
Maryland (cont'd.)
Maryland St. Hlth. & Higher Edu. Facs. Auth. Rev.,
Doctor's Cmnty. Hosp. Baa1 5.50% 7/01/24 $ 3,000 $ 2,446,290
Howard Cnty. Gen. Hosp., E.T.M. Aaa 5.50 7/01/21 500 483,185
Mercy Medical Center, F.S.A. Aaa 5.75 7/01/26 1,000 961,910
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr.
Physics Headqrtrs. BBB(d) 6.625 1/01/17 1,000 1,007,590
Maryland St. Trans. Auth. Rev., Balt. Int'l. Arpt.
Proj., Ser. A, A.M.T., F.G.I.C. Aaa 6.25 7/01/14 1,750 1,794,047
Montgomery Cnty., Gen. Oblig. Aaa 9.75 6/01/01 450 482,594
Northeast Waste Disp. Auth. Rev.,
Baltimore City Sludge Corp. Proj. NR 7.25 7/01/07 3,813 3,958,618
Montgomery Cnty. Res. Rec. Proj., Ser. A A2 6.00 7/01/07 1,000 1,028,540
Prince Georges Cnty., Poll. Cntrl. Rev., Potomac Elec.
Proj., M.B.I.A. Aaa 5.75 3/15/10 1,100 1,145,397
Takoma Park Hosp. Facs. Rev., Washington Adventist
Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,099,880
------------
17,198,821
------------------------------------------------------------------------------------------------------------------------------
Massachusetts--2.5%
Mass. Edu. Fin. Auth., Ed. Ln. Rev., Issue G., Ser. A.,
M.B.I.A., A.M.T. Aaa 5.10 12/01/13 1,000 934,450
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Mass. Inst. of
Tech. Ser. I-1 Aaa 5.20 1/01/28 1,500 1,326,585
Mass. St. Wtr. Res. Auth. Rev., M.B.I.A.,
Ser. B Aaa 6.25 12/01/11 6,720 7,296,912
Ser. B Aaa 6.25 12/01/12 5,000 5,420,400
------------
14,978,347
------------------------------------------------------------------------------------------------------------------------------
Michigan--6.8%
Brandon Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 5.875 5/01/26 1,310 (b) 1,384,853
Breitung Twnshp. Sch. Dist. Ref., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 257,935
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A,
F.S.A., A.M.T. Aaa 6.875 5/01/09 920 959,247
Detroit Sewage. Disp. Rev.,
Prerefunded Inflos AAA(d) 7.263 7/01/23 800 (b) 856,000
Unrefunded Balance Inflos AAA(d) 7.263 7/01/23 200 178,500
Detroit Wtr. Supply Sys. Rev., Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 1,015,330
Dexter Cmnty. Schs., Gen. Oblig., F.G.I.C. Aaa 5.10 5/01/28 10,000 8,681,400
Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,137,500
Holland Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 5/01/15 2,400 965,160
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 1,983,905
Kalamazoo Econ. Dev. Corp. Rev., Friendship Vlg., Ser. A BBB(d) 6.125 5/15/17 1,000 917,420
Lincoln Park Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.00 5/01/20 1,500 (b) 1,674,315
Michigan Higher Ed. Rev., Ser. XIII-A, M.B.I.A., A.M.T. Aaa 7.55 10/01/08 155 160,689
Michigan Mun. Bd. Auth. Rev., Wayne Cnty. Proj.,
M.B.I.A., E.T.M. Aaa 7.40 12/01/02 500 524,555
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Portfolio of Investments as
of December 31, 1999 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 (cont'd.)
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A A3 8.25% 7/01/12 $ 1,920 $ 1,994,707
Genesys Hlth. Sys., Ser. A Baa2 8.125 10/01/21 1,000 (b) 1,171,960
Genesys Hlth. Sys., Ser. A Baa2 7.50 10/01/27 500 (b) 563,340
Presbyterian Vlg. Oblig. NR 6.375 1/01/25 800 739,592
Michigan St. Hsg. Dev. Auth. Rev.,
Rental Hsg., Ser. B AA-(d) 7.55 4/01/23 1,000 1,039,790
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.15 4/01/10 140 146,532
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.70 4/01/23 500 520,660
Sngl. Fam. Mtge., Ser. A AA+(d) 7.50 6/01/15 2,905 2,959,062
Michigan St. Strategic Fd., Ltd. Oblig. Rev.,
Waste Mgmt. Inc. Proj., A.M.T. Ba1 6.625 12/01/12 1,500 1,455,045
Worthington Armstrong Venture, A.M.T. A-(d) 5.75 10/01/22 1,000 943,080
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co. Proj.,
F.G.I.A., A.M.T. Aaa 7.65 9/01/20 2,000 2,076,600
Oak Park, A.M.B.A.C.,
Gen. Oblig. Aaa 7.00 5/01/12 400 (b) 426,308
Gen. Oblig., Aaa 7.00 5/01/11 375 (b) 399,664
Okemos Pub. Sch. Dist.,
M.B.I.A. Aaa Zero 5/01/12 1,100 548,009
M.B.I.A. Aaa Zero 5/01/13 1,000 464,770
Posen Cons. Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000 (b)(f) 1,075,880
Wayne Cnty. Bldg. Auth., Ser. A A3 8.00 3/01/17 1,250 (b) 1,356,163
Wyandotte Elec. Rev., Gen. Oblig., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,132,980
------------
40,710,951
------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.2%
Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam.
Mtge., G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 635 650,348
St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 413 426,869
------------
1,077,217
------------------------------------------------------------------------------------------------------------------------------
Missouri--0.7%
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 3,740 3,918,248
------------------------------------------------------------------------------------------------------------------------------
Nevada--2.2%
Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Ser.
A, A.M.T. Baa2 6.50 12/01/33 10,000 9,384,800
Nevada Hsg. Div. Multi Unit Hsg. Rev., F.N.M.A., A.M.T. AAA(d) 6.60 10/01/23 3,475 3,567,783
------------
12,952,583
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
Portfolio of Investments as
of December 31, 1999 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--1.0%
New Hampshire Higher Ed. & Hlth. Facs. Auth. Rev.,
New Hampshire College BBB-(d) 6.30% 1/01/16 $ 500 $ 483,115
New Hampshire College BBB-(d) 6.375 1/01/27 2,000 1,889,200
New Hampshire St. Ind. Dev. Auth., Poll. Ctrl. Rev.,
Proj. A Ba3 7.65 5/01/21 3,420 3,513,708
------------
5,886,023
------------------------------------------------------------------------------------------------------------------------------
New Jersey--2.3%
New Jersey Econ. Dev. Auth. Rev., Performing Arts Ctr.
Proj.,
Ser. A, A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,498,336
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000 11,962,830
------------
13,461,166
------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.8%
New Mexico Mtge. Fin. Auth., Singl. Fam. Mtge., A.M.T. AAA(d) 6.30 7/01/28 4,965 4,972,001
------------------------------------------------------------------------------------------------------------------------------
New York--8.9%
Greece Central Sch. Dist.
F.G.I.C. Aaa 6.00 6/15/16 950 984,257
F.G.I.C. Aaa 6.00 6/15/17 950 979,099
F.G.I.C. Aaa 6.00 6/15/18 950 974,586
Metropolitan Trans. Auth., Trans. Facs. Rev.,
Ser. A, F.S.A. Aaa 5.75 7/01/11 675 690,937
Ser. A, F.S.A. Aaa 6.00 7/01/16 2,500 2,533,175
New York City Ind. Dev. Agcy., Spec. Fac. Rev., Terminal
One Group Assoc. Proj., A.M.T. A3 6.00 1/01/19 2,500 2,436,475
New York City Mun. Wtr. Fin. Auth. Rev., F.G.I.C. Aaa 6.75 6/15/16 10,565 (f) 10,938,578
New York City, Gen. Oblig.,
Ser. A A3 7.75 8/15/04 15 15,818
Ser. B A3 8.25 6/01/06 1,500 1,738,560
Ser. B A3 7.25 8/15/07 3,500 3,916,150
Ser. D A3 8.00 8/01/03 70 74,324
Ser. D A3 8.00 8/01/04 30 31,853
Ser. D Aaa 7.65 2/01/07 4,955 (b) 5,319,589
Ser. D A3 7.65 2/01/07 45 47,996
Ser. F A3 8.25 11/15/02 815 874,569
New York St. Dorm. Auth. Rev., Mem. Sloan Kettering
Cancer Ctr., M.B.I.A. Aaa 5.75 7/01/20 4,000 3,915,240
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,297,510
New York St. Local Gov't. Assist. Corp. Ref., Ser. E A3 6.00 4/01/14 2,000 2,083,620
New York St. Urban Dev. Corp. Rev. Ref., F.S.A.,
Correctional Facs. Aaa 6.50 1/01/09 3,000 3,268,500
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
Portfolio of Investments as
of December 31, 1999 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.)
Suffolk Cnty., Gen. Oblig., Ser. A, F.G.I.C. Aaa 5.25% 8/01/13 $ 1,325 $ 1,293,531
Triborough Bridge & Tunl. Auth. Rev., Ser. X, M.B.I.A. Aaa 6.625 1/01/12 8,500 9,446,645
------------
52,861,012
------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.7%
Mercer Cnty. Poll. Ctrl. Rev., Antelope Valley Station,
A.M.B.A.C. Aaa 7.20 6/30/13 9,000 10,324,440
------------------------------------------------------------------------------------------------------------------------------
Ohio--2.9%
Franklin Cnty. Hosp. Rev., Doctors Ohio Hlth. Corp.,
Ser. A Baa3 5.60 12/01/28 5,000 4,065,650
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Buckeye
Pwr. Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 11,825 13,323,700
------------
17,389,350
------------------------------------------------------------------------------------------------------------------------------
Oklahoma--2.9%
McGee Creek Auth. Wtr. Rev., M.B.I.A. Aaa 6.00 1/01/23 7,000 7,063,210
Tulsa Mun. Arpt. Trust Rev., A.M.T. Baa2 7.375 12/01/20 10,000 10,305,500
------------
17,368,710
------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--3.3%
Beaver Cnty. Ind. Dev. Auth., Poll. Cntrl. Rev., Ohio
Edison Co. Proj., Ser. A Baa3 4.65 6/01/33 5,000 4,775,700
Clarion Cnty. Hosp. Auth. Rev., Clarion Hosp. Proj. BBB-(d) 5.60 7/01/10 685 642,667
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Fac.,
Ser. A B2 6.20 7/01/19 3,000 2,700,660
Montgomery Cnty. Ind. Dev. Auth., Retirement Cmnty. Rev. A-(d) 5.25 11/15/28 2,000 1,589,240
Pennsylvania St., Cert. of Part., F.S.A. Aaa 6.25 11/01/06 600 626,046
Pennylvania Econ. Dev. Fin. Auth., Solid Waste Disp.
Rev., A.M.T. Baa2 6.00 6/01/31 4,500 4,037,715
Philadelphia Hosp. & Higher Edl. Facs. Auth. Rev.,
Children's Seashore House, Ser. A A-(d) 7.00 8/15/03 1,000 1,042,250
Philadelphia Wtr. & Waste Auth. Rev., M.B.I.A. Aaa 6.25 8/01/11 2,500 2,692,250
Westmoreland Cnty., Pennsylvania Ind. Dev. Auth. Rev.,
Valley Landfill Proj. BBB(d) 5.10 5/01/18 2,000 1,724,040
------------
19,830,568
------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.7%
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.50 7/01/13 3,000 3,277,260
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev.,
Ser. A, A.M.B.A.C. Aaa Zero 7/01/18 2,500 846,525
Ser. V Baa1 6.375 7/01/08 500 522,000
Ser. V Baa1 6.625 7/01/12 4,000 4,156,160
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
Portfolio of Investments as
of December 31, 1999 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 Ind., Tourist Ed. Med. & Env. Ctrl. Facs.
Rev.,
Dr. Pila Hosp. Proj., F.H.A. AAA(d) 6.125% 8/01/25 $ 500 $ 499,645
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/16 500 517,440
Puerto Rico Mun. Fin. Agcy. Rev., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 267,243
Puerto Rico Tel. Auth. Rev.,
M.B.I.A. Aaa 6.363 1/25/07 4,100(b)(c) 4,294,750
M.B.I.A. Aaa 6.307 1/16/15 7,150(b)(c) 7,623,687
------------
22,004,710
------------------------------------------------------------------------------------------------------------------------------
South Carolina--1.6%
Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 9,537,470
------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.8%
Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp.,
F.G.I.C. Aaa 6.75 9/01/10 5,000 (f) 5,597,450
McMinn Cnty. Ind. Dev. Brd. Solid Waste Rev., Recycling
Fac., A.M.T. Baa1 7.40 12/01/22 5,000 5,285,750
------------
10,883,200
------------------------------------------------------------------------------------------------------------------------------
Texas--5.9%
Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., Baptist Hlth.
Sys., Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 5,870,121
Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 3,885,140
Ser. A Aaa 7.375 11/01/09 3,500 3,885,140
Houston Indpt. Sch. Dist., Gen. Oblig., Ser. A Aaa 5.00 2/15/24 3,000 2,552,280
Houston Wtr. & Sew. Sys. Rev., Junior Lien, Ser. D,
M.B.I.A. Aaa 6.125 12/01/25 4,500 4,433,625
Keller Indpt. Sch. Dist. Rev. Aaa 6.00 8/15/23 3,970 3,994,694
Lakeway Mun. Util. Dist., Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 9/01/11 1,425 740,530
New Braunfels Indpt.,
Sch. Dist. Rev. Aaa Zero 2/01/10 2,335 1,336,601
Sch. Dist. Rev. Aaa Zero 2/01/11 2,365 1,269,910
Port Corpus Christi Auth. Rev. A2 7.50 8/01/12 2,000 2,077,180
San Antonio Elec. & Gas Rev., Ser. B, F.G.I.C. Aaa Zero 2/01/09 5,000 3,057,150
Univ. of Texas, Rev., Ser. B Aa1 6.75 8/15/13 2,035 2,137,645
------------
35,240,016
------------------------------------------------------------------------------------------------------------------------------
Utah--0.2%
Utah St. Brd. of Regents, Student Ln. Rev., Ser. F,
A.M.B.A.C., A.M.T. Aaa 7.00 11/01/01 1,000 (f) 1,041,340
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
Portfolio of Investments as
of December 31, 1999 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>
------------------------------------------------------------------------------------------------------------------------------
Washington--3.5%
Washington St., Gen. Oblig., Ser. R-97A Aa1 Zero 7/01/16 $ 8,000 $ 2,954,080
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00% 7/01/08 4,000 4,477,960
Nuclear Proj. No. 1, Ser. B, F.S.A. Aaa 7.25 7/01/09 5,000 5,712,400
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 5,400 5,221,422
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/06 3,000 2,131,230
------------
20,497,092
------------------------------------------------------------------------------------------------------------------------------
Wisconsin--1.2%
Wisconsin Hsg. & Econ. Dev. Auth., Home Ownership Rev.,
A.M.T. Aa2 6.20 3/01/27 2,100 2,059,239
Wisconsin St. Hlth. & Edu. Fac. Auth. Rev.,
Aurora Hlth. Care. Inc. Proj., Ser. A A-(d) 5.60 2/15/29 5,000 4,062,450
Aurora Hlth. Care. Inc. Proj., Ser. B A-(d) 5.625 2/15/29 1,000 816,160
------------
6,937,849
------------
Total long-term investments (cost $561,590,053) 565,065,853
------------
------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--3.5%
------------------------------------------------------------------------------------------------------------------------------
Alabama--0.6%
Decatur Ind. Dev. Bd., Solid Waste Disp. Rev.,Amoco
Chemical Co. Proj., F.R.D.D. VMIG1 5.40 1/03/00 3,600 (e) 3,600,000
------------------------------------------------------------------------------------------------------------------------------
Illinois--0.3%
Madison Cnty Env. Impt. Rev., Ser. A, F.R.D.D. VMIG1 5.35 1/03/00 100 (e) 100,000
Southwestern Dev. Auth., Solid Waste Disp. Rev., Shell
Oil Co. Proj., F.R.D.D. VMIG1 5.35 1/03/00 1,400 (e) 1,400,000
------------
1,500,000
------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.1%
Calcasieu Parish Inc., Ind. Dev. Bd. Env. Rev., Citgo
Petroleum Corp., F.R.D.D. VMIG1 5.40 1/03/00 900 (e) 900,000
------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.7%
Jackson Cnty, Ind. Ser. Facs. Rev., Chevron Inc. Proj.,
Ser. 94, F.R.D.D. VMIG1 5.40 1/03/00 4,300 (e) 4,300,000
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
Portfolio of Investments as
of December 31, 1999 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>
------------------------------------------------------------------------------------------------------------------------------
Nevada--0.3%
Washoe Cnty. Wtr. Facs. Rev., Sierra Pac. Pwr. Co.
Proj., F.R.D.D VMIG1 5.40% 1/03/00 $ 1,500 (e) $ 1,500,000
------------------------------------------------------------------------------------------------------------------------------
Ohio--0.2%
Ohio St. Solid Waste Rev., F.R.D.D. VMIG1 5.35 1/03/00 900 (e) 900,000
------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.1%
So. Carolina Jobs Econ. Dev. Auth. Rev., Wellman Inc.
Proj., F.R.D.D. Aa2 5.45 1/03/00 800 (e) 800,000
------------------------------------------------------------------------------------------------------------------------------
Texas--1.2%
Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec.
Co.,
Ser. 95A, F.R.D.D. VMIG1 5.40 1/03/00 3,000 (e) 3,000,000
Ser. 96C, F.R.D.D. VMIG1 5.40 1/03/00 3,300 (e) 3,300,000
Brazos River Harbor Nav. Dist. Rev., Dow Chemical Co.
Proj.,
Ser. 93, F.R.D.D. VMIG1 5.45 1/03/00 800 (e) 800,000
Gulf Coast Ind. Dev. Auth., Citgo Petro. Proj., F.R.D.D. VMIG1 5.40 1/03/00 200 (e) 200,000
------------
7,300,000
------------
------------------------------------------------------------------------------------------------------------------------------
Number of
Contracts
---------
CALL OPTION PURCHASED
United States Treasury Bond Future
expires Mar. 2000 (cost $425,375) 400 25,000
------------
Total short-term investments (cost $21,225,375) 20,825,000
------------
Total Investments--98.5%
(cost $582,815,428, Note 4) 585,890,853
Other assets in excess of liabilities--1.5% 8,659,204
------------
Net Assets--100% $594,550,057
------------
------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
Portfolio of Investments as
of December 31, 1999 PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
---------------
(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 Administration
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.
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. 14
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1999
<S> <C>
Investments, at value (cost $582,815,428)............................................................... $585,890,853
Cash.................................................................................................... 94,113
Interest receivable..................................................................................... 10,282,287
Receivable for Fund shares sold......................................................................... 563,907
Receivable for investments sold......................................................................... 477,563
Deferred expenses and other assets...................................................................... 18,100
-----------------
Total assets......................................................................................... 597,326,823
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 1,703,058
Dividends payable....................................................................................... 402,145
Accrued expenses........................................................................................ 274,044
Management fee payable.................................................................................. 245,302
Distribution fee payable................................................................................ 149,092
Due from broker-variation margin........................................................................ 3,125
-----------------
Total liabilities.................................................................................... 2,776,766
-----------------
Net Assets.............................................................................................. $ 594,550,057
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 403,809
Paid-in capital in excess of par..................................................................... 592,263,617
-----------------
592,667,426
Accumulated net realized loss on investments......................................................... (1,252,169)
Net unrealized appreciation on investments........................................................... 3,134,800
-----------------
Net assets, December 31, 1999........................................................................... $ 594,550,057
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($498,428,421 / 33,865,243 shares of common stock issued and outstanding)......................... $14.72
Maximum sales charge (3% of offering price).......................................................... .46
-----------------
Maximum offering price to public..................................................................... $15.18
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($92,264,695 / 6,254,058 shares of common stock issued and outstanding)........................... $14.75
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($3,059,480 / 207,371 shares of common stock issued and outstanding).............................. $14.75
Sales charge (1% of offering price).................................................................. .15
-----------------
Offering price to public............................................................................. $14.90
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($797,461 / 54,209 shares of common stock issued and outstanding)................................. $14.71
-----------------
-----------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Operations
------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1999
<S> <C>
Income
Interest.............................. $ 37,520,953
-----------------
Expenses
Management fee........................ 3,129,064
Distribution fee--Class A............. 1,329,006
Distribution fee--Class B............. 590,221
Distribution fee--Class C............. 19,821
Transfer agent's fees and expenses.... 412,000
Custodian's fees and expenses......... 150,000
Reports to shareholders............... 118,000
Registration fees..................... 47,000
Legal fees and expenses............... 45,000
Directors' fees and expenses.......... 40,000
Audit fees and expenses............... 39,000
Insurance expense..................... 8,000
Miscellaneous......................... 424
-----------------
Total expenses..................... 5,927,536
Custodian fee credit.................. (7,711)
-----------------
Net expenses....................... 5,919,825
-----------------
Net investment income.................... 31,601,128
-----------------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... (671,635)
Financial futures contracts........... 298,219
-----------------
(373,416)
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... (47,510,251)
Financial futures..................... 170,312
-----------------
(47,339,939)
-----------------
Net loss on investment transactions...... (47,713,355)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $ (16,112,227)
-----------------
-----------------
</TABLE>
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
Statement of Changes in Net Assets
------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income....... $ 31,601,128 $ 29,590,250
Net realized gain (loss) on
investment
transactions............. (373,416) 2,809,051
Net change in unrealized
depreciation on
investments.............. (47,339,939) (619,579)
----------------- -------------
Net increase (decrease) in
net assets resulting from
operations............... (16,112,227) 31,779,722
----------------- -------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (25,956,731) (23,636,186)
Class B.................. (5,456,913) (5,888,290)
Class C.................. (116,079) (65,774)
Class Z.................. (71,405) --
----------------- -------------
(31,601,128) (29,590,250)
----------------- -------------
Distributions in excess of
net investment income
Class A.................. (100,946) (17,881)
Class B.................. (18,963) (4,429)
Class C.................. (619) (86)
Class Z.................. (176) --
----------------- -------------
(120,704) (22,396)
----------------- -------------
Distributions from net
realized capital gains
Class A.................. -- (3,635,575)
Class B.................. -- (906,642)
Class C.................. -- (16,469)
----------------- -------------
-- (4,558,686)
----------------- -------------
Fund share transactions (net of share
conversions) (Note 5 & 6):
Net proceeds from shares
sold..................... 280,554,937 76,423,080
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 19,573,958 21,262,728
Cost of shares reacquired... (261,665,210) (126,905,006)
----------------- -------------
Increase (decrease) in net
assets from Fund share
transactions............. 38,463,685 (29,219,198)
----------------- -------------
Total decrease................. (9,370,374) (31,610,808)
Net Assets
Beginning of year.............. 603,920,431 635,531,239
----------------- -------------
End of year.................... $ 594,550,057 $ 603,920,431
----------------- -------------
----------------- -------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements. 16
<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. 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 the 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.
Federal Income Taxes: It is the intent of the Fund to continue to meet the
requirements of the Internal Revenue Code applicable to regulated
--------------------------------------------------------------------------------
17
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants', 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 by $120,704,
increase accumulated net realized loss on investments by $149,567 and increase
paid in capital by $28,863, due to the sale of securities purchased with market
discount during the year ended December 31, 1999. Net investment income, net
realized gains and net assets were not affected by this change.
------------------------------------------------------------
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 has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, B, C and Z
shares of the Fund. The Fund compensates PIMS 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. No
distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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
.25 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, 1999.
PIMS has advised the Fund that it received approximately $64,200 and $9,400 in
front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the year ended December 31, 1999. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $142,600 and $1,400 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America.
As of March 11, 1999, the Company along with other unaffiliated registered
investment companies (the 'Funds'), entered into a syndicated agreement ('SCA')
with an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings outstanding will be at market rates. The Funds
pay a commitment fee at an annual rate of .065 of 1% on the unused portion of
the credit facility, which is accrued and paid quarterly on a pro rata basis by
the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds
had a credit agreement with a maximum commitment of $200,000,000. The commitment
fee was .055 of 1% on the unused portion of the credit facility. The Fund did
not borrow any amounts pursuant to either agreement during the year ended
December 31, 1999. The purpose of the agreements is to serve as an alternative
source of funding for capital share redemptions.
------------------------------------------------------------
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, 1999,
the Fund incurred fees of approximately $411,000 for
--------------------------------------------------------------------------------
18
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
the services of PMFS. As of December 31, 1999, approximately $32,800 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.
------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1999, were $216,669,330 and $195,715,557,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1999 was
$583,086,606 and, accordingly, net unrealized appreciation for federal income
tax purposes was $2,804,247 (gross unrealized appreciation--$17,324,536; gross
unrealized depreciation--$14,520,289).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1999 of approximately $922,000 which expires in 2007. Accordingly,
no capital gains distribution is expected to be paid until net gains have been
realized in excess of the carryforward.
During the year ended December 31, 1999, the Fund entered into financial futures
contracts. Details of open contracts at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade December 31, Unrealized
Contracts Type Date Date 1999 Appreciation
--------- ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Long
Position:
U.S.
Treasury
100 Index Mar. 2000 $9,187,500 $9,246,875 $ 59,375
------------
------------
</TABLE>
------------------------------------------------------------
Note 5. Capital
The Fund 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%. 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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
There are 1 billion shares of common stock, $.01 par value per share, authorized
divided into four classes, designated Class A, Class B, Class C and Class Z
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, 1999:
Shares sold...................... 10,154,359 $ 150,151,142
Shares issued in connection with
reorganization (Note 6)........ 5,719,568 92,139,437
Shares issued in reinvestment of
dividends and distributions.... 1,049,415 16,182,668
Shares reacquired................ (13,662,479) (212,057,236)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 3,260,863 46,416,011
Shares issued upon conversion
from Class B................... 595,834 9,168,416
----------- -------------
Net increase in shares
outstanding.................... 3,856,697 $ 55,584,427
----------- -------------
----------- -------------
Year ended December 31, 1998:
Shares sold...................... 3,824,658 $ 61,874,353
Shares issued in reinvestment of
dividends and distributions.... 1,059,215 17,057,270
Shares reacquired................ (6,037,193) (97,515,280)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (1,153,320) (18,583,657)
Shares issued upon conversion
from Class B................... 573,854 9,271,697
----------- -------------
Net decrease in shares
outstanding.................... (579,466) $ (9,311,960)
----------- -------------
----------- -------------
<CAPTION>
Class B
---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 826,622 $ 10,991,293
Shares issued in connection with
reorganization (Note 6)........ 1,236,086 19,953,535
Shares issued in reinvestment of
dividends and distributions.... 209,350 3,243,633
Shares reacquired................ (2,859,392) (44,047,247)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (587,334) (9,858,786)
Shares reacquired upon conversion
into Class A................... (594,471) (9,168,416)
----------- -------------
Net decrease in shares
outstanding.................... (1,181,805) $ (19,027,202)
----------- -------------
----------- -------------
</TABLE>
--------------------------------------------------------------------------------
19
<PAGE>
Notes to Financial Statements PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
--------------------------------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold...................... 797,807 $ 12,909,659
Shares issued in reinvestment of
dividends and distributions.... 256,538 4,140,932
Shares reacquired................ (1,803,505) (29,167,324)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (749,160) (12,116,733)
Shares reacquired upon conversion
into Class A................... (572,437) (9,271,697)
----------- -------------
Net decrease in shares
outstanding.................... (1,321,597) $ (21,388,430)
----------- -------------
----------- -------------
<CAPTION>
Class C
---------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold...................... 91,530 $ 1,390,702
Shares issued in connection with
reorganization (Note 6)........ 29,355 473,862
Shares issued in reinvestment of
dividends and distributions.... 5,874 90,815
Shares reacquired................ (62,002) (958,956)
----------- -------------
Net increase in shares
outstanding.................... 64,757 $ 996,423
----------- -------------
----------- -------------
Year ended December 31, 1998:
Shares sold...................... 101,316 $ 1,639,068
Shares issued in reinvestment of
dividends and distributions.... 3,998 64,526
Shares reacquired................ (13,773) (222,402)
----------- -------------
Net increase in shares
outstanding.................... 91,541 $ 1,481,192
----------- -------------
----------- -------------
<CAPTION>
Class Z
---------------------------------
<S> <C> <C>
January 22, 1999(a) through December 31, 1999:
Shares sold...................... 210,908 $ 3,262,799
Shares issued in connection with
reorganization (Note 6)........ 136,091 2,192,167
Shares issued in reinvestment of
dividends and distributions.... 3,661 56,842
Shares reacquired................ (296,451) (4,601,771)
----------- -------------
Net increase in shares
outstanding.................... 54,209 $ 910,037
----------- -------------
----------- -------------
</TABLE>
---------------
(a) Commencement of offering of Class Z shares.
------------------------------------------------------------
Note 6. Reorganization
On August 26, 1998, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization (the 'Plan') which provided for the transfer of all of
the assets of the Prudential Municipal Series Fund Maryland Series ('Maryland
Series') and the Prudential Municipal Series Fund Michigan Series ('Michigan
Series') in exchange for Class A shares of the Fund and the Fund's assumption of
the liabilities of the Maryland and Michigan Series. The Plan also provided for
the transfer of all of the assets of the Class A, B, C and Z shares of the
Prudential Municipal Bond Fund--Intermediate Series ('Intermediate Series') in
exchange for like shares of the Fund and the Fund's assumption of the
liabilities of the Intermediate Series.
The Plan was approved by the shareholders of the Maryland, Michigan and
Intermediate Series at a shareholder meeting held on January 14, 1999. The
reorganization took place on January 22, 1999. The Maryland, Michigan and
Intermediate Series and the Fund incurred their pro rata share of the costs of
the reorganization, including the cost of proxy solicitation. The acquisition
was accomplished by a tax-free exchange of the following shares:
<TABLE>
<CAPTION>
National Municipals
Maryland Series: Fund Value
<S> <C> <C> <C> <C>
Class A 1,545,436 Class A 1,074,419 $17,304,069
B 930,543 A 647,510 10,432,984
C 11,019 A 7,667 123,541
Michigan Series:
Class A 2,459,122 A 1,845,487 29,729,243
B 1,640,985 A 1,230,484 19,826,554
C 43,799 A 32,842 529,193
Intermediate Series:
Class A 1,302,336 A 881,159 14,193,853
B 1,830,315 B 1,236,086 19,953,535
C 43,467 C 29,355 473,862
Z 201,141 Z 136,091 2,192,167
</TABLE>
The aggregate net assets and unrealized appreciation of the funds immediately
before the acquisition were:
<TABLE>
<CAPTION>
Unrealized
Net Assets Appreciation
----------- -------------
<S> <C> <C>
Maryland Series $27,860,594 $ 2,342,040
Michigan Series 50,084,990 4,856,230
Intermediate Series 36,813,417 1,858,582
</TABLE>
The aggregate net assets of the National Municipals Fund immediately before the
acquisition was $607,552,044.
--------------------------------------------------------------------------------
20
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 16.06 $ 16.12 $ 15.56 $ 15.98 $ 14.42
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .76 .79 .81(b) .82(b) .81(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (1.34) .06 .67 (.42) 1.57
-------- -------- -------- -------- --------
Total from investment operations........... (.58) .85 1.48 .40 2.38
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.76) (.79) (.81) (.82) (.81)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01)
Distributions from net realized gains......... -- (.12) (.10) -- --
-------- -------- -------- -------- --------
Total distributions........................ (.76) (.91) (.92) (.82) (.82)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.72 $ 16.06 $ 16.12 $ 15.56 $ 15.98
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.............................. (3.69)% 5.41% 9.80% 2.66% 16.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $498,428 $481,926 $493,178 $502,739 $538,145
Average net assets (000)...................... $531,603 $483,759 $491,279 $508,159 $446,350
Ratios to average net assets:
Expenses, including distribution fees...... .86% .73% .70%(b) .68%(b) .75%(b)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b)
Net investment income...................... 4.88% 4.89% 5.15%(b) 5.31%(b) 5.34%(b)
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 30% 23% 38% 46% 98%
</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. 21
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 16.10 $ 16.16 $ 15.60 $ 16.02 $ 14.45
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .73 .73 .75(b) .76(b) .76(b)
Net realized and unrealized gain (loss) on
investment transactions.................... (1.35) .06 .67 (.42) 1.58
-------- -------- -------- -------- --------
Total from investment operations........... (.62) .79 1.42 .34 2.34
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.73) (.73) (.75) (.76) (.76)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01)
Distributions from net realized gains......... -- (.12) (.10) -- --
-------- -------- -------- -------- --------
Total distributions........................ (.73) (.85) (.86) (.76) (.77)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.75 $ 16.10 $ 16.16 $ 15.60 $ 16.02
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.............................. (3.98)% 4.99% 9.35% 2.26% 16.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $92,265 $119,698 $141,528 $168,185 $222,865
Average net assets (000)...................... $118,044 $131,195 $151,938 $193,312 $252,313
Ratios to average net assets:
Expenses, including distribution fees...... 1.11% 1.13% 1.10%(b) 1.08%(b) 1.15%(b)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b)
Net investment income...................... 4.62% 4.49% 4.75%(b) 4.91%(b) 4.96%(b)
</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. 22
<PAGE>
Financial Highlights PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------- ------------
January 22,
1999(d)
Year Ended December 31, through
-------------------------------------------------- December 31,
1999 1998 1997 1996 1995 1999
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $16.10 $16.16 $15.60 $16.02 $14.44 $16.11
------ ------ ------ ------ ------ -----
Income from investment operations
Net investment income......................... .69 .69 .71(b) .72(b) .72(b) .73
Net realized and unrealized gain (loss) on
investment transactions.................... (1.35) .06 .67 (.42) 1.59 (1.40)
------ ------ ------ ------ ------ -----
Total from investment operations........... (.66) .75 1.38 .30 2.31 (.67)
------ ------ ------ ------ ------ -----
Less distributions
Dividends from net investment income.......... (.69) (.69) (.71) (.72) (.72) (.73)
Distributions in excess of net investment
income..................................... --(c) --(c) (.01) --(c) (.01) --(c)
Distributions from net realized gains......... -- (.12) (.10) -- -- --
------ ------ ------ ------ ------ -----
Total distributions........................ (.69) (.81) (.82) (.72) (.73) (.73)
------ ------ ------ ------ ------ -----
Net asset value, end of period................ $14.75 $16.10 $16.16 $15.60 $16.02 $14.71
------ ------ ------ ------ ------ -----
------ ------ ------ ------ ------ -----
TOTAL RETURN(a):.............................. (4.22)% 4.73% 9.08% 2.01% 16.22% (4.22)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,060 $2,296 $825 $772 $403 $797
Average net assets (000)...................... $2,643 $1,555 $758 $674 $247 $1,391
Ratios to average net assets:
Expenses, including distribution fees...... 1.36% 1.38% 1.35%(b) 1.33%(b) 1.40%(b) .64%(e)
Expenses, excluding distribution fees...... .61% .63% .60%(b) .58%(b) .65%(b) .64%(e)
Net investment income...................... 4.39% 4.23% 4.50%(b) 4.67%(b) 4.66%(b) 5.45%(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 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) Commencement of offering of Class Z shares.
(e) Annualized
--------------------------------------------------------------------------------
See Notes to Financial Statements. 23
<PAGE>
Report of Independent Accountants PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
--------------------------------------------------------------------------------
To the Shareholders and Board of Directors 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, 1999, 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 accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 18, 2000
Tax Information (Unaudited) 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, 1999) 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, 1999, dividends paid from net
investment income totalling $.76 per Class A share, $.73 per Class B share, $.69
per Class C shares and $.73 per Class Z were all federally tax-exempt interest
dividends. In addition, the Fund paid distributions of $.003 per share
(ordinary) which is taxable as ordinary.
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.
--------------------------------------------------------------------------------
24
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial materials-- and
stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one
percent is 50 basis points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. These
instruments are sensitive to changes in interest rates and homeowner refinancing
activity. They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from other securities. The rate
of return of these financial instruments rises and falls--sometimes very
suddenly--in response to changes in some specific interest rate, currency,
stock, or other variable.
Discount Rate: The interest rate charged by the
Federal Reserve on loans to member banks.
Federal Funds Rate: The interest rate charged by one
bank to another on overnight loans.
Futures Contract: An agreement to purchase or sell a
specific amount of a commodity or financial instrument at a
set price at a specified date in the future.
Leverage: The use of borrowed assets to enhance return. The expectation is that
the interest rate charged on borrowed funds will be lower than the return on the
investment. While leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument
(or product) can be bought or sold (converted into cash)
in the financial markets.
Price/Earnings Ratio: The price of a share of stock divided by the earnings per
share for a 12-month period.
Option: An agreement to purchase or sell something, such
as shares of stock, by a certain time for a specified price.
An option need not be exercised.
Spread: The difference between two values; often used to describe the difference
between "bid" and "asked" prices of a security, or between the yields of two
similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government
in the U.S. market and denominated in U.S. dollars.
<PAGE>
Comparing a $10,000 Investment
------------------------------------------------------------
Prudential National Municipals Fund, Inc. vs. the Lehman
Brothers General Municipal Bond Index
Class A
(GRAPH)
Average Annual Total Returns
With Sales Charge As of 12/31/99
Since Inception 6.12% (6.10)
Five Years 5.35 (5.32)
One Year -6.58
Without Sales Charge As of 12/31/99
Since Inception 6.44% (6.43)
Five Years 5.99 (5.97)
One Year -3.69
Class B
(GRAPH)
Average Annual Total Returns
With Sales Charge As of 12/31/99
Since Inception 7.89% (7.89)
Ten Years 5.94 (5.93)
Five Years 5.44 (5.41)
One Year -8.98
Without Sales Charge As of 12/31/99
Since Inception 7.89% (7.89)
Ten Years 5.94 (5.93)
Five Years 5.60 (5.57)
One Year -3.98
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. The information beneath the graphs is
designed to give you an idea of how much the Fund's returns can fluctuate from
year to year by measuring the best and worst calendar years in terms of total
annual return since inception of each share class (or for the past ten years for
Class B shares).
These graphs compare a $10,000 investment in Prudential National Municipals
Fund, Inc. (Class A, B, C, and Z shares) with a similar investment in the Lehman
Brothers General Municipal Bond Index (the Index) by portraying the initial
account values of Class A, C, and Z shares at the commencement of operations, at
the beginning of the ten-year period for Class B shares, and at the end of the
fiscal year (December 31), as measured on a quarterly basis, beginning in 1990
for Class A, 1989 for Class B, 1994 for Class C, and 1999 for Class Z shares.
For purposes of the graphs, and unless otherwise indicated, it has been assumed
that (a) the maximum applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A and Class C shares; (b) the maximum
applicable contingent deferred sales charges were deducted from the value of the
investment in Class B and Class C
<PAGE>
Class C
(GRAPH)
Average Annual Total Returns
With Sales Charge As of 12/31/99
Since Inception 4.21% (4.19)
Five Years 5.13 (5.10)
One Year -6.18
Without Sales Charge As of 12/31/99
Since Inception 4.41% (4.38)
Five Years 5.34 (5.31)
One Year -4.22
Class Z
(GRAPH)
Average Annual Total Returns
As of 12/31/99
Since Inception N/A
shares, assuming full redemption on December 31, 1999; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven years after purchase.
This conversion feature is not reflected in the graphs. Class Z shares are not
subject to a sales charge or distribution and service (12b-1) fees. Without
waiver of management fees and/or expense subsidization, the Fund's average
annual total returns would have been lower, as indicated in parentheses ( ).
The Index is an unmanaged index of over 21,000 municipal bonds which are
generally representative of the long-term investment-grade municipal bond
market. The Index returns include the reinvestment of all dividends, but do not
include the effect of sales charges or operating expenses of a mutual fund. The
securities in the Index may differ substantially from the securities in the
Fund. The Index is not the only one that may be used to characterize performance
of municipal bond funds, and other indexes may portray different comparative
performance. Investors cannot invest directly in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
The Prudential Mutual Fund Family
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
Global Stock 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 Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Global Utility Fund, Inc.
Target Funds
International Equity Fund
Global Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
BOND FUNDS
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 Index Series Fund
Prudential Bond Market Index Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Target Funds
Total Return Bond Fund
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
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
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Fund Symbols
NASDAQ CUSIP
Class A PRNMX 743918203
Class B PBHMX 743918104
Class C -- 743918302
Class Z -- 743918401
visit our website at www.prudential.com
Directors
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
Stephen M. Ungerman, Assistant Treasurer
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, NY 10174
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(ICON) Printed on Recycled Paper
<PAGE>
Fund Symbols
NASDAQ CUSIP
Class A PRNMX 743918203
Class B PBHMX 743918104
Class C -- 743918302
Class Z -- 743918401
visit our website at www.prudential.com
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
MF104E
(ICON) Printed on Recycled Paper
<PAGE>
[LOGO]
SEMIANNUAL REPORT JUNE 30, 2000
Prudential
National Municipals Fund, Inc.
Fund Type Tax-exempt bond
Objective High level of current income exempt from
federal income taxes
(GRAPHIC)
The views expressed in this report and information about
the Fund's portfolio holdings are for the period covered
by this report and are subject to change thereafter.
This report is not authorized for distribution to
prospective investors unless preceded or accompanied by a
current prospectus.
(LOGO)
<PAGE>
Build on the Rock
Investment Goals and Style
The Prudential National Municipals Fund invests primarily
in long-term municipal bonds of medium quality, which
offer a high level of current income that is exempt from
federal income taxes. These bonds are varied among the
states, maturities, and types of activity they support.
There can be no assurance that the Fund will achieve its
investment objective.
Portfolio Composition
Expressed as a percentage of total investments as of 6/30/00
21.7% General Obligation Bonds
21.0 Other Revenue
18.0 Utility
14.9 Industrial Development
13.4 Transportation
5.7 Miscellaneous
4.8 Prerefunded
0.5 Cash Equivalents
Credit Quality
Expressed as a percentage of total investments as of 6/30/00
47.8% AAA Insured
9.9 AAA
8.1 AA
9.0 A
21.2 BBB
4.0 Not Rated
Ten Largest Issuers
Expressed as a percentage of net assets as of 6/30/00
3.8% TX Harris Cnty. Toll Rd. Rev.
3.8 NY City
Mun. Water Fin. Authority
3.6 LA New Orleans,
General Obligation
2.9 CO Hsg. Fin. Authority
2.7 IL Metro Pier & Expo. Authority
2.4 OH State Water Dev. Authority
2.1 PR Tel. Authority
2.0 SC Piedmont Mun. Pwr. Agency
1.9 ND Mercer Cntr., Pollution Cntrl.
Rev., Antelope Valley Station
0.8 OK Tulsa Mun. Arpt. Trust
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns1 As of 6/30/00
Six One Five Ten Since
Months Year Years Years Inception2
Class A 3.49% 1.36% 27.58% (23.75) 87.57% (81.94) 92.52% (86.74)
Class B 3.43 1.19 25.42 (24.42) 80.87 (80.87) 361.34 (361.34)
Class C 3.30 0.94 23.88 (22.64) N/A 30.49 (29.18)
Class Z 3.69 1.68 N/A N/A -0.68
Lipper General
Muni Debt
Fund Avg.3 3.95 0.98 26.19 86.06 ***
Average Annual Total Returns1 As of 6/30/00
One Five Ten Since
Year Years Years Inception2
Class A -1.68% 4.35% (4.33) 6.17% (6.15) 6.17% (6.15)
Class B -3.81 4.47 (4.44) 6.11 (6.09) 7.87 (7.86)
Class C -1.07 4.17 (4.14) N/A 4.42 (4.40)
Class Z 1.68 N/A N/A -0.48
Distributions and Yields As of 6/30/00
<TABLE>
<CAPTION>
Total Distributions 30-Day Taxable Equivalent Yield4 at tax rates of
Paid for Six Months SEC Yield 36% 39.6%
<S> <C> <C> <C>
Class A 0.37 5.13 8.61% 9.12%
Class B 0.36 5.03 8.44 8.94
Class C 0.34 4.74 7.95 8.42
Class Z 0.39 5.53 9.28 9.83
</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 LLC and
Lipper Inc. The cumulative total returns do not take into
account sales charges. The average annual total returns
do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 3% for Class
A shares. Class B shares are subject to a declining
contingent deferred sales charge (CDSC) of 5%, 4%, 3%,
2%, 1%, and 1% for six years. Class B shares will
automatically convert to Class A shares, on a quarterly
basis, approximately seven years after purchase. Class C
shares are subject to a front-end sales charge of 1% and
a CDSC of 1% for 18 months. Class Z shares are not
subject to a sales charge or distribution and service
(12b-1) fees. Without waiver of management fees and/or
expense subsidization, the Fund's cumulative and average
annual total returns would have been lower, as indicated
in parentheses ( ).
2 Inception dates: Class A, 1/22/90; Class B, 4/25/80;
Class C, 8/1/94; and Class Z 1/22/99.
3 Lipper average returns are for all funds in each share
class for the six-months, one-, five-, and ten-year
periods in the General Municipal Debt Fund category. The
Lipper average is unmanaged. General Municipal Debt funds
invest at least 65% of their assets in municipal debt
issues in the top four
credit ratings.
*** Lipper Since Inception returns are 92.19% for Class
A, 404.10% for Class B, 33.73% for Class C, and -1.94%
for Class Z, based on all funds in each share class.
1
<PAGE>
(LOGO) August 14, 2000
Dear Shareholder,
After producing poor results in 1999, municipal bonds
have generated solid returns thus far in 2000. During the
six months ended June 30, 2000, the Prudential National
Municipals Fund's Class A shares returned 3.49% without
considering the initial sales charge. The Lipper Average,
which does not consider sales charges, returned 3.95%.
Municipals and long-term U.S. Treasuries were among a
small handful of fixed-income securities that produced
positive results during the first half of the year.
Generally speaking, the bond market has been adversely
affected by rising short-term interest rates that have
led to declining bond prices in most sectors of the
market.
However, investors aggressively purchased 30-year
Treasury securities as the U.S. Treasury Department moved
to limit its supply through a buy-back program. The
Department is seeking to lower the government's borrowing
costs by repurchasing these bonds with higher relative
yields. The combination of Fed-implemented interest rate
hikes and the supply and demand imbalance that led to
lower yields for long-term Treasury securities created an
inverted yield curve (an anomaly that occurs when yields
of short-term debt securities are higher than yields of
longer-term debt securities). With regard to municipals,
investors were drawn to the relative valuations and
attractive after-tax yields offered by longer-term
municipals.
A discussion of the developments in the municipal market
and a detailed review of your Fund's investments follow.
As always, we appreciate your confidence and look forward
to serving your future investment needs.
Sincerely,
John R. Strangfeld, President
Prudential National Municipals Fund, Inc.
2
<PAGE>
Prudential National Municipals Fund, Inc.
www.prudential.com (800) 225-1852
Semiannual Report June 30, 2000
Investment Adviser's Report
An impressive rebound in the municipal market
In the wake of last year's disappointing results, the
municipal market staged a strong rally during the first
two quarters of 2000. In 1999, the overall municipal
market registered one of its worst years ever. An
accelerating economy and inflationary concerns caused the
Fed to increase its federal funds rate (the rate U.S.
banks charge each other for overnight loans) three times
during the second half of the year. Bond prices fell
across the board, and the municipal market was not
spared.
A turnaround came during the first quarter of 2000, when
yields fell sharply. As a result, bond prices rose (bond
yields and prices move in opposite directions). Investors
were drawn to the compelling values in many sectors of
the municipal market. In addition, they were eager to
purchase bonds with longer maturities as the Treasury
moved to lower the supply of longer-term debt.
Performance during the second quarter of 2000 was more
muted. A dramatic increase in equity market volatility
generated greater enthusiasm for municipal bonds, and
mutual fund outflows stabilized during this time.
Nonetheless, market volatility and uncertainty over
further Fed action caused municipal yields to trade in a
fairly narrow range. Despite this, the positive
underlying fundamentals in the municipal market have led
many investors to believe that further gains could soon
occur.
A defensive stance as the year began
We had positioned the Fund defensively in the fourth
quarter of 1999, and maintained this stance into 2000.
The Fund's duration (a measure of how much a portfolio's
bonds will fluctuate in price in response to a change in
interest rates) was lowered below that of its benchmark
in order to provide a degree of protection in the event
that yields continued to rise. In addition, we increased
the Fund's exposure to cash equivalents in order to
prepare for redemptions from expected "tax-loss swapping"
and a decline in dealer
liquidity as a result of potential Y2K-related computer
disruptions.
3
<PAGE>
Prudential National Municipals Fund, Inc.
Semiannual Report June 30, 2000
While our defensive stance was successful in 1999, it
faltered during the first quarter of 2000 when the market
rebounded more quickly than we expected. During this
period, municipal yields fell, and bonds with the longest
maturities generated the strongest results.
Repositioning for success
The Fund's relative performance improved substantially
during the second quarter of 2000. Several strategic
initiatives were instituted that helped the Fund make up
some of the ground it lost early in the year. First, we
raised the Fund's duration from 7.8 years to
approximately 10 years, bringing it in line with its
benchmark. We accomplished this by selling 10-year issues
in favor of securities with 20- to 30-year maturities.
This action proved beneficial, as we were able to
generate strong results as rates declined.
In addition, we selectively purchased securities at
depressed prices during periods of market weakness. For
example, we purchased several hospital issues that were
faring poorly due to concerns over reimbursement rates
and increased competition. Buying these issues at
discounted prices proved fortuitous, as their prices rose
later in the period.
Looking ahead
As we look toward the remainder of the year, we are
encouraged by the prospects for the municipal bond
market. The supply of new-issue bonds has dropped off due
to a decline in the refunding of existing bonds. Federal,
state, and local governments have also been less apt to
issue new debt, as the strong economy has led to
increased tax revenues. The lower supply, coupled with
what we believe will be an increase in demand for
municipals, are two very positive underlying fundamentals
for the municipal bond market.
4
<PAGE>
www.prudential.com (800) 225-1852
Going forward, it's not clear what direction the U.S.
economy will ultimately take. However, it appears there
are three possible scenarios. First, economic growth
could reaccelerate, necessitating further interest rate
hikes by the Fed. Second, the economy could fall into a
recession. Third, we could experience a "soft landing,"
whereby growth falls to a more moderate and acceptable
level. The longer the uncertainty about the economy's
direction lingers, the more likely it is that volatility
in the equity market will persist. This could also make
municipal bonds appear more attractive in the eyes of
investors, spurring further demand.
Prudential National Municipals Fund Management Team
5
<PAGE>
Prudential National Municipals Fund, Inc.
Semiannual Report June 30, 2000
Financial
Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited)
<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 98.9%
----------------------------------------------------------------------------------------
Alaska 0.1%
Alaska Ind. Dev. & Expt. Auth.
Rev., Revolving Fd. A2 5.40% 4/01/01 $ 775 $ 778,736
----------------------------------------------------------------------------------------
Arizona 1.9%
Arizona St. Mun. Fin. Proj.,
Cert. of Part., Ser. 25, B.I.G. Aaa 7.875 8/01/14 2,250(h) 2,796,773
Pima Cnty. Ind. Dev. Auth. Rev.,
F.S.A. Aaa 7.25 7/15/10 1,790 1,888,575
Pima Cnty. Uni. Sch. Dist., Gen.
Oblig., F.G.I.C., Aaa 7.50 7/01/10 3,000(f) 3,584,700
Tucson Cnty. Gen. Oblig.,
Ser. A Aa3 7.375 7/01/11 1,000 1,193,030
Ser. A Aa3 7.375 7/01/12 1,100 1,318,196
-------------
10,781,274
----------------------------------------------------------------------------------------
California 5.5%
Abag Fin. Auth. for Nonprofit
Corps., Cert. of Part., Amer.
Baptist Homes., Ser. A BBB+(d) 6.20 10/01/27 1,200 1,008,924
Anaheim Pub. Fin. Auth. Lease Rev.,
Ser. 641A, F.S.A., R.I.T.E.S. NR 8.908 9/01/16 2,210(c)(i) 2,789,882
Ser. 641B, F.S.A., R.I.T.E.S. NR 8.908 9/01/24 1,815(c)(i) 2,096,452
Encinitas Union Sch. Dist., Gen.
Oblig., M.B.I.A Aaa Zero 8/01/21 3,810 1,115,720
Foothill / Eastern Corridor
Agcy., Toll Rd. Rev., Ser. A Aaa Zero 1/01/23 5,000 1,348,250
Long Beach Aquarium of the
Pacific Rev., Ser. A, A.M.T. BBB(d) 6.125 7/01/23 6,000 5,558,520
Long Beach Harbor Rev., Ser. A,
F.G.I.C., A.M.T. Aaa 6.00 5/15/18 4,000 4,234,840
Los Angeles Uni. Sch. Distr.,
Ser. A,
F.G.I.C. Aaa 6.00 7/01/15 1,000 1,090,270
Pittsburg Redev. Agy., Tax
Alloc.,
Los Medanos Comm. Dev. Proj. Aaa(d) Zero 8/01/25 2,000 456,120
Los Medanos Comm. Dev. Proj. Aaa(d) Zero 8/01/30 5,000 844,350
</TABLE>
See Notes to Financial Statements 7
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. Aaa Zero 1/01/25 $ 10,000 $ 2,405,700
Toll Rd. Rev. Aaa Zero 1/01/26 10,000 2,269,800
Santa Margarita Dana Point Auth.
Rev., M.B.I.A.,
Ser. 644C, R.I.T.E.S. NR 12.674% 8/01/09 665(i) 1,034,906
Ser. 644D, R.I.T.E.S. NR 12.674 8/01/10 810(i) 1,291,950
Ser. 644G, R.I.T.E.S. NR 12.674 8/01/14 660(i) 1,091,627
West Contra Costa Sch. Dist.,
Cert. of Part., Ref. Baa3 7.125 1/01/24 1,600 1,664,080
-------------
30,301,391
----------------------------------------------------------------------------------------
Colorado 5.6%
Arapahoe Cnty. Cap. Impvt. Trust
Fund, Hwy. Rev., Ser. E-470 Aaa 7.00 8/31/26 3,000(b) 3,364,590
Colorado Hsg. Fin. Auth., A.M.T.
Singl. Fam. Proj. Aa2 8.00 6/01/25 1,975 2,090,775
Singl. Fam. Proj., Ser. A-2 Aa2 7.25 5/01/27 1,710 1,823,801
Singl. Fam. Proj., Ser. B-1 Aa2 7.90 12/01/25 1,185 1,232,542
Singl. Fam. Proj., Ser. C-1,
M.B.I.A. Aaa 7.65 12/01/25 2,875 3,009,722
Singl. Fam. Proj., Ser. C-2 Aa2 6.875 11/01/28 3,500 3,660,545
Singl. Fam. Proj., Ser. C-2 Aa2 7.05 4/01/31 4,000 4,355,520
Colorado Springs Arpt. Rev., Ser.
A., A.M.T. BBB+(d) 7.00 1/01/22 7,960(f) 8,251,017
Denver Hlth. & Hosp. Auth.,
Healthcare Rev., Ser. A Baa2 5.375 12/01/28 4,000 3,107,840
-------------
30,896,352
----------------------------------------------------------------------------------------
Connecticut 1.3%
Connecticut St. Hlth. & Edu.
Facs. Auth. Rev., Univ. of
Hartford,
Ser. D Ba1 6.75 7/01/12 5,725(h) 5,833,088
Connecticut St. Spec. Tax Oblig.
Rev., Trans. Infrastructure,
Ser. A A1 7.125 6/01/10 1,000 1,144,490
-------------
6,977,578
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
District of Columbia 0.2%
Dist. of Columbia, Gen. Oblig.,
Ser. B, M.B.I.A. Aaa 6.00% 6/01/13 $ 1,000 $ 1,057,150
----------------------------------------------------------------------------------------
Florida 2.7%
Broward Cnty. Res. Rec. Rev.,
Broward Co. L.P. South Proj. A3 7.95 12/01/08 7,445 7,683,166
Florida St. Brd. of Ed., Gen.
Oblig. Aa2 9.125 6/01/14 1,260(b)(h) 1,675,031
Hillsborough Cnty. Ind. Dev.
Auth.
Poll. Ctrl. Rev., Tampa Elec.
Proj. Aa3 8.00 5/01/22 5,000 5,409,450
-------------
14,767,647
----------------------------------------------------------------------------------------
Georgia 2.5%
Burke Cnty. Dev. Auth., Poll.
Cntrl. Rev., M.B.I.A.,
Georgia Pwr. Co. Aaa 6.625 10/01/24 500(h) 510,075
Oglethorpe Pwr. Co. Aaa 8.00 1/01/22 5,000(h) 5,513,850
Oglethorpe Pwr. Co., E.T.M. Aaa 7.50 1/01/03 557 577,247
Forsyth Cnty. Sch. Dist. Dev.
Rev. Aa3 6.75 7/01/16 500 568,595
Fulton Cnty. Sch. Dist. Rev. Aa2 6.375 5/01/17 750(h) 826,620
Georgia Mun. Elec. Auth. Pwr.
Rev., Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000(h) 5,490,950
Green Cnty. Dev. Auth. Indl. Park
Rev. NR 6.875 2/01/04 325 333,379
-------------
13,820,716
----------------------------------------------------------------------------------------
Guam 0.2%
Guam Pwr. Auth. Rev., Ser. A BBB+(d) 6.625 10/01/14 1,000(b) 1,099,520
----------------------------------------------------------------------------------------
Hawaii 0.2%
Hawaii St. Dept. Budget & Fin.
Spl. Purp. Mtg. Rev., Hawaiian
Elec. Co., Ser. C, M.B.I.A.,
A.M.T. Aaa 7.375 12/01/20 500 514,955
Hawaii St. Harbor Cap. Impvt.
Rev., A.M.T. F.G.I.C. Aaa 6.25 7/01/15 500 515,350
-------------
1,030,305
</TABLE>
See Notes to Financial Statements 9
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Illinois 6.9%
Chicago Brd. of Ed.,
Gen. Oblig., F.G.I.C. Aaa Zero 12/01/19 $ 2,000 $ 628,560
Gen. Oblig., F.G.I.C., Ser. B-1 Aaa Zero 12/01/12 1,500 749,070
Chicago City Colleges,
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/24 5,000 1,212,450
Gen. Oblig., F.G.I.C. Aaa Zero 1/01/25 10,000 2,277,600
Chicago Single Fam. Mtge Rev.,
Ser. A, F.N.M.A. AAA(d) 7.15% 9/01/31 3,500 3,838,555
Chicago, Gen. Oblig.,
Cap. Apprec. City Colleges,
F.G.I.C. Aaa Zero 1/01/16 13,500 5,513,940
Ser. A, F.G.I.C. Aaa 6.75 1/01/35 5,000 5,472,650
Cook and Du Page Cntys., High
Sch. Dist No. 210, Gen. Oblig.,
F.S.A. Aaa Zero 12/01/11 3,035 1,635,137
Illinois Dev. Fin. Auth. Rev.,
Cmnty. Rehab. Providers, Ser. A BBB(d) 6.00 7/01/15 2,000 1,764,480
Metropolitan Pier & Expo. Auth.,
Hosptlty. Fac. Rev., McCormick
Pl. Conv. BBB(d) 7.00 7/01/26 12,910 14,929,898
-------------
38,022,340
----------------------------------------------------------------------------------------
Indiana 0.3%
Gary Ind. Mtge. Rev., Lakeshore
Dunes Apts., Ser. A, G.N.M.A. AAA(d) 6.00 8/20/34 2,000 1,946,080
----------------------------------------------------------------------------------------
Kentucky 2.8%
Henderson Cnty. Solid Waste Disp.
Rev., Macmillan Bloedel Proj.,
A.M.T. Baa2 7.00 3/01/25 6,000 6,102,840
Kenton Cnty. Arpt. Brd. Rev.,
Ser. A, A.M.T., M.B.I.A. Aaa 6.30 3/01/15 6,250 6,561,500
Louisville & Jefferson Cnty. Met.
Swr. Dist. Rev., Ser. A,
F.G.I.C. Aaa 5.00 5/15/30 3,000 2,637,930
-------------
15,302,270
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Louisiana 5.8%
New Orleans,
Gen. Oblig. Ref., F.G.I.C. Aaa 5.50% 12/01/21 $ 12,000 $ 11,675,760
Gen. Oblig., A.M.B.A.C. Aaa Zero 9/01/09 13,500 8,326,665
Orleans Parish Sch. Brd., E.T.M.,
M.B.I.A. Aaa 8.90 2/01/07 5,780(h) 7,060,732
St. Charles Parish, Env. Impt.
Rev., Louisiana Pwr. & Lt. Co.
Proj., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,029,200
-------------
32,092,357
----------------------------------------------------------------------------------------
Maryland 2.8%
Baltimore, Econ. Dev. Lease Rev.,
Armistead Partnership, Ser. A BBB+(d) 7.00 8/01/11 1,000 1,028,590
Maryland St. Hlth. & Higher Edu.
Facs. Auth. Rev.,
Doctor's Cmnty. Hosp. Baa1 5.50 7/01/24 3,000 2,324,310
Univ. Maryland Med. Sys. Baa1 6.75 7/01/30 5,000(h) 5,034,700
Maryland St. Ind. Dev. Fin. Auth.
Rev., Amer. Ctr. Physics
Headqrtrs. BBB(d) 6.625 1/01/17 1,000 1,002,500
Montgomery Cnty., Gen. Oblig. Aaa 9.75 6/01/01 450 471,186
Northeast Waste Disp. Auth. Rev.,
Baltimore City Sludge Corp.
Proj. NR 7.25 7/01/07 3,446 3,544,659
Montgomery Cnty. Res. Rec.
Proj., Ser. A A2 6.00 7/01/07 1,000 1,024,070
Takoma Park Hosp. Facs. Rev.,
Washington Adventist Hosp.,
F.S.A. Aaa 6.50 9/01/12 1,000(h) 1,113,180
-------------
15,543,195
----------------------------------------------------------------------------------------
Massachusetts 1.6%
Mass. St. Hlth. & Edl. Facs.
Auth. Rev., Mass. Inst. of Tech.
Ser. I-1 Aaa 5.20 1/01/28 1,500(h) 1,394,505
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mass. St. Tpke. Auth. Met. Hwy.
Sys. Rev., M.B.I.A. Aaa 5.00% 1/01/37 $ 9,000 $ 7,767,630
-------------
9,162,135
----------------------------------------------------------------------------------------
Michigan 6.3%
Detroit Econ. Dev. Corp., Res.
Rec. Rev., Ser. A, F.S.A.,
A.M.T. Aaa 6.875 5/01/09 920 952,504
Detroit Sewage. Disp. Rev.,
Prerefunded Inflos AAA(d) 6.655 7/01/23 800(b) 849,000
Unrefunded Balance Inflos Aaa 6.655 7/01/23 200 185,500
Detroit Wtr. Supply Sys. Rev.,
Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 1,031,860
Dexter Cmnty. Schs., Gen. Oblig.,
F.G.I.C. Aaa 5.10 5/01/28 10,000(h) 9,108,500
Dickinson Cnty. Mem. Hosp. Sys.
Rev. Ba1 8.00 11/01/14 1,000 1,128,770
Huron Valley Sch. Dist., Gen.
Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 2,072,280
Kalamazoo Econ. Dev. Corp. Rev.,
Friendship Vlg., Ser. A BBB(d) 6.125 5/15/17 1,000 887,380
Michigan Higher Ed. Rev., Ser.
XIII-A, M.B.I.A., A.M.T. Aaa 7.55 10/01/08 155 158,825
Michigan Mun. Bd. Auth. Rev.,
Wayne Cnty. Proj., M.B.I.A.,
E.TM. Aaa 7.40 12/01/02 500 518,555
Michigan St. Hosp. Fin. Auth.
Rev.,
Bay Med. Ctr., Ser. A A3 8.25 7/01/12 1,920 1,958,573
Genesys Hlth. Sys., Ser. A Baa2 8.125 10/01/21 1,000(b) 1,165,700
Genesys Hlth. Sys., Ser. A Baa2 7.50 10/01/27 500(b) 560,495
Presbyterian Vlg. Oblig. NR 6.375 1/01/25 800 711,560
Michigan St. Hsg. Dev. Auth.
Rev.,
Rental Hsg., Ser. B AA-(d) 7.55 4/01/23 1,000 1,032,030
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.15 4/01/10 140 145,642
Rental Hsg., Ser. A, A.M.T. AA-(d) 7.70 4/01/23 500 516,485
Sngl. Fam. Mtge., Ser. A AA+(d) 7.50 6/01/15 2,905 2,966,354
</TABLE>
12 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michigan St. Strategic Fd., Ltd.
Oblig. Rev., Waste Mgmt. Inc.
Proj., A.M.T. Ba1 6.625% 12/01/12 $ 1,500 $ 1,464,630
Monroe Cnty. Poll. Ctrl. Rev.,
Detroit Edison Co. Proj.,
F.G.I.C., A.M.T. Aaa 7.65 9/01/20 2,000(h) 2,048,700
Oak Park, A.M.B.A.C.,
Gen. Oblig. Aaa 7.00 5/01/12 400(b) 422,132
Gen. Oblig., Aaa 7.00 5/01/11 375(b) 395,749
Okemos Pub. Sch. Dist.,
M.B.I.A. Aaa Zero 5/01/12 1,100 576,092
M.B.I.A. Aaa Zero 5/01/13 1,000 490,320
Wayne Cnty. Bldg. Auth., Ser. A A3 8.00 3/01/17 1,250(b) 1,338,287
Wyandotte Elec. Rev., Gen.
Oblig., M.B.I.A. Aaa 6.25 10/01/08 2,000(h) 2,132,660
-------------
34,818,583
----------------------------------------------------------------------------------------
Minnesota 2.9%
Minneapolis & St. Paul Met.
Arpts., Comm. Arpt. Rev., Ser.
A, A.M.B.A.C. Aaa 5.00 1/01/22 9,085 8,188,038
Minneapolis St. Paul Hsg. Fin.
Brd. Rev., Single Fam. Mtge.,
G.N.M.A., A.M.T. AAA(d) 7.30 8/01/31 570 581,565
Minnesota Agric. & Econ. Dev.
Brd. Rev., Fairview Hlth. Care
Sys., Ser. A A2 6.375 11/15/22 7,000 6,945,820
St. Paul Science Museum, Cert. of
Part., E.T.M. AAA(d) 7.50 12/15/01 315(h) 323,971
-------------
16,039,394
----------------------------------------------------------------------------------------
Missouri 0.7%
Missouri St. Hsg. Dev. Comn. Mtge
Rev., Single Fam. Homeowner Ln.,
Ser. A, G.N.M.A., A.M.T. AAA(d) 7.20 9/01/26 3,610 3,772,992
</TABLE>
See Notes to Financial Statements 13
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nevada 1.7%
Clark Cnty. Indl. Dev. Rev.,
Southwest Gas Corp., Ser. A,
A.M.T. Baa2 6.50% 12/01/33 $ 10,000 $ 9,479,600
----------------------------------------------------------------------------------------
New Hampshire 2.0%
Manchester Hsg. & Redev. Auth.
Rev.,
Cap. Apprec., Ser. B, A.C.A. Baa3 Zero 1/01/24 4,740 951,555
Cap. Apprec., Ser. B, A.C.A. Baa3 Zero 1/01/27 4,140 673,619
Cap. Apprec., Ser. B, A.C.A. Baa3 Zero 1/01/30 4,640 611,227
New Hampshire Higher Ed. & Hlth.
Facs. Auth. Rev.,
New Hampshire College BBB-(d) 6.30 1/01/16 500 476,365
New Hampshire College BBB-(d) 6.375 1/01/27 2,000 1,840,140
New Hampshire Hlth. & Ed. Facs.
Auth. Rev., College Issue BBB-(d) 7.50 1/01/31 3,000 3,007,230
New Hampshire St. Ind. Dev.
Auth., Poll. Ctrl. Rev., Proj. A Ba3 7.65 5/01/21 3,420 3,500,165
-------------
11,060,301
----------------------------------------------------------------------------------------
New Jersey 1.4%
New Jersey Hlth. Care Facs. Fin.
Auth. Rev., Hackensack Univ.
Med. Ctr. A3 6.00 1/01/34 8,000 7,863,920
----------------------------------------------------------------------------------------
New York 9.3%
Metropolitan Trans. Auth., Trans.
Facs. Rev., Ser. A, F.S.A. Aaa 6.00 7/01/16 2,500 2,581,675
New York City Ind. Dev. Agcy.,
Rev., Brooklyn Navy Yard Cogen
Partners, A.M.T. Baa3 5.65 10/01/28 2,000 1,730,520
New York City Mun. Wtr. Fin. Auth.,
Wtr.& Swr. Sys. Rev., F.G.I.C. Aaa 6.75 6/15/16 10,565(f) 10,861,454
Wtr.& Swr. Sys. Rev., Ser. B Aa3 6.00 6/15/33 10,000 10,152,100
New York City, Gen. Oblig.,
Ser. F A3 8.25 11/15/02 815 862,996
Ser. D A3 8.00 8/01/03 70(h) 73,401
</TABLE>
14 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ser. D A3 8.00 8/01/04 $ 30(h) $ 31,457
Ser. A A3 7.75 8/15/04 15 15,664
Ser. B A3 8.25 6/01/06 1,500 1,743,540
Ser. D A3 7.65 2/01/07 45 47,439
Ser. B A3 7.25 8/15/07 3,500 3,947,895
New York St. Dorm. Auth. Rev.,
City Univ., F.S.A. Aaa 5.00 7/01/28 5,000 4,407,450
Mem. Sloan Kettering Cancer
Ctr., M.B.I.A. Aaa 5.50 7/01/23 4,000 3,893,160
New York St. Env. Facs. Corp.,
Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,318,848
New York St. Urban Dev. Corp.
Rev. Ref., F.S.A., Correctional
Facs. Aaa 6.50 1/01/09 3,000 3,289,020
New York, Gen. Oblig., Ser. A,
F.S.A. Aaa 6.00 5/15/30 6,430 6,566,444
-------------
51,523,063
----------------------------------------------------------------------------------------
North Dakota 1.9%
Mercer Cnty. Poll. Ctrl. Rev.,
Antelope Valley Station,
A.M.B.A.C. Aaa 7.20 6/30/13 9,000(h) 10,447,920
----------------------------------------------------------------------------------------
Ohio 3.0%
Franklin Cnty. Hosp. Rev.,
Doctors Ohio Hlth. Corp., Ser. A Baa3 5.60 12/01/28 5,000(h) 3,592,550
Ohio St. Wtr. Dev. Auth. Poll.
Ctrl. Facs. Rev., Buckeye Pwr.
Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 11,825 13,207,579
-------------
16,800,129
----------------------------------------------------------------------------------------
Oklahoma 3.2%
McGee Creek Auth. Wtr. Rev.,
M.B.I.A. Aaa 6.00 1/01/23 7,000 7,311,500
Tulsa Mun. Arpt. Trust Rev.,
A.M.T. Baa1 7.375 12/01/20 10,000 10,165,000
-------------
17,476,500
</TABLE>
See Notes to Financial Statements 15
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pennsylvania 4.7%
Beaver Cnty. Ind. Dev. Auth.,
Poll. Cntrl. Rev., Ohio Edison
Co. Proj., Ser. A Baa3 4.65% 6/01/33 $ 5,000 $ 4,770,450
Clarion Cnty. Hosp. Auth. Rev.,
Clarion Hosp. Proj. BBB-(d) 5.60 7/01/10 685 628,885
Delaware Cnty. Ind. Dev. Auth.
Rev., Res. Rec. Fac., Ser. A B2 6.20 7/01/19 3,000 2,616,540
Montgomery Cnty. Ind. Dev. Auth.,
Retirement Cmnty. Rev. A-(d) 5.25 11/15/28 2,000 1,562,900
Philadelphia Hosp. & Higher Edl.
Facs. Auth. Rev., Children's
Seashore House, Ser. A A-(d) 7.00 8/15/03 1,000 1,033,180
Philadelphia, Gen. Oblig.,
F.S.A. Aaa 5.00 3/15/28 7,500 6,567,075
M.B.I.A. Aaa 5.00 5/15/25 3,000 2,653,470
Westmoreland Cnty., Pennsylvania
Ind. Dev. Auth. Rev., Valley
Landfill Proj. BBB(d) 5.10 5/01/18 7,000 6,096,090
-------------
25,928,590
----------------------------------------------------------------------------------------
Puerto Rico 2.9%
Puerto Rico Comnwlth., Gen.
Oblig. Baa1 6.50 7/01/13 3,000 3,368,280
Hwy. & Trans. Auth. Rev., Ser.
A, A.M.B.A.C. Aaa Zero 7/01/18 2,500 910,500
Puerto Rico Tel. Auth. Rev.,
M.B.I.A. Aaa 6.16 1/25/07 4,100(b)(c) 4,264,000
M.B.I.A. Aaa 6.715 1/16/15 7,150(c)(h) 7,570,063
-------------
16,112,843
----------------------------------------------------------------------------------------
South Carolina 3.7%
Charleston Wtrwks. & Swr. Rev.,
E.T.M. Aaa 10.375 1/01/10 7,415(h) 9,476,518
Piedmont Mun. Pwr. Agcy. Elec.
Rev., M.B.I.A. Aaa 5.375 1/01/25 11,415(g) 10,827,470
-------------
20,303,988
</TABLE>
16 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tennessee 2.7%
Bristol Hlth. & Edl. Fac. Rev.,
Bristol Memorial Hosp., F.G.I.C. Aaa 6.75% 9/01/10 $ 5,000(f) $ 5,593,050
McMinn Cnty. Ind. Dev. Brd. Solid
Waste Rev., Recycling Fac.,
A.M.T. Ba1 7.40 12/01/22 5,000 5,143,100
Shelby Cnty. Hlth. Edu. & Hsg.
Facs. Brd. Rev., St. Judes
Childrens Research Aaa 5.375 7/01/29 5,000 4,516,000
-------------
15,252,150
----------------------------------------------------------------------------------------
Texas 9.3%
Bexar Cnty. Hlth. Facs. Dev.
Corp. Rev., Baptist Hlth. Sys.,
Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 5,992,336
Dallas Ft. Worth, Regl. Arpt.
Rev., F.G.I.C.,
Ser. A Aaa 7.375 11/01/08 3,500 3,853,535
Ser. A Aaa 7.375 11/01/09 3,500 3,853,535
Harris Cnty., Toll Rd. Rev.,
Ref., F.G.I.C. Aaa 6.00 8/01/13 20,000(g) 21,078,200
Keller Indpt. Sch. Dist. Rev. Aaa 6.00 8/15/23 3,970 4,132,095
Lakeway Mun. Util. Dist., Gen.
Oblig., Ser. A, F.G.I.C. Aaa Zero 9/01/11 1,425 778,207
Matagorda Cnty. Nav. Dist. No. 1
Rev., Houston Ltg. Pwr. Co.,
A.M.B.A.C. Aaa 5.125 11/01/28 2,340 2,080,470
New Braunfels Indpt.,
Sch. Dist. Rev. Aaa Zero 2/01/10 2,335 1,397,147
Sch. Dist. Rev. Aaa Zero 2/01/11 2,365 1,333,009
Panhandle Regl. Hsg. Fin. Corp.
Rev.,
Mult. Fam. Hsg., Ser. A A3 6.625 3/01/20 1,000 973,660
Mult. Fam. Hsg., Ser. A A3 6.75 3/01/31 4,000 3,898,520
Port Corpus Christi Auth. Rev. A2 7.50 8/01/12 2,000 2,061,580
-------------
51,432,294
</TABLE>
See Notes to Financial Statements 17
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utah 0.2%
Utah St. Brd. of Regents, Student
Ln. Rev., Ser. F, A.M.B.A.C.,
A.M.T. Aaa 7.00% 11/01/01 $ 1,000(h) $ 1,027,740
----------------------------------------------------------------------------------------
Washington 2.2%
Washington St. Pub. Pwr. Supply
Sys. Rev.,
Nuclear Proj. No. 1, Ser. A,
F.S.A. Aaa 7.00 7/01/08 4,000 4,485,920
Nuclear Proj. No. 2, F.S.A. Aaa 5.40 7/01/12 5,400(h) 5,376,456
Nuclear Proj. No. 3, Ser. B,
F.G.I.C. Aaa Zero 7/01/06 3,000 2,200,530
-------------
12,062,906
----------------------------------------------------------------------------------------
West Virginia 0.4%
West Virginia St. Hosp. Fin.
Auth., Oak Hill Hosp. Rev., Ser.
B NR 6.75 9/01/30 2,000 1,992,080
-------------
Total long-term investments (cost
$535,862,530) 546,974,039
-------------
SHORT-TERM INVESTMENTS 4.8%
----------------------------------------------------------------------------------------
Georgia 0.9%
Bartow Cnty. Dev. Auth., Poll.
Ctrl. Rev., Georgia Pwr. Co.,
Ser. 98-2, F.R.D.D., A.M.T. VMIG1 4.80 7/03/00 5,000(e) 5,000,000
----------------------------------------------------------------------------------------
Illinois
Madison Cnty. Env. Impvt. Rev.
Shell Wood Riv. Refng., Ser. 97,
F.R.D.D., A.M.T. VMIG1 4.70 7/03/00 200(e) 200,000
----------------------------------------------------------------------------------------
Kansas 0.1%
Butler Cnty. Solid Wst. Disp. &
Congregation Rev., Ser. 96B,
F.R.D.D., A.M.T. VMIG1 4.75 7/03/00 800(e) 800,000
</TABLE>
18 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maryland
Maryland St. Energy Fin. Adm.
Solid Wst. Disp. Rev., Ser.
2000, F.R.D.D., A.M.T. VMIG1 4.70% 7/03/00 $ 200(e) $ 200,000
----------------------------------------------------------------------------------------
Michigan 0.2%
Michigan St. Strategic Fd. Ltd.
Oblig. Rev., Dow Chem. Corp.
Proj., Ser. 99, F.R.D.D., A.M.T. P1 4.75 7/03/00 1,100(e) 1,100,000
----------------------------------------------------------------------------------------
New Mexico 0.5%
Farmington Poll. Ctrl. Rev.,
Merlots, Ser. DD, F.R.D.D. VMIG1 4.89 7/05/00 2,500(e) 2,500,000
----------------------------------------------------------------------------------------
Pennsylvania 1.4%
Emmaus Gen. Auth. Rev., Variable
Rate Ln. Prog., Ser. 2000A,
F.R.W.D. A-1(d) 4.85 7/06/00 7,500(e) 7,500,000
----------------------------------------------------------------------------------------
South Carolina 0.1%
Berkeley Cnty. Sch. Exmp. Fac.,
Amoco Chem. Co. Proj., Ser. 97,
F.R.D.D., A.M.T. VMIG1 4.70 7/03/00 600(e) 600,000
----------------------------------------------------------------------------------------
Texas 1.3%
Brazos River Auth. Poll. Ctrl.
Rev., Texas Util. Elec. Co.,
Ser. 95A, F.R.D.D., A.M.T. VMIG1 4.70 7/03/00 500(e) 500,000
Ser. 96C, F.R.D.D., A.M.T. VMIG1 4.70 7/03/00 600(e) 600,000
Brazos River Harbor Nav. Dist.
Rev., Dow Chem. Co. Proj.,
Ser. 93, F.R.D.D., A.M.T. P1 4.75 7/03/00 900(e) 900,000
Ser. 97, F.R.D.D., A.M.T. P1 4.75 7/03/00 4,600(e) 4,600,000
Gulf Coast Ind. Dev. Auth., Env.
Facs. Rev., Ser. 1999, F.R.D.D.,
A.M.T. VMIG1 4.75 7/03/00 500(e) 500,000
-------------
7,100,000
</TABLE>
See Notes to Financial Statements 19
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Interest Maturity Amount Value
Description (a) Rating Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Virginia 0.3%
Campbell Cnty. Ind. Dev. Auth.
Rev., Hadson Pwr., Ser. 90A,
F.R.D.D., A.M.T. CPS1 4.70% 7/03/00 $ 1,800(e) $ 1,800,000
-------------
Total short-term investments
(cost $26,800,000) 26,800,000
-------------
Total Investments 103.7% (cost
$562,662,530) 573,774,039
-------------
Liabilities in excess of other
assets (3.7)% (20,692,224)
-------------
Net Assets 100% $ 553,081,815
-------------
-------------
</TABLE>
20 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Portfolio of Investments as of June 30, 2000 (Unaudited) Cont'd.
------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.C.A.--American Capital Access
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 Administration
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
R.I.T.E.S.--Residual Interest Tax Exempt Securities Receipts
(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) Segregated as collateral for when-issued or extended settlement security.
(i) Private placement.
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 21
<PAGE>
Prudential National Municipals Fund, Inc.
Statement of Assets and Liabilities (Unaudited)
<TABLE>
<CAPTION>
June 30,
2000
---------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (cost $562,662,530) $ 573,774,039
Receivable for investments sold 8,982,790
Interest receivable 8,725,082
Receivable for Fund shares sold 1,151,093
Deferred expenses and other assets 12,012
Unrealized appreciation on interest rate swaps (Notes 1 and 4) 10,063
Due from broker-variation margin 4,376
-------------
Total assets 592,659,455
-------------
LIABILITIES
Bank overdraft 3,904,120
Payable for investments purchased 32,847,074
Payable for Fund shares reacquired 1,839,271
Dividends payable 380,127
Accrued expenses 273,839
Management fee payable 203,993
Distribution fee payable 129,216
-------------
Total liabilities 39,577,640
-------------
NET ASSETS $ 553,081,815
-------------
-------------
Net assets were comprised of:
Common stock, at par $ 372,232
Paid-in capital in excess of par 545,803,556
-------------
546,175,788
Accumulated net realized loss on investments (4,191,920)
Net unrealized appreciation on investments 11,097,947
-------------
Net assets, June 30, 2000 $ 553,081,815
-------------
-------------
</TABLE>
22 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Statement of Assets and Liabilities (Unaudited) Cont'd.
<TABLE>
<CAPTION>
June 30, 2000
<S> <C>
---------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share ($480,871,402 /
32,373,177 shares of common stock issued and outstanding) $14.85
Maximum sales charge (3% of offering price) .46
-------------
Maximum offering price to public $15.31
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($69,185,928 / 4,646,776 shares of common stock issued and
outstanding) $14.89
-------------
-------------
Class C:
Net asset value and redemption price per share ($2,261,519 /
151,895 shares of common stock issued and outstanding) $14.89
Sales charge (1% of offering price) .15
-------------
Offering price to public $15.04
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($762,966 / 51,385 shares of common stock issued and
outstanding) $14.85
-------------
-------------
</TABLE>
See Notes to Financial Statements 23
<PAGE>
Prudential National Municipals Fund, Inc.
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 2000
<S> <C>
---------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $17,081,337
-------------
Expenses
Management fee 1,364,035
Distribution fee--Class A 599,559
Distribution fee--Class B 204,857
Distribution fee--Class C 9,257
Transfer agent's fees and expenses 226,000
Custodian's fees and expenses 74,000
Reports to shareholders 72,000
Registration fees 24,000
Audit fee 19,000
Directors' fees and expenses 19,000
Legal fees and expenses 12,000
Insurance expense 6,000
Miscellaneous 16,714
-------------
Total expenses 2,646,422
Less: Custodian fee credit (2,862)
-------------
Net expenses 2,643,560
-------------
Net investment income 14,437,777
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on:
Investment transactions (2,188,253)
Financial futures contracts (751,498)
-------------
(2,939,751)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments 8,036,084
Financial futures (83,000)
Interest rate swaps 10,063
-------------
7,963,147
-------------
Net gain on investment transactions 5,023,396
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $19,461,173
-------------
-------------
</TABLE>
24 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
2000 1999
<S> <C> <C>
------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 14,437,777 $ 31,601,128
Net realized loss on investment
transactions (2,939,751) (373,416)
Net change in unrealized appreciation
(depreciation) on investments 7,963,147 (47,339,939)
---------------- -----------------
Net increase (decrease) in net assets
resulting from operations 19,461,173 (16,112,227)
---------------- -----------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A (12,355,388) (25,956,731)
Class B (2,005,145) (5,456,913)
Class C (57,241) (116,079)
Class Z (20,003) (71,405)
---------------- -----------------
(14,437,777) (31,601,128)
---------------- -----------------
Distributions in excess of net investment
income
Class A -- (100,946)
Class B -- (18,963)
Class C -- (619)
Class Z -- (176)
---------------- -----------------
-- (120,704)
---------------- -----------------
Fund share transactions (net of share
conversions)
(Note 5 & 6):
Net proceeds from shares sold 39,758,276 280,554,937
Net asset value of shares issued in
reinvestment of dividends and
distributions 8,792,012 19,573,958
Cost of shares reacquired (95,041,926) (261,665,210)
---------------- -----------------
Increase (decrease) in net assets from
Fund share transactions (46,491,638) 38,463,685
---------------- -----------------
Total decrease (41,468,242) (9,370,374)
NET ASSETS
Beginning of period 594,550,057 603,920,431
---------------- -----------------
End of period $553,081,815 $ 594,550,057
---------------- -----------------
---------------- -----------------
</TABLE>
See Notes to Financial Statements 25
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited)
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
26
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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.
Interest Rate Swaps: In a simple interest rate swap, one investor pays
a floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liability management tools. In
more complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by 'marking-to-market' to reflect the
market value of the swap. When the swap is terminated, the Fund will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Fund's basis in the contract, if any.
The Fund is exposed to credit loss in the event of non-performance by the
other party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
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
27
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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 the 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.
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.
28
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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'). 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. PIFM
pays for the services of PIC, the cost of 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.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund up to and including $250 million, .226% of
1% of the next $250 million, .203 of 1% of the next $500 million, .181% of the
next $250 million, .160% of 1% of the next $250 million and .141% of 1% over 1.5
billion. Prior to January 1, 2000, PIC was reimbursed by PIFM for reasonable
costs and expenses incurred in furnishing investment advisory services.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
B, C and Z shares of the Fund. The Fund compensates PIMS 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.
No distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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 .25 of 1%, .50 of
29
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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, 2000.
PIMS has advised the Fund that it received approximately $17,000 and $100
in front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the six months ended June 30, 2000. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the six months ended June 30, 2000, it
received approximately $72,500 and $700 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the six months ended June 30, 2000.
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 six months ended June 30, 2000,
the Fund incurred fees of approximately $189,300 for the services of PMFS. As of
June 30, 2000, approximately $30,800 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.
30
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 2000, were $328,551,014 and $353,313,814,
respectively.
The federal income tax basis of the Fund's investments at June 30, 2000
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation for federal income tax purposes was $11,111,509
(gross unrealized appreciation--$17,978,787; gross unrealized
depreciation--$6,867,278).
For federal income tax purposes, the Fund has a capital loss carryforward
as of December 31, 1999 of approximately $922,000 which expires in 2007.
Accordingly, no capital gains distribution is expected to be paid until net
gains have been realized in excess of the carryforward.
During the six months ended June 30, 2000, the Fund entered into financial
futures contracts. Details of open contracts at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade June 30, Unrealized
Contracts Type Date Date 2000 Depreciation
--------- ---------------- ----------- ---------- ---------- --------------
<C> <C> <S> <C> <C> <C>
Short Position:
U.S. Treasury
28 Index Sept. 2000 $2,702,000 $2,725,625 $(23,625)
--------------
--------------
</TABLE>
The Fund entered into a swap agreement with Morgan Stanley Capital
Services, Inc. The Fund receives the fixed rate each June 29 and December 29 up
to and including December 29, 2010 (the 'Termination Date') and the Fund pays
the Bond Market AssociationE Municipal Swap Index announced by Municipal Market
Data each Wednesday, or if such day is not a New York Business Day, then the
next New York Business Day during the Calculation Period (the 'Determination
Date').
Details of open interest rate swaps at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Notional
Amount Fixed Floating Termination Unrealized
(000) Type Rate Rate Date Appreciation
-------- ----------------- -------------- ------------ ------------- -------------
<C> <S> <C> <C> <C> <C>
$ 16,000 Forward Rate 5.2525% B.M.A. 12/29/10 $10,063
</TABLE>
Note 5. Capital
The Fund 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%. 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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will
31
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
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.
There are 1 billion shares of common stock, $.01 par value per share,
authorized divided into four classes, designated Class A, Class B, Class C and
Class Z 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, 2000:
Shares sold 2,547,061 $ 37,339,021
Shares issued in reinvestment of dividends and
distributions 517,475 7,589,385
Shares reacquired (5,556,324) (81,592,432)
---------------- --------------
Net decrease in shares outstanding before conversion (2,491,788) (36,664,026)
Shares issued upon conversion from Class B 999,722 14,699,358
---------------- --------------
Net decrease in shares outstanding (1,492,066) $ (21,964,668)
---------------- --------------
---------------- --------------
Year ended December 31, 1999:
Shares sold 10,154,359 $ 150,151,142
Shares issued in connection with reorganization
(Note 6) 5,719,568 92,139,437
Shares issued in reinvestment of dividends and
distributions 1,049,415 16,182,668
Shares reacquired (13,662,479) (212,057,236)
---------------- --------------
Net increase in shares outstanding before conversion 3,260,863 46,416,011
Shares issued upon conversion from Class B 595,834 9,168,416
---------------- --------------
Net increase in shares outstanding 3,856,697 $ 55,584,427
---------------- --------------
---------------- --------------
<CAPTION>
Class B
----------------------------------------------------
<S> <C> <C>
Six months ended June 30, 2000:
Shares sold 141,393 $ 2,073,895
Shares issued in reinvestment of dividends and
distributions 78,217 1,149,576
Shares reacquired (829,602) (12,193,597)
---------------- --------------
Net decrease in shares outstanding before conversion (609,992) (8,970,126)
Shares reacquired upon conversion into Class A (997,290) (14,699,358)
---------------- --------------
Net decrease in shares outstanding (1,607,282) $ (23,669,484)
---------------- --------------
---------------- --------------
Year ended December 31, 1999:
Shares sold 826,622 $ 10,991,293
Shares issued in connection with reorganization
(Note 6) 1,236,086 19,953,535
Shares issued in reinvestment of dividends and
distributions 209,350 3,243,633
Shares reacquired (2,859,392) (44,047,247)
---------------- --------------
Net decrease in shares outstanding before conversion (587,334) (9,858,786)
Shares reacquired upon conversion into Class A (594,471) (9,168,416)
---------------- --------------
Net decrease in shares outstanding (1,181,805) $ (19,027,202)
---------------- --------------
---------------- --------------
</TABLE>
32
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C Shares Amount
---------------------------------------------------- ---------------- --------------
Six months ended June 30, 2000:
<S> <C> <C>
Shares sold 766 $ 11,222
Shares issued in reinvestment of dividends and
distributions 2,419 35,541
Shares reacquired (58,661) (861,390)
---------------- --------------
Net decrease in shares outstanding (55,476) $ (814,627)
---------------- --------------
---------------- --------------
Year ended December 31, 1999:
Shares sold 91,530 $ 1,390,702
Shares issued in connection with reorganization
(Note 6) 29,355 473,862
Shares issued in reinvestment of dividends and
distributions 5,874 90,815
Shares reacquired (62,002) (958,956)
---------------- --------------
Net increase in shares outstanding 64,757 $ 996,423
---------------- --------------
---------------- --------------
<CAPTION>
Class Z
----------------------------------------------------
<S> <C> <C>
Six months ended June 30, 2000:
Shares sold 22,851 $ 334,138
Shares issued in reinvestment of dividends and
distributions 1,194 17,510
Shares reacquired (26,869) (394,507)
---------------- --------------
Net decrease in shares outstanding (2,824) $ (42,859)
---------------- --------------
---------------- --------------
January 22, 1999(a) through
December 31, 1999:
Shares sold 210,908 $ 3,262,799
Shares issued in connection with reorganization
(Note 6) 136,091 2,192,167
Shares issued in reinvestment of dividends and
distributions 3,661 56,842
Shares reacquired (296,451) (4,601,771)
---------------- --------------
Net increase in shares outstanding 54,209 $ 910,037
---------------- --------------
---------------- --------------
</TABLE>
---------------
(a) Commencement of offering of Class Z shares.
Note 6. Reorganization
On August 26, 1998, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization (the 'Plan') which provided for the transfer of all of
the assets of the Prudential Municipal Series Fund Maryland Series ('Maryland
Series') and the Prudential Municipal Series Fund Michigan Series ('Michigan
Series') in exchange for Class A shares of the Fund and the Fund's assumption of
the liabilities of the Maryland and Michigan Series. The Plan also provided for
the transfer of all of the assets of the Class A, B, C and Z shares of the
Prudential Municipal Bond Fund--Intermediate Series
33
<PAGE>
Prudential National Municipals Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
('Intermediate Series') in exchange for like shares of the Fund and the Fund's
assumption of the liabilities of the Intermediate Series.
The Plan was approved by the shareholders of the Maryland, Michigan and
Intermediate Series at a shareholder meeting held on January 14, 1999. The
reorganization took place on January 22, 1999. The Maryland, Michigan and
Intermediate Series and the Fund incurred their pro rata share of the costs of
the reorganization, including the cost of proxy solicitation.
The acquisition was accomplished by a tax-free exchange of the following
shares:
<TABLE>
<CAPTION>
National Municipals
Maryland Series: Fund Value
<S> <C> <C> <C> <C>
Class A 1,545,436 Class A 1,074,419 $17,304,069
B 930,543 A 647,510 10,432,984
C 11,019 A 7,667 123,541
Michigan Series:
Class A 2,459,122 A 1,845,487 29,729,243
B 1,640,985 A 1,230,484 19,826,554
C 43,799 A 32,842 529,193
Intermediate Series:
Class A 1,302,336 A 881,159 14,193,853
B 1,830,315 B 1,236,086 19,953,535
C 43,467 C 29,355 473,862
Z 201,141 Z 136,091 2,192,167
</TABLE>
The aggregate net assets and unrealized appreciation of the funds
immediately before the acquisition were:
<TABLE>
<CAPTION>
Unrealized
Net Assets Appreciation
----------- -------------
<S> <C> <C>
Maryland Series $27,860,594 $ 2,342,040
Michigan Series 50,084,990 4,856,230
Intermediate Series 36,813,417 1,858,582
</TABLE>
The aggregate net assets of the National Municipals Fund immediately
before the acquisition was $607,552,044.
34
<PAGE>
Prudential National Municipals Fund, Inc.
Financial
Highlights
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Class A
----------------
Six Months Ended
June 30, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.72
----------------
Income from investment operations
Net investment income .37
Net realized and unrealized gain (loss) on investment
transactions .13
----------------
Total from investment operations .50
----------------
Less distributions
Dividends from net investment income (.37)
Distributions in excess of net investment income --
Distributions from net realized gains --
----------------
Total distributions (.37)
----------------
Net asset value, end of period $ 14.85
----------------
----------------
TOTAL RETURN(a): 3.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $480,871
Average net assets (000) $482,282
Ratios to average net assets:
Expenses, including distribution fees .90%(d)
Expenses, excluding distribution fees .65%(d)
Net investment income 5.15%(d)
For Class A, B, C and Z shares:
Portfolio turnover rate 59%
</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.
36 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 16.06 $ 16.12 $ 15.56 $ 15.98 $ 14.42
---------------- ---------------- ---------------- ---------------- ----------------
.76 .79 .81(b) .82(b) .81(b)
(1.34) .06 .67 (.42) 1.57
---------------- ---------------- ---------------- ---------------- ----------------
(.58) .85 1.48 .40 2.38
---------------- ---------------- ---------------- ---------------- ----------------
(.76) (.79) (.81) (.82) (.81)
--(c) --(c) (.01) --(c) (.01)
-- (.12) (.10) -- --
---------------- ---------------- ---------------- ---------------- ----------------
(.76) (.91) (.92) (.82) (.82)
---------------- ---------------- ---------------- ---------------- ----------------
$ 14.72 $ 16.06 $ 16.12 $ 15.56 $ 15.98
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
(3.69)% 5.41% 9.80% 2.66% 16.91%
$498,428 $481,926 $493,178 $502,739 $538,145
$531,603 $483,759 $491,279 $508,159 $446,350
.86% .73% .70%(b) .68%(b) .75%(b)
.61% .63% .60%(b) .58%(b) .65%(b)
4.88%(d) 4.89% 5.15%(b) 5.31%(b) 5.34%(b)
30% 23% 38% 46% 98%
</TABLE>
See Notes to Financial Statements 37
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Class B
-----------------
Six Months Ended
June 30, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.75
--------
Income from investment operations
Net investment income .36
Net realized and unrealized gain (loss) on investment
transactions .14
--------
Total from investment operations .50
--------
Less distributions
Dividends from net investment income (.36)
Distributions in excess of net investment income --
Distributions from net realized gains --
--------
Total distributions (.36)
--------
Net asset value, end of period $ 14.89
--------
--------
TOTAL RETURN(a): 3.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $69,186
Average net assets (000) $82,393
Ratios to average net assets:
Expenses, including distribution fees 1.15%(d)
Expenses, excluding distribution fees .65%(d)
Net investment income 4.89%(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.
38 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 16.10 $ 16.16 $ 15.60 $ 16.02 $ 14.45
---------------- ---------------- ---------------- ---------------- ----------------
.73 .73 .75(b) .76(b) .76(b)
(1.35) .06 .67 (.42) 1.58
---------------- ---------------- ---------------- ---------------- ----------------
(.62) .79 1.42 .34 2.34
---------------- ---------------- ---------------- ---------------- ----------------
(.73) (.73) (.75) (.76) (.76)
--(c) --(c) (.01) --(c) (.01)
-- (.12) (.10) -- --
---------------- ---------------- ---------------- ---------------- ----------------
(.73) (.85) (.86) (.76) (.77)
---------------- ---------------- ---------------- ---------------- ----------------
$ 14.75 $ 16.10 $ 16.16 $ 15.60 $ 16.02
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
(3.98)% 4.99% 9.35% 2.26% 16.49%
$ 92,265 $119,698 $141,528 $168,185 $222,865
$118,044 $131,195 $151,938 $193,312 $252,313
1.11% 1.13% 1.10%(b) 1.08%(b) 1.15%(b)
.61% .63% .60%(b) .58%(b) .65%(b)
4.62% 4.49% 4.75%(b) 4.91%(b) 4.96%(b)
</TABLE>
See Notes to Financial Statements 39
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------
Six Months Ended
June 30, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.75
-------
Income from investment operations
Net investment income .34
Net realized and unrealized gain (loss) on investment
transactions .14
-------
Total from investment operations .48
-------
Less distributions
Dividends from net investment income (.34)
Distributions in excess of net investment income --
Distributions from net realized gains --
-------
Total distributions (.34)
-------
Net asset value, end of period $ 14.89
-------
-------
TOTAL RETURN(a): 3.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 2,262
Average net assets (000) $ 2,482
Ratios to average net assets:
Expenses, including distribution fees 1.40%(d)
Expenses, excluding distribution fees .65%(d)
Net investment income 4.64%(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.
40 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$16.10 $16.16 $15.60 $16.02 $14.44
------- ------- ------- ------- -------
.69 .69 .71(b) .72(b) .72(b)
(1.35) .06 .67 (.42) 1.59
------- ------- ------- ------- -------
(.66) .75 1.38 .30 2.31
------- ------- ------- ------- -------
(.69) (.69) (.71) (.72) (.72)
--(c) --(c) (.01) --(c) (.01)
-- (.12) (.10) -- --
------- ------- ------- ------- -------
(.69) (.81) (.82) (.72) (.73)
------- ------- ------- ------- -------
$14.75 $16.10 $16.16 $15.60 $16.02
------- ------- ------- ------- -------
------- ------- ------- ------- -------
(4.22)% 4.73% 9.08% 2.01% 16.22%
$3,060 $2,296 $ 825 $ 772 $ 403
$2,643 $1,555 $ 758 $ 674 $ 247
1.36% 1.38% 1.35%(b) 1.33%(b) 1.40%(b)
.61% .63% .60%(b) .58%(b) .65%(b)
4.39% 4.23% 4.50%(b) 4.67%(b) 4.66%(b)
</TABLE>
See Notes to Financial Statements 41
<PAGE>
Prudential National Municipals Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
------------------------------------
January 22,
1999(d)
Six Months Through
Ended December 31,
June 30, 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 14.71 $ 16.11
------------- -------
Income from investment operations
Net investment income .39 .73
Net realized and unrealized gain (loss) on
investment transactions .14 (1.40)
------------- -------
Total from investment operations .53 (.67)
------------- -------
Less distributions
Dividends from net investment income (.39) (.73)
Distributions in excess of net investment
income -- --(c)
Distributions from net realized gains -- --
------------- -------
Total distributions (.39) (.73)
------------- -------
Net asset value, end of period $ 14.85 $ 14.71
------------- -------
------------- -------
TOTAL RETURN(a): 3.69% (4.22)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 763 $ 797
Average net assets (000) $ 745 $ 1,391
Ratios to average net assets:
Expenses, including distribution fees .65%(e) .64%(e)
Expenses, excluding distribution fees .65%(e) .64%(e)
Net investment income 5.40%(e) 5.45%(e)
</TABLE>
------------------------------
(a) 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) Commencement of offering of Class Z shares.
(e) Annualized.
42 See Notes to Financial Statements
<PAGE>
Prudential National Municipals Fund, Inc.
Getting the Most From Your Prudential Mutual Fund
How many times have you read these reports-or other
financial materials-and stumbled across a word that you
don't understand?
Many shareholders have run into the same problem. We'd
like to help. So we'll use this space from time to time
to explain some of the words you might have read, but not
understood. And if you have a favorite word that no one
can explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one
percent is 50 basis points.
Collateralized Mortgage Obligations (CMOs): Mortgage-
backed bonds that separate mortgage pools into different
maturity classes called tranches. These instruments are
sensitive to changes in interest rates and homeowner
refinancing activity. They are subject to prepayment and
maturity extension risk.
Derivatives: Securities that derive their value from
other securities. The rate of return of these financial
instruments rises and falls-sometimes very suddenly-in
response to changes in some specific interest rate,
currency, stock, or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to member banks.
Federal Funds Rate: The interest rate charged by one bank
to another on overnight loans.
Futures Contract: An agreement to purchase or sell a
specific amount of a commodity or financial instrument at
a set price at a specified date in the future.
<PAGE>
Prudential National Municipals Fund, Inc.
Getting the Most From Your Prudential Mutual Fund
Leverage: The use of borrowed assets to enhance return.
The expectation is that the interest rate charged on
borrowed funds will be lower than the return on the
investment. While leverage can increase profits, it can
also magnify losses.
Liquidity: The ease with which a financial instrument (or
product) can be bought or sold (converted into cash) in
the financial markets.
Price/Earnings Ratio: The price of a share of stock
divided by the earnings per share for a 12-month period.
Option: An agreement to purchase or sell something, such
as shares of stock, by a certain time for a specified
price. An option need not be exercised.
Spread: The difference between two values; often used to
describe the difference between "bid" and "asked" prices of a
security, or between the yields of two similar maturity
bonds.
Yankee Bond: A bond sold by a foreign company or
government on the U.S. market and denominated in U.S.
dollars.
<PAGE>
www.prudential.com (800) 225-1852
For More Information
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Directors
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
William V. Healey, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
194 Wood Avenue South
Iselin, NJ 08830
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Fund Symbols NASDAQ CUSIP
Class A PRNMX 743918203
Class B PBHMX 743918104
Class C PNMCX 743918302
Class Z N/A 743918401
The views expressed in this report and information about
the Fund's portfolio holdings are for the period covered
by this report and are subject to change thereafter.
The accompanying financial statements as
of June 30, 2000, were not audited and, accordingly, no
opinion is expressed on them.
<PAGE>
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
MF104E2 743918203 743918104 743918302 743918401
(LOGO) Printed on Recycled Paper
<PAGE>
ANNUAL REPORT AUGUST 31, 2000
Prudential Municipal Series Fund/Massachusetts Series
Fund Type Municipal Bond
Objective Maximize current income that is exempt from Massachusetts State and
federal income taxes, consistent with the preservation of capital
(GRAPHIC)
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus. The views expressed in this
report and information about the Fund's portfolio holdings are for the period
covered by this report and are subject to change thereafter.
(LOGO)
<PAGE>
Build on the Rock
Investment Goals and Style The Prudential Municipal Series Fund/Massachusetts
Series' investment objective is to maximize current income that is exempt from
Massachusetts state and federal income taxes, consistent with the preservation
of capital. However, certain shareholders may be subject to the alternative
minimum tax (AMT) because some of the Series' bonds are AMT eligible. There can
be no assurance the Series will achieve its investment objective.
Portfolio Composition
Expressed as a percentage of total investments as of 8/31/00
59.2% Revenue Bonds
20.0 Prerefunded
15.2 General Obligation Bonds
4.7 Miscellaneous
0.9 Cash Equivalents
Credit Quality
Expressed as a percentage of total investments as of 8/31/00
16.4% AAA
13.1 AA
3.7 A
24.4 BBB
1.5 BB
40.0 Insured
0.9 Short-term
Ten Largest Issuers
Expressed as a percentage of net assets as of 8/31/00
6.6% Massachusetts St. General Obligation
5.6 Massachusetts St. Port Authority Revenue
5.4 Massachusetts St. Turnpike Authority
4.4 Massachusetts St.Hlth. & Edl.--Faulkner Hospital*
4.4 Massachusetts St. Water Pollution Abatement
4.3 Boston Massachusetts Ind. Dev. Financial Authority
4.2 Massachusetts St. Hlth. & Edl.--Beth Israel Hospital
4.0 Massachusetts St. Hlth. & Edl.--Jordan Hospital*
4.0 Massachusetts Bay Transportation Authority Rev.
4.0 Puerto Rico Commonwealth
* Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns(1) As of 8/31/00
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 4.82% 26.67% (26.44) 91.13% (90.79) 93.82% (93.47)
Class B 4.65 24.58 (24.35) 83.96 (83.63) 192.76 (182.71)
Class C 4.40 23.05 (22.83) N/A 32.25 (32.01)
Class Z 5.08 N/A N/A 17.48 (17.37)
Lipper MA Muni
Debt Fund Avg.(3) 5.15 27.43 93.38 ***
</TABLE>
Average Annual Total Returns(1) As of 9/30/00
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 1.35% 4.01% (3.97) 6.37% (6.35) 6.03% (6.01)
Class B -0.75 4.11 (4.08) 6.28 (6.26) 6.90 (6.62)
Class C 1.98 3.82 (3.78) N/A 4.36 (4.33)
Class Z 4.75 N/A N/A 4.17 (4.15)
</TABLE>
Distributions and Yields As of 8/31/00
<TABLE>
<CAPTION>
Total Distributions 30-Day Taxable Equivalent Tax Rates of
Paid for 12 Months SEC Yield Yield(4) at 36% 39.6%
<S> <C> <C> <C> <C>
Class A $0.53 4.28% 7.11% 7.53%
Class B $0.50 4.22 7.01 7.43
Class C $0.48 3.99 6.63 7.02
Class Z $0.56 4.67 7.76 8.22
</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 LLC and Lipper Inc. The
cumulative total returns do not take into account sales charges. The
average annual total returns do take into account applicable sales charges.
The Series charges a maximum front-end sales charge 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 are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months. Class Z shares
are not subject to a sales charge or distribution and service (12b-1) fees.
Without waiver of management fees and/or expense subsidization, the Series'
cumulative and average annual total returns would have been lower, as
indicated in parentheses ( ).
(2) Inception dates: Class A, 1/22/90; Class B, 9/25/84; Class C, 8/1/94; and
Class Z, 12/6/96.
(3) Lipper Average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the Massachusetts Municipal Debt Fund
category. Single-state Municipal Debt funds limit their securities that are
exempt from taxation in a specified state (double tax exempt) or city
(triple tax exempt).
(4) Taxable equivalent yields reflect federal and applicable state tax rates.
*** Lipper Since Inception returns are 98.27% for Class A, 226.85% for Class B,
38.06% for Class C, and 16.50% for Class Z, based on all funds in each
share class.(1)
<PAGE>
(LOGO) October 18, 2000
DEAR SHAREHOLDER,
The tax-exempt bond market was very volatile during our fiscal year that ended
August 31, 2000. Municipal bond prices began to fall early in the period because
the Federal Reserve (the Fed) repeatedly increased short-term interest rates to
slow a rapidly expanding U.S. economy. However, higher interest rates and strong
economic growth caused issuance of municipal bonds to decline at a time when
many investors sought the tax-exempt income provided by these securities. This
strong investor demand helped municipal bond prices end the 12 months higher.
While many of the bonds held by the Prudential Municipal Series
Fund/Massachusetts Series gained in value, one of its holdings performed poorly.
Losses on these bonds detracted from the Series' returns. Without considering
the initial sales charge, the Series' share classes underperformed their
benchmark Lipper Average, which is not subject to sales charges. We discuss
developments in the municipal bond market and explain the Series' investments on
the following pages.
Proposed merger A proposal to merge the Massachusetts Series into the National
Municipal Fund will be put to a shareholder vote at a special shareholder
meeting scheduled for December 7, 2000. For information regarding this proposal,
please refer to the enclosed materials.
As always, we appreciate your continued confidence in Prudential mutual funds,
and look forward to serving your future investment needs.
Sincerely,
John R. Strangfeld, President
Prudential Municipal Series Fund
2
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Annual Report August 31, 2000
Investment Adviser's Report
Municipal bonds gained amid volatile market conditions Prices of municipal bonds
went on a roller coaster ride during our fiscal year that began September 1,
1999. They ended the 12 months higher as investors hurriedly bought a shrinking
supply of newly issued tax-exempt securities. Furthermore, prices of munis
finished the 12 months higher on the belief that the Federal Reserve was nearly
through with its latest round of increases in short-term interest rates.
The Fed raised short-term rates four times during our fiscal year out of concern
that an overheated U.S. economy might ignite higher inflation via rising
consumer prices and accelerating wages. By lifting short-term rates, the Fed
pushed borrowing costs higher for businesses and consumers, hoping it would slow
economic growth to a more sustainable pace and help check inflationary
pressures.
Timely duration moves
The trend toward higher short-term rates had initially led investors to
require higher yields on municipal securities (and lower prices). In order to
reduce our portfolio's sensitivity to the rise in interest rates, we lowered
the Series' duration in early autumn of 1999. (Duration measures how much a
portfolio's bonds will fluctuate in price for a given change in interest
rates. It is expressed in years.)
As the year 2000 began, we expected the Fed to continue tightening monetary
policy. We also believed that further rate increases would ultimately be viewed
as positive by the bond market because they would show the Fed's determination
to fight inflation. With this in mind, we began to lengthen the Series' duration
in January 2000, which enabled the Series to benefit more fully as prices of
munis gained later in the year.
3
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Annual Report August 31, 2000
The municipal bond rally picked up steam in the spring of 2000 after the Fed
aggressively raised rates in mid-May. Data indicated that economic growth was
moderating. This, in turn, fueled optimism that the Fed would not have to
continue hiking rates during the remainder of 2000. Consequently, many investors
willingly paid higher prices for munis and accepted lower yields.
While investors scrambled to buy municipal bonds, the supply of newly issued
munis dwindled. Many state and local governments accumulated such hefty cash
reserves during the long U.S. economic expansion that their borrowing needs
declined, which led to decreased issuance of tax-exempt bonds. In addition, the
supply of new issues due to refunding activity shrank because many state and
local governments had already replaced higher-cost debt securities with
lower-cost bonds to save on interest expenses. This supply/demand imbalance also
helped boost municipal bond prices.
Bradford College bonds hurt Series' returns
By contrast, we own bonds backed by Bradford College whose prices declined
sharply because the college shut its doors at the end of its spring semester
in 2000. While the college continues to make its debt payments on the bonds,
it is expected that the sale of the campus facilities will be necessary in
order for the college to continue meeting its debt obligations. (The campus
is currently being marketed.) Standard & Poor's Corporation downgraded its
rating of the bonds to CCC, which indicates there is substantial credit risk.
Losses suffered on these bonds were a key reason that the Series share
classes, without considering the initial sales charge, underperformed their
benchmark Lipper Average, which is not subject to sales charges. On the other
hand, the Series also owns bonds backed by Harvard University that are rated
AAA because of Harvard's strong financial standing. These bonds gained in
value as prices of munis generally moved higher.
Prudential Municipal Series Fund Management Team
4
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Portfolio of Investments as of August 31, 2000
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.4%
Boston Massachusetts Ind. Dev.
Fin. Auth., Swr. Fac. Rev.,
Harbor Elec. Energy Co. Proj.,
A.M.T. Baa1 7.375% 05/15/15 $ 1,500 $ 1,541,565
Brockton Massachusetts, Gen. Oblig. Aa3 6.125 06/15/18 1,030 1,057,985
Holyoke Massachusetts, Gen. Oblig.,
School Proj., M.B.I.A. Aaa 8.10 06/15/05 700(e) 764,820
Lowell Massachusetts, Gen. Oblig. Aaa 7.625 02/15/10 750(e) 783,457
Lynn Mass. Wtr. & Swr. Comn.,
Gen. Rev., Ser. A, M.B.I.A. Aaa 7.25 12/01/10 850(e) 872,967
Mass. Bay Trans. Auth. Rev.,
Assmnt., Ser. A Aa1 5.25 07/01/30 750 712,088
Mass. Bay Trans. Auth., Gen.
Trans. Sys., Ser. A. M.B.I.A. Aaa 5.50 03/01/15 700 722,645
Mass. St. College Bldg. Auth. Proj.
Rev., Ser. A, M.B.I.A. Aaa Zero 05/01/22 2,250 667,193
Mass. St. Dev. Fin. Agy. Rev.,
Concord-Assabet Family Svcs. Ba2 6.00 11/01/28 750(f) 550,477
Higher Ed. Smith College, Aa1 5.75 07/01/29 500 508,425
Mass. St. Gen. Oblig.,
Ser. A, A.M.B.A.C. Aaa 5.00 07/01/12 1,000 1,006,150
Ser. C, F.G.I.C. Aaa 6.00 08/01/09 1,250 1,371,975
Mass. St. Hlth. & Edl. Facs. Auth.
Harvard University, Ser. W Aaa 6.00 07/01/35 500 529,920
Ser. A, F.G.I.C. Aaa 5.875 10/01/29 500 513,290
Beth Israel Hospital, A.M.B.A.C. Aaa 7.437(d) 07/01/25 1,500 1,518,750
Dana Farber Cancer Proj.,
Ser. G-1 A1 6.25 12/01/22 625 626,369
Faulkner Hospital, Ser. C Baa1 6.00 07/01/23 1,500(e) 1,582,680
Holyoke Hospital, Ser. B Baa3 6.50 07/01/15 550 510,934
Jordan Hospital, Ser. C BBB+(c) 6.875 10/01/22 1,350(e) 1,436,926
Med. Academic & Scientific
Co., Ser. A BBB-(c) 6.625 01/01/15 1,000 1,014,880
Simmons College Ser. D, A.M.B.A.C. Aaa 6.05 10/01/20 1,000 1,059,620
Valley Regional Hlth. Sys.,
Ser. C AAA(c) 7.00 07/01/10 825 957,437
Winchester Hospital, Ser. D AAA(c) 5.75 07/01/24 1,000 999,910
</TABLE>
See Notes to Financial Statements 5
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mass. St. Ind. Fin. Agcy. Rev.,
Bradford College CCC(c) 5.625% 11/01/28 $ 1,000 $ 819,700
Cambridge Friends School BBB(c) 5.80 09/01/28 700 651,280
Phillips Academy Aaa 5.375 09/01/23 1,000 976,150
Mass. St. Port Auth. Rev.,
Ser. 1999A Baa3 5.75 10/01/29 600 597,210
Ser. B, A.M.T. Aa3 5.00 07/01/18 1,000 932,790
Ser. D, A.M.T. Aa3 6.25 07/01/17 1,000 1,069,820
Mass. St. Tpk. Auth., Met. Hwy.
Sys. Rev.,
Ser. C, M.B.I.A. Aaa Zero 01/01/17 2,000 820,520
Ser. A, A.M.B.A.C. Aaa 5.00 01/01/39 750 671,708
Ser. A, M.B.I.A. Aaa Zero 01/01/28 2,000 428,100
Mass. St. Water Poll. Abatement
Trust Rev., Ser. 5 Aaa 5.50 08/01/29 500 492,855
Trust Rev., Ser. A Aa3 6.375 02/01/15 1,000 1,066,370
Mass. St. Water Res. Auth. Rev.,
Ser. B, M.B.I.A. Aaa 6.25 12/01/11 500 560,100
Ser. D, M.B.I.A. Aaa 6.00 08/01/13 500 546,135
Plymouth County Mass Corr. Facs.
Cert. of Part., Ser.A Aaa 7.00 04/01/22 500(e) 535,755
Puerto Rico Commonwealth
Gen. Oblig., A.M.B.A.C. NR 9.977 07/01/10 500 695,095
Gen. Oblig. Pub. Impt., M.B.I.A. Aaa Zero 07/01/19 2,000 733,180
Puerto Rico Electric Pwr. Auth.
Rev., Ser. T Baa1 6.375 07/01/24 1,000(e) 1,097,740
Rail Connections Inc. Mass.
Rev., Ser. B A(c) Zero 07/01/21 2,500 675,075
Virgin Islands Public Fin. Auth.
Rev., Gross Rcpts. Taxes Ln.,
Ser. A BBB-(c) 6.50 10/01/24 500 517,945
-----------
Total long-term investments
(cost $33,357,650) $35,197,991
-----------
</TABLE>
6 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS 0.8%
Mass. St. Hlth. & Edl. Facs. Auth.
Rev., Ser. SGA 65, F.R.D.D. A1+(c) 4.35% 09/01/00 $ 300 $ 300,000
-----------
Total short-term investments
(cost $300,000) 300,000
-----------
Total Investments 99.2%
(cost $33,657,650; Note 4) 35,497,991
-----------
Other assets in excess of
liabilities 0.8% 272,320
-----------
Net Assets 100% $35,770,311
-----------
-----------
</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 (b).
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) 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.
(c) Standard & Poor's Rating.
(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) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) Fair valued security.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements 7
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $33,657,650) $35,497,991
Cash 56,886
Interest receivable 461,669
Deferred expenses 906
---------------
Total assets 36,017,452
---------------
LIABILITIES
Payable for Series shares reacquired 119,442
Accrued expenses 81,263
Dividends payable 16,168
Management fee payable 15,157
Distribution fee payable 8,965
Deferred trustees' fees 6,146
---------------
Total liabilities 247,141
---------------
NET ASSETS $35,770,311
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 32,311
Paid-in capital in excess of par 34,351,578
---------------
34,383,889
Accumulated net realized loss on investments (453,919)
Net unrealized appreciation on investments 1,840,341
---------------
Net assets, August 31, 2000 $35,770,311
---------------
---------------
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Statement of Assets and Liabilities Con't.
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($26,657,318 / 2,407,579 shares of beneficial interest
issued and outstanding) $11.07
Maximum sales charge (3% of offering price) .34
---------------
Maximum offering price to public $11.41
---------------
---------------
Class B:
Net asset value, offering price and redemption price per
share ($8,734,206 / 789,262 shares of beneficial interest
issued and outstanding) $11.07
---------------
---------------
Class C:
Net asset value, and redemption price per share
($305,273 / 27,586 shares of beneficial interest issued
and outstanding) $11.07
Sales charge (1% of offering price) .11
---------------
Offering price to public $11.18
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per
share ($73,514/6,644 shares of beneficial interest
issued and outstanding) $11.06
---------------
---------------
</TABLE>
See Notes to Financial Statements 9
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 2,277,530
---------------
Expenses
Management fee 185,314
Distribution fee--Class A 66,378
Distribution fee--Class B 50,534
Distribution fee--Class C 1,610
Custodian's fees and expenses 75,000
Report to shareholders 40,000
Registration fees 30,000
Transfer agent's fees and expenses 18,000
Audit fee 10,000
Trustees' fees and expenses 10,000
Legal fees and expenses 8,000
Miscellaneous 4,653
---------------
Total expenses 499,489
Less: Custodian fee credit (339)
---------------
Net expenses 499,150
---------------
Net investment income 1,778,380
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (250,743)
Financial futures transactions (4,742)
---------------
(255,485)
Net change in unrealized appreciation of investments 69,319
---------------
Net loss on investments (186,166)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,592,214
---------------
---------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------
2000 1999
<S> <C> <C>
DECREASE IN NET ASSETS
Operations
Net investment income $ 1,778,380 $ 2,069,644
Net realized loss on investment transactions (255,485) (12,605)
Net change in unrealized appreciation
(depreciation) of investments 69,319 (2,713,045)
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations 1,592,214 (656,006)
--------------- ---------------
Dividends and distributions (Note 1):
Dividends from net investment income
Class A (1,292,367) (1,418,190)
Class B (472,416) (640,864)
Class C (9,612) (8,016)
Class Z (3,985) (2,574)
--------------- ---------------
(1,778,380) (2,069,644)
--------------- ---------------
Distributions in excess of net investment
income
Class A -- (9,090)
Class B -- (4,519)
Class C -- (55)
Class Z -- (20)
--------------- ---------------
-- (13,684)
--------------- ---------------
Distributions from net realized gains
Class A -- (284,387)
Class B -- (141,295)
Class C -- (1,712)
Class Z -- (626)
--------------- ---------------
-- (428,020)
--------------- ---------------
Series share transactions (net of share
conversions) (Note 5):
Net proceeds from shares sold 1,277,060 7,872,665
Net asset value of shares issued in
reinvestment of dividends 991,084 1,388,189
Cost of shares reacquired (7,028,093) (10,782,045)
--------------- ---------------
Net decrease in net assets from Series share
transactions (4,759,949) (1,521,191)
--------------- ---------------
Total decrease (4,946,115) (4,688,545)
NET ASSETS
Beginning of year 40,716,426 45,404,971
--------------- ---------------
End of year $ 35,770,311 $ 40,716,426
--------------- ---------------
--------------- ---------------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of 11
series. The monies of each series are invested in separate, independently
managed portfolios. The Massachusetts Series (the 'Series') commenced investment
operations in September, 1984. The Series is diversified and seeks to achieve
its investment objective of obtaining the maximum amount of income exempt from
federal and applicable state income taxes with a minimum of risk by investing in
'investment grade' tax-exempt securities whose ratings are within the four
highest ratings categories by a nationally recognized statistical rating
organization or, if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
All securities are valued as of 4:15 p.m., New York time.
Financial Futures Contracts: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the 'initial margin.' Subsequent payments, known as
'variation margin,' are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing
12
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements Cont'd.
market interest rates. Should interest rates move unexpectedly, the Series may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets.
Inverse Floaters: The Series invests in variable rate securities commonly
called 'inverse floaters'. The interest rates on these securities have an
inverse relationship to the interest rate of other securities or the value of an
index. Changes in interest rate on the other security or index inversely affect
the rate paid on the inverse floater, and the inverse floater's price will be
more volatile than that of a fixed-rate bond. Additionally, some of these
securities contain a 'leverage factor' whereby the interest rate moves inversely
by a 'factor' to the benchmark rate. Certain interest rate movements and other
market factors can substantially affect the liquidity of inverse floating rate
notes.
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 Series amortizes premiums and original issue discount paid on
purchases of 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.
Federal Income Taxes: For federal income tax purposes, each series in the
Fund is treated as a separate taxpaying entity. It is the intent of the Series
to continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Custody Fee Credits: The Series has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
13
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements Cont'd.
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'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
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 Fund's average daily net assets.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares. The Fund compensates PIMS 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. The distribution fees are accrued daily and payable monthly. No
distribution or service fees were paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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 .25 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 period September 1, 1999 through August 22, 2000. Effective August 23,
2000 such expenses under the plans were .25 of 1%, .25 of 1% and .25 of 1% of
the average daily net assets of Class A, B and C shares, respectively.
PIMS has advised the Series that it has received approximately $1,100 and
$1,100 in front-end sales charges resulting from sales of Class A and C shares,
14
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements Cont'd.
respectively, during the year ended August 31, 2000. From these fees PIMS paid
such sales charges to an affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, it
received approximately $11,700 in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the year ended August 31, 2000.
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 August 31, 2000, the
Series incurred fees of approximately $14,100 for the services of PMFS. As of
August 31, 2000, approximately $1,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000, were $16,518,232 and
$12,215,755, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was $33,718,451 and accordingly, net unrealized appreciation of
investments
15
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements Cont'd.
for federal income tax purposes was $1,779,540 (gross unrealized
appreciation--$2,207,265, gross unrealized depreciation--$427,725).
The Series elected, for United States Federal income tax purposes, to
treat capital losses of approximately $129,000 incurred in the ten month period
ended August 31, 2000 as having been incurred in the following fiscal year.
For federal income tax purposes, the Portfolio had a capital loss
carryforward as of August 31, 2000 of approximately $242,000 of which $8,000
expires in 2007 and $234,000 expires in 2008 respectively. Accordingly, no
capital gains distributions are expected to be paid to shareholders until future
net gains have been realized in excess of such capital loss carryforward.
Note 5. Capital
The 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%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending upon
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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 qualified 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. The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years ended August
31, 2000 and August 31, 1999 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 19,201 $ 207,810
Shares issued in reinvestment of dividends 69,229 748,726
Shares reacquired (443,521) (4,784,158)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (355,091) (3,827,622)
Shares issued upon conversion from Class B 280,516 3,045,106
---------- ------------
Net increase (decrease) in shares outstanding (74,575) $ (782,516)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 478,960 $ 5,646,776
Shares issued in reinvestment of dividends and distributions 84,266 981,877
Shares reacquired (589,103) (6,781,033)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (25,877) (152,380)
Shares issued upon conversion from Class B 69,112 806,972
---------- ------------
Net increase (decrease) in shares outstanding 43,235 $ 654,592
---------- ------------
---------- ------------
</TABLE>
16
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
------------------------------------------------------------ ---------- ------------
Year ended August 31, 2000:
<S> <C> <C>
Shares sold 65,659 $ 709,733
Shares issued in reinvestment of dividends 21,644 233,926
Shares reacquired (184,115) (1,992,731)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (96,812) (1,049,072)
Shares reacquired upon conversion into Class A (280,709) (3,045,106)
---------- ------------
Net increase (decrease) in shares outstanding (377,521) $ (4,094,178)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 170,635 $ 1,982,178
Shares issued in reinvestment of dividends and distributions 34,077 397,292
Shares reacquired (335,629) (3,901,106)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (130,917) (1,521,636)
Shares reacquired upon conversion into Class A (69,125) (806,972)
---------- ------------
Net increase (decrease) in shares outstanding (200,042) $ (2,328,608)
---------- ------------
---------- ------------
<CAPTION>
Class C
------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 12,528 $ 134,833
Shares issued in reinvestment of dividends 422 4,568
Shares reacquired (2,271) (24,766)
---------- ------------
Net increase (decrease) in shares outstanding 10,679 $ 114,635
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 13,079 $ 154,281
Shares issued in reinvestment of dividends and distributions 504 5,854
Shares reacquired (6,438) (74,609)
---------- ------------
Net increase (decrease) in shares outstanding 7,145 $ 85,526
---------- ------------
---------- ------------
<CAPTION>
Class Z
------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 20,993 $ 224,684
Shares issued in reinvestment of dividends 357 3,864
Shares reacquired (21,121) (226,438)
---------- ------------
Net increase (decrease) in shares outstanding 229 $ 2,110
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 7,626 $ 89,430
Shares issued in reinvestment of dividends and distributions 273 3,166
Shares reacquired (2,210) (25,297)
---------- ------------
Net increase (decrease) in shares outstanding 5,689 $ 67,299
---------- ------------
---------- ------------
</TABLE>
17
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Notes to Financial Statements Cont'd.
Note 6. Proposed Reorganization
On August 23, 2000, the Trustees of the Series approved an Agreement and Plan of
Reorganization (the 'Plan of Reorganization'), which provides for the transfer
of all of the assets and liabilities of the Series to Prudential National
Municipals Funds, Inc. ('National Municipals'). Class A, Class B and Class C
shares of the Series would be exchanged at net asset value for Class A shares of
equivalent value of National Municipals. The Class Z shares of the Series would
be exchanged at net asset value for Class Z shares of equivalent value of
National Municipals. The Series would then cease operations.
The Plan of Reorganization requires approval by the shareholders of the
Series to become effective and a proxy/prospectus will be mailed to shareholders
in October 2000. If the Plan is approved, it is expected that the reorganization
will take place in December 2000. The Series and National Municipals will each
bear their pro rata share of the costs of the reorganization, including cost of
proxy solicitation.
18
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights
<TABLE>
<CAPTION>
Class A
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.09
---------------
Income from investment operations
Net investment income .53
Net realized and unrealized gain (loss) on investment
transactions (.02)
---------------
Total from investment operations .51
---------------
Less distributions
Dividends from net investment income (.53)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.53)
---------------
Net asset value, end of year $ 11.07
---------------
---------------
TOTAL RETURN(b): 4.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 26,657
Average net assets (000) $ 26,551
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.28%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 4.87%
For Class A, B, C and Z shares:
Portfolio turnover rate 34%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) 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.
(c) Less than .005 per share.
20 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.90 $ 11.69 $ 11.54 $ 11.63
---------------- ---------------- ---------------- ----------------
.53 .55 .58(a) .59(a)
(.70) .37 .33 (.02)
---------------- ---------------- ---------------- ----------------
(.17) .92 .91 .57
---------------- ---------------- ---------------- ----------------
(.53) (.55) (.58) (.59)
--(c) (.01) --(c) --(c)
(.11) (.15) (.18) (.07)
---------------- ---------------- ---------------- ----------------
(.64) (.71) (.76) (.66)
---------------- ---------------- ---------------- ----------------
$ 11.09 $ 11.90 $ 11.69 $ 11.54
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
(1.44)% 8.10% 8.10% 4.93%
$ 27,527 $ 29,024 $ 28,890 $ 28,058
$ 30,705 $ 29,031 $ 29,096 $ 28,091
1.11% 1.04% 1.00%(a) 1.06%(a)
.91% .94% .90%(a) .96%(a)
4.62% 4.75% 5.00%(a) 5.06%(a)
24% 33% 22% 18%
</TABLE>
See Notes to Financial Statements 21
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.08
---------------
Income from investment operations
Net investment income .50
Net realized and unrealized gain (loss) on investment
transactions (.01)
---------------
Total from investment operations .49
---------------
Less distributions
Dividends from net investment income (.50)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.50)
---------------
Net asset value, end of year $ 11.07
---------------
---------------
TOTAL RETURN(b): 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 8,734
Average net assets (000) $ 10,214
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.52%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 4.62%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than .005 per share.
22 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.89 $ 11.68 $ 11.53 $ 11.62
---------------- ---------------- ---------------- ----------------
.50 .51 .53(a) .54(a)
(.70) .37 .33 (.02)
---------------- ---------------- ---------------- ----------------
(.20) .88 .86 .52
---------------- ---------------- ---------------- ----------------
(.50) (.51) (.53) (.54)
--(c) (.01) --(c) --(c)
(.11) (.15) (.18) (.07)
---------------- ---------------- ---------------- ----------------
(.61) (.67) (.71) (.61)
---------------- ---------------- ---------------- ----------------
$ 11.08 $ 11.89 $ 11.68 $ 11.53
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
(1.76)% 7.67% 7.67% 4.51%
$ 12,931 $ 16,256 $ 18,247 $ 22,758
$ 14,837 $ 17,253 $ 20,301 $ 25,751
1.41% 1.44% 1.40%(a) 1.46%(a)
.91% .94% .90%(a) .96%(a)
4.32% 4.35% 4.60%(a) 4.66%(a)
</TABLE>
See Notes to Financial Statements 23
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.08
---------------
Income from investment operations
Net investment income .48
Net realized and unrealized gain (loss) on investment
transactions (.01)
---------------
Total from investment operations .47
---------------
Less distributions
Dividends from net investment income (.48)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (0.48)
---------------
Net asset value, end of year $ 11.07
---------------
---------------
TOTAL RETURN(b): 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 305
Average net assets (000) $ 220
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.76%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 4.38%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than .005 per share.
24 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.89 $ 11.68 $ 11.53 $ 11.62
---------------- ---------------- ---------------- ----------------
.47 .48 .50(a) .51(a)
(.70) .37 .33 (.02)
---------------- ---------------- ---------------- ----------------
(.23) .85 .83 .49
---------------- ---------------- ---------------- ----------------
(.47) (.48) (.50) (.51)
--(c) (.01) --(c) --(c)
(.11) (.15) (.18) (.07)
---------------- ---------------- ---------------- ----------------
(.58) (.64) (.68) (.58)
---------------- ---------------- ---------------- ----------------
$ 11.08 $ 11.89 $ 11.68 $ 11.53
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
(2.00)% 7.41% 7.41% 4.26%
$ 187 $ 116 $ 78 $ 45
$ 196 $ 101 $ 48 $ 41
1.66% 1.69% 1.65%(a) 1.72%(a)
.91% .94% .90%(a) .97%(a)
4.08% 4.08% 4.36%(a) 4.39%(a)
</TABLE>
See Notes to Financial Statements 25
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.08
---------------
Income from investment operations
Net investment income .56
Net realized and unrealized gain (loss) on investment
transactions (.02)
---------------
Total from investment operations .54
---------------
Less distributions
Dividends from net investment income (.56)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.56)
---------------
Net asset value, end of period $ 11.06
---------------
TOTAL RETURN(b): 5.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 74
Average net assets (000) $ 78
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.03%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 5.13%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total return for periods of less than a full
year is not annualized.
(c) Annualized.
(d) Commencement of offering of Class Z shares.
(e) Amounts are actual and not rounded to the nearest thousand.
(f) Less than .005 per share.
26 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------------------------------------------------------------------
Year Ended August 31, December 6, 1996(d)
------------------------------------------ through August 31,
1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C>
$ 11.89 $ 11.68 $ 11.80
---------------- ---------------- ----------
.56 .58 .47(a)
(.70) .37 .06
---------------- ---------------- ----------
(.14) .95 .53
---------------- ---------------- ----------
(.56) (.58) (.47)
--(f) (.01) --(f)
(.11) (.15) (.18)
---------------- ---------------- ----------
(.67) (.74) (.65)
---------------- ---------------- ----------
$ 11.08 $ 11.89 $ 11.68
---------------- ---------------- ----------
(1.26)% 8.31% 4.54%
$ 71 $ 9 $ 204(e)
$ 53 $ 7 $ 200(e)
.91% .94% .90%(a)(c)
.91% .94% .90%(a)(c)
4.86% 4.91% 5.55%(a)(c)
</TABLE>
See Notes to Financial Statements 27
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of Prudential Municipal Series Fund,
Massachusetts Series
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 Municipal Series Fund,
Massachusetts Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, 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 four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion. The accompanying financial highlights for the year ended August 31,
1996 were audited by other independent accountants, whose opinion dated October
14, 1996 was unqualified.
As described in Note 6 to the financial statements, on August 23, 2000, the
Board of Trustees of the Fund approved an agreement and Plan of Reorganization,
subject to shareholder approval, whereby the Fund would be merged into
Prudential National Municipals Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
28
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income of $.53 per Class A share, $.50 per Class B share, $.48
per Class C share and $.56 per Class Z share were all federally tax-exempt
interest dividends.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001 you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to federal tax status of the distributions received by you in
calendar year 2000.
29
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Prudential Mutual Funds
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
Large Capitalization Stock Funds
Prudential 20/20 Focus Fund
Prudential Equity Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Strategic Partners Focused Growth Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Value Fund
Small- to Mid-Capitalization Stock Funds
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential U.S. Emerging Growth Fund, Inc.
Target Funds
Small Capitalization Growth Fund
Small Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Sector Stock Funds
Prudential Natural Resources Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Global/International Stock Funds
Global Utility Fund, Inc.
Prudential Europe Growth Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Target Funds
International Equity Fund
BALANCED/ALLOCATION FUNDS
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
<PAGE>
www.prudential.com (800) 225-1852
BOND FUNDS
Taxable Bond Funds
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 Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Prudential Total Return Bond Fund, Inc.
Target Funds
Total Return Bond Fund
Tax-Free Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global/International Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
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 Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Money Market Series
Tax-Free Money Market Funds
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
Prudential Tax-Free Money Fund, Inc.
Other Money Market Funds
COMMAND Government Fund
COMMAND Money Fund
COMMAND Tax-Free Fund
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial materials--and
stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis
points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes called tranches. These
instruments are sensitive to changes in interest rates and homeowner refinancing
activity. They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from other securities. The rate
of return of these financial instruments rises and falls--sometimes very
suddenly--in response to changes in some specific interest rate, currency,
stock, or other variable.
Discount Rate: The interest rate charged by the Federal Reserve on loans to
member banks.
Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.
Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.
<PAGE>
www.prudential.com (800) 225-1852
Leverage: The use of borrowed assets to enhance return. The expectation is that
the interest rate charged on borrowed funds will be lower than the return on the
investment. While leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument (or product) can be bought
or sold (converted into cash) in the financial markets.
Price/Earnings Ratio: The price of a share of stock divided by the earnings per
share for a 12-month period.
Option: An agreement to purchase or sell something, such as shares of stock, by
a certain time for a specified price. An option need not be exercised.
Spread: The difference between two values; often used to describe the difference
between "bid" and "asked" prices of a security, or between the yields of two
similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government on the U.S. market
and denominated in U.S. dollars.
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Class A Growth of a $10,000 Investment
(GRAPHIC)
Average Annual Total Returns as of 8/31/00
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C>
With Sales Charge 1.68% 4.21% (4.17) 6.37% (6.35) 6.13% (6.11)
Without Sales Charge 4.82% 4.84% (4.80) 6.69% (6.67) 6.44% (6.42)
</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.The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return for the ten year period. The graph compares a
$10,000 investment in the Prudential Municipal Series Fund/Massachusetts Series
(Class A shares) with a similar investment in the Lehman Brothers Municipal Bond
Index (the Index) by portraying the initial account value at the beginning of
the ten-year period of Class A shares, and the account value at the end of the
current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1990 for Class A shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
front-end sales charge of 3% was deducted from the initial $10,000 investment in
Class A shares; (b) all recurring fees (including management fees) were
deducted; and (c) all dividends and distributions were reinvested. The numbers
in parentheses ( ) show the Series' average annual total return without waiver
of management fees and/or expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class B Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 8/31/00
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C>
With Sales Charge -0.35% 4.32% (4.29) 6.29% (6.27) 6.97% (6.74)
Without Sales Charge 4.65% 4.49% (4.46) 6.29% (6.27) 6.97% (6.74)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return for the ten-year period. The graph compares a
$10,000 investment in the Prudential Municipal Series Fund/Massachusetts Series
(Class B shares) with a similar investment in the Lehman Brothers Municipal Bond
Index (the Index) by portraying the initial account value at the beginning of
the ten- year period of Class B shares, and the account value at the end of the
current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1990 for Class B shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
contingent deferred sales charge of 5%, 4%, 3%, 2%, 1%, and 1% for six years was
deducted from the value of the investment in Class B shares, assuming full
redemption on August 31, 2000; (b) all recurring fees (including management
fees) were deducted; and (c) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A shares, on a quarterly
basis, beginning approximately seven years after purchase. This conversion
feature is not reflected in the graph. The numbers in parentheses ( ) show the
Series' average annual total return without waiver of management fees and/or
expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Municipal Series Fund Massachusetts Series
Class C Growth of a $10,000 Investment
(GRAPHIC)
Average Annual Total Returns as of 8/31/00
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C>
With Sales Charge 2.35% 4.03% (3.99) N/A 4.53% (4.50)
Without Sales Charge 4.40% 4.24% (4.20) N/A 4.70% (4.67)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return since inception of the share class.The graph
compares a $10,000 investment in the Prudential Municipal Series
Fund/Massachusetts Series (Class C shares) with a similar investment in the
Lehman Brothers Municipal Bond Index (the Index) by portraying the initial
account value at the commencement of operations of Class C shares, and the
account values at the end of the current fiscal year (August 31, 2000), as
measured on a quarterly basis, beginning in August 1994 for Class C shares. For
purposes of the graph, and unless otherwise indicated, it has been assumed that
(a) the maximum applicable front-end sales charge of 1% was deducted from the
initial $10,000 investment in Class C shares; (b) the maximum applicable
contingent deferred sales charge of 1% for 18 months was deducted from the value
of the investment in Class C shares, assuming full redemption on August 31,
2000; (c) all recurring fees (including management fees) were deducted; and (d)
all dividends and distributions were reinvested. The numbers in the parentheses
( ) show the Series' average annual total return without waiver of management
fees and/or expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class Z Growth of a $10,000 Investment
Average Annual Total Returns as of 8/31/00
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C>
With Sales Charge 5.08% N/A N/A 4.41% (4.38)
Without Sales Charge 5.08% N/A N/A 4.41% (4.38)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return since inception of the share class.The graph
compares a $10,000 investment in the Prudential Municipal Series
Fund/Massachusetts Series (Class Z shares) with a similar investment in the
Lehman Brothers Municipal Bond Index (the Index) by portraying the initial
account value at the commencement of operations of Class Z shares, and the
account value at the end of the current fiscal year (August 31, 2000), as
measured on a quarterly basis, beginning in December 1996 for Class Z shares.
For purposes of the graph, and unless otherwise indicated, it has been assumed
that (a) all recurring fees (including management fees) were deducted; and (b)
all dividends and distributions were reinvested. Class Z shares are not subject
to a sales charge or distribution and service (12b-1) fees. The numbers in
parentheses ( ) show the Series' average annual total return without waiver of
management fees and/or expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
For More Information
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's web site at:
http://www.prudential.com
Trustees
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
William V. Healey, Assistant Secretary
Manager
Prudential Investments
Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment
Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 8098
Philadelphia, PA 19101
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Fund Symbols NASDAQ CUSIP
Class A PUMAX 74435M655
Class B PMUNX 74435M663
Class C PMACX 74435M564
Class Z PMAZX 74435M416
MF119E
(LOGO) Printed on Recycled Paper
<PAGE>
ANNUAL REPORT AUGUST 31, 2000
Prudential Municipal Series Fund/North Carolina Series
Fund Type Municipal Bond
Objective Maximize current income that is exempt from North Carolina
State and federal income taxes, consistent with the preservation of capital
(GRAPHIC)
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus. The views expressed in this
report and information about the Fund's portfolio holdings are for the period
covered by this report and are subject to change thereafter.
(LOGO)
<PAGE>
Build on the Rock
Investment Goals and Style
The Prudential Municipal Series Fund/North Carolina Series' investment
objective is to maximize current income that is exempt from North Carolina
State and federal income taxes, consistent with the preservation of capital.
However, certain shareholders may be subject to the alternative minimum tax
(AMT) because some of the Series' bonds are AMT eligible. There can be no
assurance that the Series will achieve its investment objective.
Portfolio Composition
Expressed as a percentage of total investments as of 8/31/00
60.7% Revenue Bonds
14.2 General Obligation Bonds
22.6 Prerefunded
2.5 Cash Equivalents
Credit Quality
Expressed as a percentage of total investments as of 8/31/00
23.6% AAA
10.8 AA
4.2 A
20.2 BBB
38.7 Insured
2.5 Cash Equivalents
Ten Largest Issuers
Expressed as a percentage of net assets as of 8/31/00
15.7% No. Carolina Eastern Municipal Power Agency*
8.5 No. Carolina Municipal Power Agency
7.8 Charlotte Water & Sewer*
7.3 No. Carolina Med. Care Comm. Hosp. Revenue
5.7 Puerto Rico Commonwealth
4.4 Pitt Cnty. Pub. Fac.
3.9 Charlotte Arpt. Revenue
3.8 Northern Hosp. Dist.
3.2 Charlotte Mecklenberg Hosp. Auth.*
2.6 Guam Arpt. Auth. Revenue
* Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
<TABLE>
<CAPTION>
Cumulative Total Returns(1) As of 8/31/00
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 5.67% 28.36% (28.13) 86.27% (85.93) 90.16% (89.81)
Class B 5.31 26.14 (25.91) 79.41 (79.09) 173.53 (164.07)
Class C 5.05 24.59 (24.36) N/A 32.31 (32.07)
Lipper NC
Muni Debt
Fund Avg.(3) 5.21 27.58 84.96 ***
<CAPTION>
Average Annual Total Returns(1) As of 9/30/00
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 2.30% 4.31% (4.27) 6.06% (6.04) 5.85% (5.83)
Class B 0.12 4.40 (4.36) 5.99 (5.97) 6.62 (6.34)
Class C 2.84 4.10 (4.06) N/A 4.40 (4.37)
<CAPTION>
Distributions and Yields As of 8/31/00
Total Distributions 30-Day Taxable Equivalent Tax Rates of
Paid for 12 Months SEC Yield Yield(4) at 36% 39.6%
<S> <C> <C> <C> <C>
Class A $0.53 4.37% 7.40% 7.84%
Class B $0.50 4.32 7.32 7.75
Class C $0.48 4.09 6.93 7.34
</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 LLC and Lipper Inc. The
cumulative total returns do not take into account sales charges. The
average annual total returns do take into account applicable sales charges.
The Series charges a maximum front-end sales charge 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 are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months. Without waiver
of management fees and/or expense subsidization, the Series' cumulative and
average annual total returns would have been lower, as indicated in
parentheses ( ).
(2) Inception dates: Class A, 1/22/90; Class B, 2/13/85; and Class C, 8/1/94.
(3) Lipper Average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the North Carolina Municipal Debt Fund
category. Single-state Municipal Debt funds limit their securities that are
exempt from taxation in a specified state (double tax exempt) or city
(triple tax exempt).
(4) Taxable equivalent yields reflect federal and applicable state tax rates.
*** Lipper Since Inception returns are 89.64% for Class A, 201.64% for Class B,
and 37.48% for Class C, based on all funds in each share class.
1
<PAGE>
(LOGO) October 18, 2000
Dear Shareholder,
During our fiscal year ended August 31, 2000, the Class A and Class B shares of
the Prudential Municipal Series Fund/North Carolina Series, without considering
the initial sales charge, outperformed their benchmark Lipper Average, which is
not subject to sales charges. The Series performed well even though conditions
in the municipal bond market were very volatile.
Municipal bond prices began to fall early in our fiscal year because the Federal
Reserve repeatedly increased short-term interest rates to slow a rapidly
expanding U.S. economy. However, higher interest rates and strong economic
growth caused issuance of municipal bonds to decline at a time when many
investors sought the tax-exempt income provided by these securities. This strong
investor demand helped municipal bond prices end the 12 months higher.
Amid these shifting market conditions, Prudential's Municipal Bond sector team
took advantage of changing investment opportunities. The team accomplished this
by skillfully managing the risk that fluctuating interest rates could pose to
the Series' securities, by evaluating bond issuers' ability to make timely
principal and interest payments, and by identifying undervalued bonds.
Proposed merger
A proposal to merge the North Carolina Series into the National Municipals
Fund will be put to a shareholder vote at a special shareholder meeting
scheduled for December 7, 2000. For information regarding this proposal,
please refer to the enclosed materials.
Sincerely,
John R. Strangfeld, President
Prudential Municipal Series Fund
2
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Annual Report August 31, 2000
Investment Adviser's Report
Municipal bonds gained amid volatile market conditions
Prices of municipal bonds went on a roller coaster ride during our fiscal
year that began September 1, 1999. They ended the 12 months higher as
investors hurriedly bought a shrinking supply of newly issued tax-exempt
securities. Furthermore, prices of munis finished the 12 months higher on the
belief that the Federal Reserve (the Fed) was nearly through with its latest
round of increases in short-term interest rates.
The Fed raised short-term rates four times during our fiscal year out of concern
that an overheated U.S. economy might ignite higher inflation via rising
consumer prices and accelerating wages. By lifting short-term rates, the Fed
pushed borrowing costs higher for businesses and consumers, which it hoped would
slow economic growth to a more sustainable pace and help check inflationary
pressures.
Timely duration moves
The trend toward higher short-term rates had initially led investors to
require higher yields on municipal securities (and lower prices). In order to
reduce our portfolio's sensitivity to the rise in interest rates, we lowered
the Series' duration in the early autumn of 1999. (Duration measures how much
a portfolio's bonds will fluctuate in price for a given change in interest
rates. It is expressed in years.)
As the year 2000 began, we expected the Fed to continue tightening monetary
policy. We also believed that further rate increases would ultimately be viewed
as positive by the bond market because they would show the Fed's determination
to fight inflation. With this in mind, we began to lengthen the Series' duration
in January 2000, which enabled the Series to benefit more fully as prices of
munis rallied later in the year. Our timely adjustments to the Series' duration
was an important reason that, without considering sales charges, the Series'
Class A and Class B shares outperformed their benchmark Lipper Average, which is
not subject to sales charges.
3
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Annual Report August 31, 2000
Municipal bonds beat stocks
The municipal bond rally picked up steam in the spring of 2000 after the Fed
aggressively raised rates in mid-May. Data indicated that economic growth was
moderating. This, in turn, fueled optimism that the Fed would not have to
continue hiking rates during the remainder of 2000. Consequently, many
investors willingly paid higher prices for munis and accepted lower yields.
This strong demand for tax-exempt bonds helped the Lehman Municipal Bond Index
return 7.56% for the first eight months of 2000, compared with only 4.10% for
the Standard & Poor's 500 Composite Stock Price Index.
While investors scrambled to buy municipal bonds, the supply of newly issued
tax-exempt securities dwindled. Many state and local governments accumulated
such hefty cash reserves during the long U.S. economic expansion that their
borrowing needs declined, which led to decreased issuance of tax-exempt bonds.
In addition, the supply of new munis due to refunding activity shrank because
many state and local governments had already replaced higher-cost debt
securities with lower-cost bonds to save on interest expenses.
This periodic supply/demand imbalance in the municipal bond market heightened
the appeal of Puerto Rico bonds, which are triple tax exempt in all 50 states.
Not surprisingly, Puerto Rico debt securities performed exceptionally well. The
Series benefited from this trend as its various Puerto Rico bonds accounted for
9.8% of its total investments at the close of our fiscal year.
Other positions that enhanced the Series' returns included a portion of its
holdings in the North Carolina Eastern Municipal Power Agency. These bonds
gained in value after being escrowed to their maturity date and are now backed
by direct obligations of the U.S. Treasury. We also benefited from good demand
for North Carolina securities by selling at a profit tax-exempt bonds issued for
a North Carolina retirement home.
Prudential Municipal Series Fund Management Team
4
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Portfolio of Investments as of August 31, 2000
<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 96.4%
Charlotte Mecklenberg Hosp. Auth.,
Hlth. Care Sys. Rev. AA(c) 6.25% 1/01/20 $ 430(e) $ 448,735
Hlth. Care Sys. Rev. Aa3 6.25 1/01/20 320 326,800
Hlth. Care Sys. Rev. Aa3 5.875 1/15/26 500 504,870
Charlotte Arpt. Rev.,
Ser. B, M.B.I.A., A.M.T. Aaa 6.00 7/01/24 1,000 1,028,800
Ser. B, M.B.I.A., A.M.T. Aaa 6.00 7/01/28 500 513,785
Charlotte Storm Wtr. Fee Rev. Aa2 6.00 6/01/25 500 524,590
Charlotte No. Carolina Wtr. &
Swr. Sys. Rev. Aa2 5.25 6/01/24 500 482,210
Gen. Oblig. Aaa 6.20 6/01/17 1,500(e) 1,574,760
Gen. Oblig. Aaa 5.90 2/01/19 1,000(e) 1,064,630
Columbus Cnty. Ind. Fac. & Poll.
Ctrl. Fin. Auth. Rev., Int'l.
Paper Co. Proj., A.M.T. Baa1 6.15 4/01/21 1,000 1,005,960
Concord Util. Sys. Rev., M.B.I.A. Aaa 5.50 12/01/14 1,000 1,023,300
Cumberland Cnty. Hosp. Fac. Rev.,
Cumberland Cnty. Hosp. Sys. Inc. A3 5.25 10/01/29 500 430,950
Guam Arpt. Auth. Rev.,
Ser. B, A.M.T. BBB(c) 6.60 10/01/10 1,000 1,057,400
Guam Pwr. Auth. Rev.,
Ser. A BBB(c) 6.625 10/01/14 250(e) 276,640
Ser. A AAA(c) 6.75 10/01/24 525(e) 583,385
Halifax Cnty. Ind. Fac. & Poll.
Ctrl. Fin. Auth. Rev., Champion
Int'l. Corp. Proj., Ser. A,
A.M.T. Baa1 5.45 11/01/33 1,000 868,610
Lincoln Cnty., Gen. Oblig.,
F.G.I.C. Aaa 5.10 6/01/09 500 515,625
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev., Ser. A, E.T.M. Baa3 6.40 1/01/21 1,000 1,113,250
Pwr. Sys. Rev., Ser. A Aaa 6.00 1/01/26 650(e) 697,274
Pwr. Sys. Rev., Ser. A, E.T.M. Aaa 6.50 1/01/18 1,995 2,261,652
Pwr. Sys. Rev., Ser. A, M.B.I.A. Aaa 6.50 1/01/18 1,005 1,131,982
Pwr. Sys. Rev., A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,070,410
</TABLE>
See Notes to Financial Statements 5
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
No. Carolina Hsg. Fin. Agcy. Home
Ownership Ser. 6A, A.M.T. Aa2 6.20% 1/01/29 $ 1,000 $ 1,023,090
No. Carolina Med. Care Comm.,
Hosp. Rev.,
Annie Pen Mem. Hosp. Proj. Baa3 7.50 8/15/21 1,000(e) 1,060,670
Rex Hosp. Proj. Aaa 6.25 6/01/17 1,750(e) 1,865,307
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev.,
M.B.I.A. Aaa 6.00 1/01/10 1,250 1,356,787
No. 1 Catawba Elec. Rev.,
M.B.I.A. Aaa 6.22 1/01/12 2,000(d) 2,042,500
Northern Hosp. Dist., Surry Cnty.
Hlth. Care Fac. Rev. Ba1 7.875 10/01/21 1,500 1,503,885
Piedmont Triad Arpt. Auth., Arpt.
Rev., Ser. B, F.S.A., A.M.T. Aaa 6.00 7/01/21 1,000 1,028,800
Pitt Cnty. Pub. Fac., Cert. of
Part.,
Ser. A, M.B.I.A. Aaa 5.55 4/01/12 1,000 1,041,070
Ser. B, M.B.I.A. Aaa 5.40 4/01/08 700 732,291
Pitt Cnty. Rev., Pitt Cnty. Mem.
Hosp., E.T.M. Aaa 5.25 12/01/21 1,000 976,150
Puerto Rico Commonwlth.,
Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 1,240 1,292,601
Pub. Impt., Gen. Oblig. Baa1 Zero 7/01/15 2,150 991,021
Puerto Rico Ind. Tourist Ed.
Cogen Fac., AES Puerto Rico
Proj., A.M.T. Baa2 6.625 6/01/26 575 599,397
Puerto Rico Tel. Auth. Rev.,
M.B.I.A., R.I.B.S. Aaa 6.42 1/25/07 1,000(e)(d) 1,052,500
Randolph Cnty., Cert. of Part.,
F.S.A. Aaa 5.75 6/01/22 500 509,290
University of No. Carolina, Util.
Sys. Rev. Aa2 Zero 8/01/19 2,715 960,350
Virgin Islands Pub. Fin. Auth.
Rev., Gross Rcpts. Taxes Loan
Note,
Ser. A BBB(c) 6.50 10/01/24 500 517,945
Virgin Islands Terr., Spl. Tax,
Ser. 91 AAA(c) 7.75 10/01/06 305(e) 319,061
Wake Cnty. Hosp. Rev., E.T.M.,
M.B.I.A. Aaa 5.125 10/01/26 1,000 960,950
Winston Salem, Sngl. Fam. Mtge.
Rev., A.M.T. A1 8.00 9/01/07 205 209,627
------------
Total long-term investments
(cost $36,830,475) $ 38,548,910
------------
</TABLE>
6 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS 1.3%
Halifax Cnty. Ind. Facs. & Poll.
Fin. Auth., Westmoreland-Hadson
Roanoke Valley, Ser. 91,
F.R.D.D., A.M.T. CPS1 4.40% 9/01/00 $ 400 $ 400,000
No. Carolina Med. Care Comm.
Hlth. Care Fac. Rev., The Givens
Estates Inc. Proj., Ser. 97,
F.R.D.D. VMIG1 4.35 9/01/00 100 100,000
------------
Total short-term investments
(cost $500,000) $ 500,000
------------
Total Investments 97.7%
(cost $37,330,475; Note 4) 39,048,910
------------
Other assets in excess of
liabilities 2.3% 936,581
------------
Net Assets 100% $ 39,985,491
------------
------------
</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.
E.T.M--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Corporation.
R.I.B.S.--Residual Interest Bonds.
(b) 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.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at August 31, 2000.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements 7
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $37,330,475) $39,048,910
Cash 35,416
Receivable for investments sold 543,475
Interest receivable 531,412
Other assets 1,151
---------------
Total assets 40,160,364
---------------
LIABILITIES
Payable for Series shares reacquired 63,259
Accrued expenses 56,128
Dividends payable 22,518
Management fee payable 16,871
Distribution fee payable 9,951
Deferred trustee's fee 6,146
---------------
Total liabilities 174,873
---------------
NET ASSETS $39,985,491
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 36,379
Paid-in capital in excess of par 38,695,310
---------------
38,731,689
Accumulated net realized loss on investments (464,633)
Net unrealized appreciation on investments 1,718,435
---------------
Net assets, August 31, 2000 $39,985,491
---------------
---------------
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($29,821,562 / 2,713,441 shares of beneficial interest
issued and outstanding) $10.99
Maximum sales charge (3% of offering price) .34
---------------
Maximum offering price to public $11.33
---------------
---------------
Class B:
Net asset value, offering price and redemption price per
share ($10,133,543 / 921,699 shares of beneficial interest
issued and outstanding) $10.99
---------------
---------------
Class C:
Net asset value and redemption price per share
($30,386 / 2,763 shares of beneficial interest issued and
outstanding) $10.99
Sales charge (1% of offering price) .11
---------------
Offering price to public $11.10
---------------
---------------
</TABLE>
See Notes to Financial Statements 9
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 2,451,879
---------------
Expenses
Management fee 205,793
Distribution fee--Class A 71,587
Distribution fee--Class B 61,851
Distribution fee--Class C 213
Custodian's fees and expenses 72,000
Reports to shareholders 32,000
Registration fees 20,000
Transfer agent's fees and expenses 17,000
Audit fee 10,000
Trustees' fees and expenses 9,000
Legal fees and expenses 4,000
Miscellaneous 2,345
---------------
Total expenses 505,789
Less: Custodian fee credit (272)
---------------
Net expenses 505,517
---------------
Net investment income 1,946,362
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on:
Investment transactions (476,170)
Financial futures transactions 12,974
---------------
(463,196)
Net change in unrealized appreciation on Investments 572,593
---------------
Net gain on investments 109,397
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,055,759
---------------
---------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 1,946,362 $ 2,241,676
Net realized gain (loss) on investment
transactions (463,196) 58,888
Net change in unrealized appreciation of
investments 572,593 (3,120,844)
--------------- -----------
Net increase (decrease) in net assets
resulting from operations 2,055,759 (820,280)
--------------- -----------
Dividends and distributions (Note 1):
Dividends from net investment income
Class A (1,376,420) (1,400,647)
Class B (568,691) (839,833)
Class C (1,251) (1,196)
--------------- -----------
(1,946,362) (2,241,676)
--------------- -----------
Distributions from net realized gains
Class A (13,336) (152,983)
Class B (6,298) (100,812)
Class C (13) (148)
--------------- -----------
(19,647) (253,943)
--------------- -----------
Series share transactions (net of share
conversions)
(Note 5):
Net proceeds from shares sold 971,027 3,818,192
Net asset value of shares issued in
reinvestment of dividends and distributions 1,005,340 1,320,522
Cost of shares reacquired (8,068,943) (7,739,135)
--------------- -----------
Net decrease in net assets from Series share
transactions (6,092,576) (2,600,421)
--------------- -----------
Total decrease (6,002,826) (5,916,320)
NET ASSETS
Beginning of year 45,988,317 51,904,637
--------------- -----------
End of year $39,985,491 $45,988,317
--------------- -----------
--------------- -----------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund
was organized as a Massachusetts business trust on May 18, 1984 and consists
of 11 series. The monies of each series are invested in separate,
independently managed portfolios. The North Carolina Series (the 'Series')
commenced investment operations in February 1985. The Series is diversified
and its investment objective is to maximize current income that is exempt
from North Carolina State and federal income taxes consistent with the
preservation of capital and, in conjunction therewith, the Series may invest
in debt securities with the potential for capital gain. The Series seeks to
achieve this objective by investing primarily in North Carolina State,
municipal and local government obligations and obligations of other
qualifying issuers. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic or political
developments in a specific state, industry or region.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
All securities are valued as of 4:15 p.m., New York time.
Financial Futures Contracts: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the 'initial margin.' Subsequent payments, known as 'variation margin,'
are made or received by the Series each day, depending on the daily fluctuation
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
12
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Notes to Financial Statements Cont'd.
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
Options: The Series 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 Series currently
owns or intends to purchase. When the Series purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series 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 Series 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 Series 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.
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 Series 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.
Federal Income Taxes: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue
13
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Notes to Financial Statements Cont'd.
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Custodian 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. In connection therewith, PIC is
obligated to keep certain books and records of the Fund. PIFM pays for the
services of PIC, the cost of 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 the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B and Class C shares of the Fund. The Fund compensates PIMS 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.
14
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Notes to Financial Statements Cont'd.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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 .25 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 period September 1, 1999 through August 22, 2000. Effective August 23,
2000, such expenses under the plans were .25 of 1% of the average daily net
assets of the Class A, B and C shares.
PIMS has advised the Series that it received approximately $1,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 2000. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PIMS has advised the Series that during the year ended August 31, 2000, it
received approximately $15,400 in contingent deferred sales charges imposed upon
certain redemptions by Class B shareholders.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee at an annual rate of .080 of 1% of
the unused portion of the credit facility. The commitment fee is accrued and
paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA
is March 9, 2001. Prior to March 9, 2000, the commitment fee was .065 of 1% of
the unused portion of the credit facility. The Series did not borrow any amounts
pursuant to the SCA during the year ended August 31, 2000.
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 August 31, 2000, the
Series incurred fees of approximately $14,100 for the services of PMFS. As of
August 31, 2000, approximately $1,100 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.
15
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Notes to Financial Statements Cont'd.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $8,805,438 and $15,796,356,
respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000, was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $1,718,435 (gross unrealized appreciation-$1,931,114; gross
unrealized depreciation-$212,679).
For federal income tax purposes, the Series has a capital loss
carryforward as of August 31, 2000 of approximately $220,500 which expires in
2008. Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of this amount. In
addition, the Series will elect to treat net capital losses of approximately
$242,700, incurred in the ten month period ended August 31, 2000 as having
occurred in the following fiscal year.
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3%. 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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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.
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>
Class A Shares Amount
------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 40,432 $ 432,926
Shares issued in reinvestment of dividends and distributions 64,170 685,642
Shares reacquired (535,132) (5,709,136)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (430,530) (4,590,568)
Shares issued upon conversion from Class B 452,915 4,847,220
---------- -----------
Net increase (decrease) in shares outstanding 22,385 $ 256,652
---------- -----------
---------- -----------
Year ended August 31, 1999:
Shares sold 160,409 $ 1,841,063
Shares issued in reinvestment of dividends and distributions 70,495 808,498
Shares reacquired (371,069) (4,230,540)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (140,165) (1,580,979)
Shares issued upon conversion from Class B 251,666 2,895,820
---------- -----------
Net increase (decrease) in shares outstanding 111,501 $ 1,314,841
---------- -----------
---------- -----------
</TABLE>
16
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
------------------------------------------------------------- ---------- -----------
Year ended August 31, 2000:
<S> <C> <C>
Shares sold 50,141 $ 537,507
Shares issued in reinvestment of dividends and distributions 29,876 319,061
Shares reacquired (220,782) (2,359,807)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (140,765) (1,503,239)
Shares reacquired upon conversion into Class A (452,626) (4,847,220)
---------- -----------
Net increase (decrease) in shares outstanding (593,391) $(6,350,459)
---------- -----------
---------- -----------
Year ended August 31, 1999:
Shares sold 170,364 $ 1,976,534
Shares issued in reinvestment of dividends and distributions 44,516 511,315
Shares reacquired (306,345) (3,508,595)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (91,465) (1,020,746)
Shares reacquired upon conversion into Class A (251,607) (2,895,820)
---------- -----------
Net increase (decrease) in shares outstanding (343,072) $(3,916,566)
---------- -----------
---------- -----------
<CAPTION>
Class C
-------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 55 $ 594
Shares issued in reinvestment of dividends and distributions 60 637
---------- -----------
Net increase (decrease) in shares outstanding 115 $ 1,231
---------- -----------
---------- -----------
Year ended August 31, 1999:
Shares sold 52 $ 595
Shares issued in reinvestment of dividends and distributions 61 709
---------- -----------
Net increase (decrease) in shares outstanding 113 $ 1,304
---------- -----------
---------- -----------
</TABLE>
Note 6. Proposed Reorganization
On August 23, 2000, the Trustees of the Series approved an Agreement and Plan of
Reorganization (the 'Plan of Reorganization') which provides for the transfer of
all of the assets and liabilities of the Series to Prudential National
Municipals Fund, Inc. ('National Municipals'). Class A, Class B and Class C
shares of the Series would be exchanged at net asset value for Class A shares of
equivalent value of National Municipals. The Series would then cease operations.
The Plan of Reorganization requires approval by the shareholders of the
Series to become effective and a proxy/prospectus will be mailed to shareholders
in October 2000. If the Plan is approved, it is expected that the reorganization
will take place in December 2000. The Series and National Municipals will each
bear their pro rata share of the costs of the reorganization, including cost of
proxy solicitation.
17
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.92
--------
Income from investment operations
Net investment income .52
Net realized and unrealized gain (loss) on investment
transactions .08
--------
Total from investment operations .60
--------
Less distributions
Dividends from net investment income (.52)
Distributions in excess of net investment income --
Distributions from net realized gains (.01)
--------
Total distributions (.53)
--------
Net asset value, end of year $ 10.99
--------
--------
TOTAL RETURN(b): 5.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $29,822
Average net assets (000) $28,635
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.15%
Expenses, excluding distribution and service (12b-1) fees .90%
Net investment income 4.81%
For Class A, B and C shares:
Portfolio turnover rate 22%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
18 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 11.69 $ 11.28 $ 11.06 $ 11.19
-------- -------- -------- --------
.53 .55 .54(a) .53(a)
(.71) .41 .38 (.01)
-------- -------- -------- --------
(.18) .96 .92 .52
-------- -------- -------- --------
(.53) (.55) (.54) (.53)
-- --(c) -- --
(.06) -- (.16) (.12)
-------- -------- -------- --------
(.59) (.55) (.70) (.65)
-------- -------- -------- --------
$ 10.92 $ 11.69 $ 11.28 $ 11.06
-------- -------- -------- --------
-------- -------- -------- --------
(1.72)% 8.72% 8.58% 4.70%
$ 29,400 $ 30,149 $ 29,350 $ 28,089
$ 30,621 $ 29,617 $ 29,055 $ 27,628
1.03% .84% .93%(a) 1.03%(a)
.83% .74% .83%(a) .93%(a)
4.57% 4.79% 4.87%(a) 4.78%(a)
15% 27% 35% 23%
</TABLE>
See Notes to Financial Statements 19
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.93
---------------
Income from investment operations
Net investment income .49
Net realized and unrealized gain (loss) on investment
transactions .07
---------------
Total from investment operations .56
---------------
Less distributions
Dividends from net investment income (.49)
Distributions in excess of net investment income --
Distributions from net realized gains (.01)
---------------
Total distributions (.50)
---------------
Net asset value, end of year $ 10.99
---------------
---------------
TOTAL RETURN(b): 5.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $10,133
Average net assets (000) $12,495
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.39%
Expenses, excluding distribution and service (12b-1) fees .90%
Net investment income 4.55%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
20 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.69 $ 11.29 $ 11.06 $ 11.19
-------- -------- -------- --------
.49 .51 .50(a) .49(a)
(.70) .40 .39 (.01)
-------- -------- -------- --------
(.21) .91 .89 .48
-------- -------- -------- --------
(.49) (.51) (.50) (.49)
-- --(c) -- --
(.06) -- (.16) (.12)
-------- -------- -------- --------
(.55) (.51) (.66) (.61)
-------- -------- -------- --------
$ 10.93 $ 11.69 $ 11.29 $ 11.06
-------- -------- -------- --------
-------- -------- -------- --------
(1.93)% 8.19% 8.25% 4.28%
$ 16,560 $ 21,726 $524,952 $ 31,029
$ 19,695 $ 23,460 $ 27,703 $ 35,605
1.33% 1.24% 1.33%(a) 1.43%(a)
.83% .74% .83%(a) .93%(a)
4.26% 4.39% 4.47%(a) 4.37%(a)
</TABLE>
See Notes to Financial Statements 21
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.93
---------------
Income from investment operations
Net investment income .47
Net realized and unrealized gain (loss) on investment
transactions .07
---------------
Total from investment operations .54
---------------
Less distributions
Dividends from net investment income (.47)
Distributions in excess of net investment income --
Distributions from net realized gains (.01)
---------------
Total distributions (.48)
---------------
Net asset value, end of year $ 10.99
---------------
---------------
TOTAL RETURN(b): 5.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 30
Average net assets (000) $ 29
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.64%
Expenses, excluding distribution and service (12b-1) fees .90%
Net investment income 4.33%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
22 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------------------------
Year Ended August 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C>
$11.69 $11.29 $11.06 $11.19
------- ------- ------- -------
.46 .48 .47(a) .46(a)
(.70) .40 .39 (.01)
------- ------- ------- -------
(.24) .88 .86 .45
------- ------- ------- -------
(.46) (.48) (.47) (.46)
-- --(c) -- --
(.06) -- (.16) (.12)
------- ------- ------- -------
(.52) (.48) (.63) (.58)
------- ------- ------- -------
$10.93 $11.69 $11.29 $11.06
------- ------- ------- -------
------- ------- ------- -------
(2.18)% 7.92% 7.98% 4.03%
$ 29 $ 30 $ 62 $ 72
$ 30 $ 31 $ 68 $ 69
1.58% 1.49% 1.58%(a) 1.68%(a)
.83% .74% .83%(a) .93%(a)
4.02% 4.14% 4.22%(a) 4.14%(a)
</TABLE>
See Notes to Financial Statements 23
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, North Carolina Series
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 Municipal Series Fund,
North Carolina Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, 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 four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion. The accompanying financial highlights for the year ended August 31,
1996 were audited by other independent accountants, whose opinion dated October
14, 1996 was unqualified. As described in Note 6 to the financial statements, on
August 23, 2000, the Board of Trustees of the Fund approved an Agreement and
Plan of Reorganization, subject to shareholder approval, whereby the Fund would
be merged into Prudential National Municipals Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
24
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Federal Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 2000,
dividends paid from net investment income of $0.52 per Class A share, $0.49 per
Class B share, and $0.47 per Class C share were all federally tax-exempt
interest dividends. In addition, the Series paid to Class A, B and C shares a
long-term capital gain distribution of $0.005 which is taxable as such.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or Substitute
1099 DIV as to the federal tax status of the distributions received by you in
calendar year 2000.
25
<PAGE>
Prudential Municipal Series Fund North Carolina Series
Getting the Most from Your Prudential Mutual Fund
When you invest through Prudential Mutual Funds, you receive financial advice
from a Prudential Securities Financial Advisor or Pruco Securities registered
representative. Your advisor or representative can provide you with the
following services:
There's No Reward Without Risk; but Is This Risk Worth It? Your financial
advisor or registered representative can help you match the reward you seek with
the risk you can tolerate. Risk can be difficult to gauge-sometimes even the
simplest investments bear surprising risks. The educated investor knows that
markets seldom move in just one direction. There are times when a market sector
or asset class will lose value or provide little in the way of total return.
Managing your own expectations is easier with help from someone who understands
the markets and who knows you!
Keeping Up With the Joneses
A financial advisor or registered representative can help you wade through the
numerous available mutual funds to find the ones that fit your individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals-not at you personally. Your financial
advisor or registered representative will review your investment objectives with
you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance-not just based on
the current investment fad.
Buy Low, Sell High
Buying at the top of a market cycle and selling at the bottom are among the most
common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and should remind you that you're investing for the long
haul.
<PAGE>
www.prudential.com (800) 225-1852
Class A Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 8/31/00
One Year Five Years Ten Years Since Inception
With Sales
Charge 2.50% 4.48% (4.44%) 6.09% (6.07%) 5.94% (5.92%)
Without Sales
Charge 5.67% 5.12% (5.08%) 6.42% (6.40%) 6.25% (6.23%)
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.The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return for the ten-year period. The graph compares a
$10,000 investment in the Prudential Municipal Series Fund/North Carolina Series
(Class A shares) with a similar investment in the Lehman Brothers Municipal Bond
Index (the Index) by portraying the initial account value at the beginning of
the ten-year period of Class A shares, and the account value at the end of the
current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1990 for Class A shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
front-end sales charge of 3% was deducted from the initial $10,000 investment in
Class A shares; (b) all recurring fees (including management fees) were
deducted; and (c) all dividends and distributions were reinvested. The numbers
in parentheses ( ) show the Series' average annual total return without waiver
of management fees and/or expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Municipal Series Fund North Carolina Series
(GRAPH)
Class B Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Average Annual Total Returns as of 8/31/00
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C> <C> <C> <C>
With Sales
Charge 0.31% 4.59% (4.55%) 6.02% (6.00%) 6.69% (6.45%)
Without Sales
Charge 5.31% 4.75% (4.72%) 6.02% (6.00%) 6.69% (6.45%)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return for the ten-year period. The graph compares a
$10,000 investment in the Prudential Municipal Series Fund/North Carolina Series
(Class B shares) with a similar investment in the Lehman Brothers Municipal Bond
Index (the Index) by portraying the initial account value at the beginning of
the ten-year period of Class B shares, and the account value at the end of the
current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1990 for Class B shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
contingent deferred sales charge of 5%, 4%, 3%, 2%, 1%, and 1% for six years was
deducted from the value of the investment in Class B shares, assuming full
redemption on August 31, 2000; (b) all recurring fees (including management
fees) were deducted; and (c) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A shares, on a quarterly
basis, beginning approximately seven years after purchase. This conversion
feature is not reflected in the graph. The numbers in parentheses ( ) show the
Series' average annual total return without waiver of management fees and/or
expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
(GRAPH)
Class C Growth of a $10,000 Investment
<TABLE>
<CAPTION>
Average Annual Total Returns as of 8/31/00
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C> <C> <C>
With Sales
Charge 3.00% 4.29% (4.25%) N/A 4.54% (4.51%)
Without Sales
Charge 5.05% 4.50% 4.46%) N/A 4.71% (4.68%)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return since inception of the share class.The graph
compares a $10,000 investment in the Prudential Municipal Series Fund/North
Carolina Series (Class C shares) with a similar investment in the Lehman
Brothers Municipal Bond Index (the Index) by portraying the initial account
value at the commencement of operations of Class C shares, and the account
values at the end of the current fiscal year (August 31, 2000), as measured on a
quarterly basis, beginning in August 1994 for Class C shares. For purposes of
the graph, and unless otherwise indicated, it has been assumed that (a) the
maximum applicable front-end sales charge of 1% was deducted from the initial
$10,000 investment in Class C shares; (b) the maximum applicable contingent
deferred sales charge of 1% for 18 months was deducted from the value of the
investment in Class C shares, assuming full redemption on August 31, 2000; (c)
all recurring fees (including management fees) were deducted; and (d) all
dividends and distributions were reinvested. The numbers in parentheses ( ) show
the Series' average annual total return without waiver of management fees and/or
expense subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
For More Information
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's web site at:
http://www.prudential.com
Trustees
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
William V. Healey, Assistant Secretary
Manager
Prudential Investments
Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment
Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 8098
Philadelphia, PA 19101
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Fund Symbols NASDAQ CUSIP
Class A PRNAX 74435M812
Class B PNCSX 74435M820
Class C PCNCX 74435M515
MF122E
(ICON) Printed on Recycled Paper
<PAGE>
ANNUAL REPORT AUGUST 31, 2000
Prudential
Municipal Series Fund/
Ohio Series
Fund Type Municipal Bond
Objective Maximize current income that is exempt from Ohio State and federal
income taxes, consistent with the preservation of capital
(GRAPHIC)
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus. The views expressed in this
report and information about the Fund's portfolio holdings are for the period
covered by this report and are subject to change thereafter.
(LOGO)
<PAGE>
Build on the Rock
Investment Goals and Style
The Prudential Municipal Series Fund/Ohio Series' investment objective is to
maximize current income that is exempt from Ohio State and federal income taxes,
consistent with the preservation of capital. However, certain shareholders may
be subject to the alternative minimum tax (AMT) because some of the Series'
bonds are AMT eligible. There can be no assurance that the Series will achieve
its investment objective.
Portfolio Composition
Expressed as a percentage of total investments as of 8/31/00
51.3% Revenue Bonds
28.9 General Obligation Bonds
17.9 Prerefunded
1.9 Miscellaneous
Credit Quality
Expressed as a percentage of total investments as of 8/31/00
12.3% AAA
11.7 AA
5.5 A
18.7 BBB
4.6 BB
47.2 Insured
Ten Largest Issuers
Expressed as a percentage of net assets as of 8/31/00
6.7% Ohio State Turnpike Commission Revenue
4.6 Guam Power Authority Revenue*
4.5 Ohio State Air Quality Development Authority Revenue
3.8 Puerto Rico Public Buildings Authority Revenue
3.7 University of Puerto Rico Revenue
3.7 Columbus Citation Housing Development Corp.
3.5 Lucas County Hospital Revenue
3.3 Lorain County Hospital Revenue
3.0 Montgomery County Health System Revenue
2.8 Lucas County Health Facility Revenue
* Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns(1) As of 8/31/00
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 5.17% 26.47% (26.25) 88.49% (87.99) 93.36% (92.84)
Class B 4.90 24.29 (24.07) 81.75 (81.27) 197.76 (194.33)
Class C 4.64 22.77 (22.55) N/A 31.46 (31.11)
Lipper OH
Muni Debt
Fund Avg.(3) 4.85 27.03 91.48 ***
<CAPTION>
Average Annual Total Returns(1) As of 9/30/00
One Five Ten Since
Year Years Years Inception(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Class A 1.34% 3.94% (3.90) 6.14% (6.11) 5.99% (5.97)
Class B -0.76 4.05 (4.01) 6.08 (6.05) 7.00 (6.91)
Class C 1.96 3.76 (3.72) N/A 4.25 (4.21)
<CAPTION>
Distributions and Yields As of 8/31/00
Total Distributions 30-Day Taxable Equivalent Tax Rates of
Paid for 12 Months SEC Yield Yield(4) at 36% 39.6%
<S> <C> <C> <C> <C>
Class A $0.61 4.26% 7.17% 7.60%
Class B $0.58 4.20 7.07 7.50
Class C $0.55 3.97 6.69 7.08
</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 LLC and Lipper Inc. The
cumulative total returns do not take into account sales charges. The
average annual total returns do take into account applicable sales charges.
The Series charges a maximum front-end sales charge 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 are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months. Without waiver
of management fees and/or expense subsidization, the Series' cumulative and
average annual total returns would have been lower, as indicated in
parentheses ( ).
(2) Inception dates: Class A, 1/22/90; Class B, 9/20/84; and Class C, 8/1/94.
(3) Lipper Average returns are for all funds in each share class for the one-,
five-, and ten-year periods in the Ohio Municipal Debt Fund category.
Single-state Municipal Debt funds limit their securities that are exempt
from taxation in a specified state (double tax exempt) or city (triple tax
exempt).
(4) Taxable equivalent yields reflect federal and applicable state tax rates.
*** Lipper Since Inception returns are 96.05% for Class A, 223.93% for Class B,
and 37.09% for Class C, based on all funds in each share class.
1
<PAGE>
(LOGO) October 18, 2000
Dear Shareholder,
During our fiscal year ended August 31, 2000, the Class A and Class B shares of
the Prudential Municipal Series Fund/Ohio Series, without considering the
initial sales charge, outperformed their benchmark Lipper Average, which is not
subject to sales charges. The Series performed well even though conditions in
the municipal bond market were very volatile.
Municipal bond prices began to fall early in our fiscal year because the Federal
Reserve repeatedly increased short-term interest rates to slow a rapidly
expanding U.S. economy. However, higher interest rates and strong economic
growth caused issuance of municipal bonds to decline at a time when many
investors sought the tax-exempt income provided by these securities. This strong
investor demand helped municipal bond prices end the 12 months higher.
Amid these shifting market conditions, Prudential's Municipal Bond sector team
took advantage of changing investment opportunities. The team accomplished this
by skillfully managing the risk that fluctuating interest rates could pose to
the Series' securities, and by identifying undervalued bonds.
Proposed merger
A proposal to merge the Ohio Series into the National Municipals Fund will be
put to a shareholder vote at a special shareholder meeting scheduled for
December 7, 2000. For information regarding this proposal, please refer to the
enclosed materials.
Sincerely,
John R. Strangfeld, President
Prudential Municipal Series Fund
2
<PAGE>
Prudential Municipal Series Fund Ohio Series
Annual Report
August 31, 2000
Investment Adviser's Report
Municipal bonds gained amid volatile market conditions Prices of municipal bonds
went on a roller coaster ride during our fiscal year that began September 1,
1999. They ended the 12 months higher as investors hurriedly bought a shrinking
supply of newly issued tax-exempt securities. Furthermore, prices of munis
finished the 12 months higher on the belief that the Federal Reserve (the Fed)
was nearly through with its latest round of increases in short-term interest
rates.
The Fed raised short-term rates four times during our fiscal year out of concern
that an overheated U.S. economy might ignite higher inflation via rising
consumer prices and accelerating wages. By lifting short-term rates, the Fed
pushed borrowing costs higher for businesses and consumers, which it hoped would
slow economic growth to a more sustainable pace and help check inflationary
pressures.
Timely duration moves
The trend toward higher short-term rates had initially led investors to require
higher yields on municipal securities (and lower prices). In order to reduce our
portfolio's sensitivity to the rise in interest rates, we lowered the Series'
duration in the early autumn of 1999. (Duration measures how much a portfolio's
bonds will fluctuate in price for a given change in interest rates. It is
expressed in years.)
As the year 2000 began, we expected the Fed to continue tightening monetary
policy. We also believed that further rate increases would ultimately be viewed
as positive by the bond market because they would show the Fed's determination
to fight inflation. With this in mind, we began to lengthen the Series' duration
in January 2000, which enabled the Series to benefit more fully as prices of
munis rallied later in the year. Our timely adjustments to the Series' duration
was an important reason that, without considering sales charges, the Series'
Class A and Class B shares outperformed their benchmark Lipper Average, which is
not subject to sales charges.
3
<PAGE>
Prudential Municipal Series Fund Ohio Series
Annual Report August 31, 2000
Municipal bonds beat stocks
The municipal bond rally picked up steam in the spring of 2000 after the Fed
aggressively raised rates in mid-May. Data indicated that economic growth was
moderating. This, in turn, fueled optimism that the Fed would not have to
continue hiking rates during the remainder of 2000. Consequently, many investors
willingly paid higher prices for munis and accepted lower yields.
This strong demand for tax-exempt bonds helped the Lehman Municipal Bond Index
return 7.56% for the first eight months of 2000, compared with only 4.10% for
the Standard & Poor's 500 Composite Stock Price Index.
Puerto Rico bonds enhanced Series' returns While investors scrambled to buy
municipal bonds, the supply of newly issued tax-exempt securities dwindled. Many
state and local governments accumulated such hefty cash reserves during the long
U.S. economic expansion that their borrowing needs declined, which in turn led
to decreased issuance of tax-exempt bonds. In addition, the supply of new bonds
due to refunding activity shrank, as many state and local governments had
already replaced higher-cost debt securities with lower-cost bonds to save on
interest expenses.
In Ohio, the amount of newly issued tax-exempt bonds from August 31, 1999, to
August 31, 2000, dropped 27%, compared with the same period a year earlier,
according to Thomson Financial Securities Data. As an alternative to Ohio
securities, some market participants, including us, turned to Puerto Rico bonds,
which are triple tax exempt in all 50 states. Not surprisingly, Puerto Rico
bonds performed very well. The Series benefited from this trend since its
various Puerto Rico bonds accounted for 8.60% of its total investments at the
end of our fiscal year.
CSC Steel bonds hurt Series' performance On the other hand, the Series owns
nonrated tax- exempt bonds backed by CSC Steel that declined sharply in value
because the company failed to make its August 2000 interest payment. The U.S.
steel industry has generally been
4
<PAGE>
www.prudential.com (800) 225-1852
hurt by competition from inexpensively priced imported steel. CSC Steel has
suffered from severe cash flow problems. It is trying to avoid a bankruptcy
filing by negotiating with its lenders.
Prudential Municipal Series Fund Management Team
5
<PAGE>
Prudential Municipal Series Fund Ohio Series
Portfolio of Investments as of August 31, 2000
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.7%
Akron, Gen. Oblig. A1 10.50% 12/01/04 $ 200 $ 245,358
Brecksville Broadview Heights City
Sch. Dist., F.G.I.C. Aaa 6.50 12/01/16 1,000 1,103,350
Canton Water Works Sys., Gen.
Oblig., A.M.B.A.C. Aaa 5.85 12/01/15 700 729,960
Clear Fork Valley Loc. Sch. Dist.,
Richland Cnty. AA-(c) Zero 12/01/24 845 206,290
Cleveland Arpt. Spl. Rev. Ref.,
Continental Airlines, Inc., A.M.T. Ba2 5.70 12/01/19 650 565,636
Cleveland Cuyahoga Cnty. Port Auth.
Rev., Dev. Cap. Impvt. proj. Ser.
A NR 5.375 5/15/19 980 871,249
Cleveland, Gen. Oblig., M.B.I.A. Aaa 5.75 8/01/15 1,000 1,059,740
Cleveland, Gen. Oblig., M.B.I.A. Aaa 5.75 8/01/14 1,000 1,063,140
Columbus Citation Hsg. Dev. Corp.,
Mtge. Rev., F.H.A. AA(c) 7.625 1/01/22 1,850(e) 2,236,520
Columbus, Gen. Oblig., Mun. Arpt.
No. 32, A.M.T. Aaa 7.15 7/15/06 435 444,531
Cuyahoga Cnty. Hosp. Rev., Meridia
Health Sys. A1 6.25 8/15/24 1,500(e) 1,642,275
Dayton, Gen. Oblig., M.B.I.A. Aaa 7.00 12/01/07 480 549,658
Dover Mun. Elec. Sys. Rev.,
F.G.I.C. Aaa 5.95 12/01/14 1,000 1,047,200
Franklin Cnty. Hosp. Rev., Senior
Doctors Hlth. Corp., Ser. A Baa3 5.60 12/01/28 900 655,038
Greene Cnty. Cap. Apprec., Wtr.
Sys. Rev., Ser. A, F.G.I.C. Aaa 6.125 12/01/21 1,000 1,056,620
Guam Pwr. Auth. Rev., Ser. A AAA(c) 6.75 10/01/24 2,500(e) 2,778,025
Hilliard City Sch. Dist.,
Cap. Apprec.-Sch. Impvt., F.G.I.C. Aaa Zero 12/01/09 2,000 1,276,920
Cap. Apprec.-Sch. Impvt., F.G.I.C. Aaa Zero 12/01/18 1,720 624,412
Cap. Apprec.-Sch. Impvt., F.G.I.C. Aaa Zero 12/01/19 1,720 586,279
Huber Heights Water Sys. Rev., Cap.
Apprec., M.B.I.A. Aaa Zero 12/01/23 1,000 270,100
Hudson City, Park Impvt. Aa2 6.125 12/01/19 555 589,638
Lorain Cnty. Hosp. Rev., Ref.
Mtge., Elyria United Methodist
Village BBB+(c) 6.875 6/01/22 2,000 1,996,360
</TABLE>
6 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lucas Cnty. Hlth. Fac. Rev., Ref.,
Ohio Presbyterian Retirement Svcs. NR 6.625% 7/01/14 $ 1,750 $ 1,711,132
Lucas Cnty. Hosp. Rev., Promedica
Healthcare Oblig., Ser. 96,
M.B.I.A. Aaa 5.75 11/15/09 2,000(d) 2,130,240
Marysville Village Sch. Dist., Gen.
Oblig., Sch. Impvt., M.B.I.A. Aaa Zero 12/01/15 865 374,804
Miami Cnty. Hosp. Fac. Rev., Ref. &
Impvt., Upper Valley Med. Ctr. Baa2 6.375 5/15/26 750 679,117
Montgomery Cnty. Hlth. Sys. Rev.,
Ref., Franciscan Med. Ctr., Dayton NR 5.50 7/01/18 1,750(e) 1,806,315
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek,
F.G.I.C. Aaa Zero 9/01/05 1,000 793,110
Morgan, Loc. Sch. Dist. F.S.A. Aaa 5.75 12/01/22 1,000 1,018,150
Mount Vernon City Sch. Dist., Gen.
Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 556,600
Newark, Ltd. Tax Gen. Oblig., Wtr.
Impvt., Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/06 805 600,305
Ohio Hsg. Fin. Agy. Mtg. Rev., Res.
Conv. Opt C1, G.N.M.A., A.M.T. Aaa 6.05 3/01/32 1,000 1,011,380
Ser. A, G.N.M.A., A.M.T. Aaa 6.35 9/01/31 1,000 1,034,250
Ohio St. Air Quality Dev. Auth.
Rev., Poll. Ctrl.,
Cleveland Elec. Co. Proj., Ref.,
A.M.T. Ba1 6.10 8/01/20 1,000 950,260
Cleveland Elec. Co. Proj., Ref.,
F.G.I.C. Aaa 8.00 12/01/13 2,500 2,704,800
Ohio St. Bldg. Auth., Das Data Ctr.
Proj., Aa2 6.00 10/01/08 615 670,381
Ohio St. Environ. Impvt. Rev.,
Ref., USX Corp. Proj. Baa2 5.625 5/01/29 1,000 907,190
Ohio St. Higher Edl. Fac. Comn.
Rev., Case Western Resv. Univ.,
Ser. B Aa3 6.50 10/01/20 750 848,775
</TABLE>
See Notes to Financial Statements 7
<PAGE>
Prudential Municipal Series Fund Ohio Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ohio St. Solid Waste Disposal Rev.,
USG Corp. Proj. A.M.T. Baa1 6.05% 8/01/34 $ 1,000 $ 954,360
Ohio St. Solid Waste Rev., A.M.T. NR 8.50 8/01/22 500(f) 147,500
Ohio St. Tpk. Comm., Tpk. Rev.,
Ref., Series A, F.G.I.C. Aaa 5.50 2/15/24 4,000 4,063,400
Ohio St. Univ., Gen. Rcpts., Ser. A Aa2 6.00 12/01/16 1,000 1,065,800
Ohio St. Water Dev. Auth., Poll.
Cntrl. Fac. Rev. Ba3 5.25 9/01/33 1,250 1,232,575
Pickerington Local Sch. Dist.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/08 890 598,881
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/13 525 263,529
Puerto Rico Comwlth.
Gen. Oblig., M.B.I.A. NR 7.497 7/01/12 1,000 1,173,670
Hwy. & Transn. Auth. Rev., Ser. A,
M.B.I.A. Aaa 5.00 7/01/38 750 694,987
Puerto Rico Indl. Tourist Edu.,
Med. & Env. Catl. Facs., Rev. Baa2 6.625 6/01/26 1,000 1,042,430
Puerto Rico Pub. Bldgs. Auth. Rev.,
Gtd. Pub. Ed. & Hlth. Facs., Ser.
J Baa1 Zero 7/01/06 3,000 2,299,620
Richland Cnty. Ohio Hosp. Facs.
Rev. Ser. B A-(c) 6.375 11/15/22 1,000 997,520
Trumbull Cnty., Gen. Oblig.
Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/09 1,250 798,075
Univ. of Puerto Rico Rev., Cap.
Apprec. Ref., Ser. N, M.B.I.A. Aaa Zero 6/01/13 4,245 2,261,609
Virgin Islands Pub. Fin. Auth.
Rev.,
Gross Rcpts. Taxes, Loan Notes,
Ser. A BBB-(c) 6.50 10/01/24 500 517,945
Ref., Matching Loan Notes, Ser. A AAA(c) 7.25 10/01/18 1,000(e) 1,079,990
Virgin Islands Terr., Hugo Ins.
Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 305(e) 319,061
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 830(e) 858,901
-----------
Total long-term investments
(cost $57,188,566) 59,764,961
-----------
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS 1.3%
Ohio St. Air Quality Dev. Auth.
Rev. Adj. Ref., Cincinnati Gas &
Elec., Ser. B, F.R.D.D. VMIG1 4.30% 9/01/00 $ 100 $ 100,000
Ohio St. Solid Waste Rev.,
BP Explr. & Oil Proj., F.R.D.D. VMIG1 4.45 9/01/00 600 600,000
BP Explr. & Oil Proj., F.R.D.D VMIG1 4.45 9/01/00 100 100,000
-----------
Total short-term investments
(cost $800,000) 800,000
-----------
Total Investments 100.0%
(cost $57,988,566; Note 4) 60,564,961
Other assets in excess of
liabilities 28,591
-----------
Net Assets 100% $60,593,552
-----------
-----------
</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 (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) 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.
(c) Standard & Poor's Rating.
(d) Represents when-issued security.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) Security in default.
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 9
<PAGE>
Prudential Municipal Series Fund Ohio Series
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $57,988,566) $ 60,564,961
Cash 98,237
Interest receivable 706,111
Other assets 1,847
-----------------
Total assets 61,371,156
-----------------
LIABILITIES
Payable for investments purchased 622,274
Accrued expenses 76,485
Dividends payable 31,082
Management fee payable 26,063
Distribution fee payable 15,518
Deferred trustee's fees 6,182
-----------------
Total liabilities 777,604
-----------------
NET ASSETS $ 60,593,552
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 53,717
Paid-in capital in excess of par 58,084,547
-----------------
58,138,264
Accumulated net realized loss on investments (121,107)
Net unrealized appreciation on investments 2,576,395
-----------------
Net assets, August 31, 2000 $ 60,593,552
-----------------
-----------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($44,267,072 / 3,925,073 shares of beneficial interest
issued and outstanding) $11.28
Maximum sales charge (3% of offering price) 0.35
-----------------
Maximum offering price to public $11.63
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share
($16,148,328 / 1,430,872 shares of beneficial interest
issued and outstanding) $11.29
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($178,152 / 15,786 shares of beneficial interest issued
and outstanding) $11.29
Sales charge (1% of offering price) 0.11
-----------------
Offering price to public $11.40
-----------------
-----------------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential Municipal Series Fund Ohio Series
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
August 31, 2000
<S> <C>
----------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 3,948,930
-----------------
Expenses
Management fee 329,819
Distribution fee--Class A 114,178
Distribution fee--Class B 99,475
Distribution fee--Class C 1,463
Custodian's fees and expenses 84,000
Reports to shareholders 53,000
Transfer agent's fees & expenses 40,000
Registration fees 28,000
Legal fees and expenses 16,000
Audit fees 10,000
Trustees' fees and expenses 8,000
Miscellaneous 8,289
-----------------
Total expenses 792,224
Custodian fee credit (1,371)
-----------------
Net expenses 790,853
-----------------
Net investment income 3,158,077
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (199,137)
Financial futures transactions 186,509
-----------------
(12,628)
-----------------
Net change in unrealized appreciation on:
Investments (99,889)
Financial futures contracts (65,563)
-----------------
(165,452)
-----------------
Net loss on investments (178,080)
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,979,997
-----------------
-----------------
</TABLE>
12 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------
2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 3,158,077 $ 3,603,673
Net realized gain (loss) on investment
transactions (12,628) 769,806
Net change in unrealized appreciation on
investments (165,452) (5,472,852)
----------------- --------------
Net increase (decrease) in net assets
resulting from operations 2,979,997 (1,099,373)
----------------- --------------
Dividends and distributions (Note 1):
Dividends to shareholders from net
investment income
Class A (2,221,407) (2,304,508)
Class B (928,047) (1,287,519)
Class C (8,623) (11,646)
----------------- --------------
(3,158,077) (3,603,673)
----------------- --------------
Distributions in excess of net investment
income
Class A (21,138) (38,470)
Class B (9,767) (23,367)
Class C (95) (164)
----------------- --------------
(31,000) (62,001)
----------------- --------------
Distributions from net realized gains
Class A (257,882) (1,111,350)
Class B (119,154) (675,050)
Class C (1,168) (4,744)
----------------- --------------
(378,204) (1,791,144)
----------------- --------------
Series share transactions (net of share conversions)
(Note 5):
Net proceeds from shares sold 1,352,379 6,020,350
Net asset value of shares issued in
reinvestment of dividends and
distributions 2,139,011 3,287,977
Cost of shares reacquired (15,195,098) (16,660,880)
----------------- --------------
Net decrease in net assets from Series
share transactions (11,703,708) (7,352,553)
----------------- --------------
Total decrease (12,290,992) (13,908,744)
NET ASSETS
Beginning of year 72,884,544 86,793,288
----------------- --------------
End of year $ 60,593,552 $ 72,884,544
----------------- --------------
----------------- --------------
</TABLE>
See Notes to Financial Statements 13
<PAGE>
Prudential Municipal Series Fund Ohio Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
eleven series. The monies of each series are invested in separate, independently
managed portfolios. The Ohio Series (the 'Series') commenced investment
operations in September, 1984. The Series is diversified and its investment
objective is to maximize current income that is exempt from Ohio state and
federal income taxes consistent with the preservation of capital and, in
conjunction therewith, the Series may invest in debt securities with the
potential for capital gains. The Series seeks to achieve this objective by
investing primarily in Ohio state, municipal and local government obligations
and obligations of other qualifying issuers. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in preparation of its financial statements.
Securities Valuation: The Series values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing services, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
Financial Futures Contracts: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the 'initial margin.' Subsequent payments, known as 'variation margin,'
are made or received by the Series each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
14
<PAGE>
Prudential Municipal Series Fund Ohio Series
Notes to Financial Statements Cont'd.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
Securities Transactions and 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 Series amortizes premiums and accretes original issue
discount paid on purchases of 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.
Federal Income Taxes: For federal income tax purposes, each series in the
Fund is treated as a separate taxpaying entity. It is the intent of the Series
to continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from
net investment income. Payment of dividends are made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
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.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' 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 decrease distribution in excess of net investment income
and increase accumulated net realized loss on investments by $31,000, due to the
sale of securities purchased with market discount during the year ended August
31, 2000. Net investment income, net realized gains and net assets were not
affected by this change.
15
<PAGE>
Prudential Municipal Series Fund Ohio Series
Notes to Financial Statements Cont'd.
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'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
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 the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B and Class C shares of the Fund. The Fund compensated PIMS 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 PIMS 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 .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively.
Effective August 23, 2000, such expenses under the Plans were .25 of 1% of
average daily net assets of Class A, B and C shares.
PIMS has advised the Series that they received approximately $5,100 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 2000. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
16
<PAGE>
Prudential Municipal Series Fund Ohio Series
Notes to Financial Statements Cont'd.
PIMS has advised the Series that for the year ended August 31, 2000, they
received approximately $31,600 and $500 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The purpose of the credit
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000 the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts during the year
ended August 31, 2000.
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 August 31, 2000, the
Series incurred fees of approximately $30,700 for the services of PMFS. As of
August 31, 2000, approximately $3,500 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.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $16,892,810 and
$29,457,232, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $2,576,395 (gross unrealized appreciation--$3,647,355; gross
unrealized depreciation--$1,070,960).
The Series will elect, for United States Federal income tax purposes, to
treat net capital losses of $141,150 incurred in the ten-month period ended
August 31, 2000 as having been incurred in the following fiscal year.
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the
17
<PAGE>
Prudential Municipal Series Fund Ohio Series
Notes to Financial Statements Cont'd.
shares are held. Class C shares are sold with a front-end sales charge of 1% and
a contingent deferred sales charge of 1% during the first 18 months. 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.
The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the year ended August
31, 2000 and the year ended August 31, 1999 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
--------------------------------------------------------------- -------- -----------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold.................................................... 35,347 $ 392,038
Shares issued in reinvestment of dividends and distributions... 140,612 1,551,607
Shares reacquired.............................................. (949,391) (10,496,063)
-------- -----------
Net decrease in shares outstanding before conversion........... (773,432) (8,552,418)
Shares issued upon conversion from Class B..................... 570,794 6,334,941
-------- -----------
Net increase (decrease) in shares outstanding.................. (202,638) $(2,217,477)
-------- -----------
-------- -----------
Year ended August 31, 1999:
Shares sold.................................................... 275,877 $ 3,318,064
Shares issued in reinvestment of dividends and distributions... 177,578 2,124,198
Shares reacquired.............................................. (695,495) (8,255,801)
-------- -----------
Net decrease in shares outstanding before conversion........... (242,040) (2,813,539)
Shares issued upon conversion from Class B..................... 181,742 2,187,166
-------- -----------
Net increase (decrease) in shares outstanding.................. (60,298) $ (626,373)
-------- -----------
-------- -----------
<CAPTION>
Class B
---------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold.................................................... 86,605 $ 960,143
Shares issued in reinvestment of dividends and distributions... 52,484 579,499
Shares reacquired.............................................. (410,380) (4,534,774)
-------- -----------
Net decrease in shares outstanding before conversion........... (271,291) (2,995,132)
Shares reacquired upon conversion into Class A................. (570,548) (6,334,941)
-------- -----------
Net increase (decrease) in shares outstanding.................. (841,839) $(9,330,073)
-------- -----------
-------- -----------
</TABLE>
18
<PAGE>
Prudential Municipal Series Fund Ohio Series
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
--------------------------------------------------------------- -------- -----------
Year ended August 31, 1999:
<S> <C> <C>
Shares sold.................................................... 209,044 $ 2,517,815
Shares issued in reinvestment of dividends and distributions... 96,304 1,154,072
Shares reacquired.............................................. (698,008) (8,392,171)
-------- -----------
Net decrease in shares outstanding before conversion........... (392,660) (4,720,284)
Shares reacquired upon conversion into Class A................. (181,591) (2,187,166)
-------- -----------
Net increase (decrease) in shares outstanding.................. (574,251) $(6,907,450)
-------- -----------
-------- -----------
<CAPTION>
Class C
---------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold.................................................... 18 $ 198
Shares issued in reinvestment of dividends and distributions... 716 7,905
Shares reacquired.............................................. (14,664) (164,261)
-------- -----------
Net increase (decrease) in shares outstanding.................. (13,930) $ (156,158)
-------- -----------
-------- -----------
Year ended August 31, 1999:
Shares sold.................................................... 15,141 $ 184,471
Shares issued in reinvestment of dividends and distributions... 816 9,707
Shares reacquired.............................................. (1,115) (12,908)
-------- -----------
Net increase (decrease) in shares outstanding.................. 14,842 $ 181,270
-------- -----------
-------- -----------
</TABLE>
Note 6. Proposed Reorganization
On August 23, 2000, the Trustees of the Series approved an Agreement and Plan of
Reorganization (the 'Plan of Reorganization') which provides for the transfer of
all of the assets and liabilities of the Series to Prudential National
Municipals Fund, Inc. ('National Municipals'). Class A, Class B and Class C
shares of the Series would be exchanged at net asset value for Class A shares of
equivalent value of National Municipals. The Series would then cease operations.
The Plan of Reorganization requires approval of the shareholders of the
Series to become effective and a proxy/prospectus will be mailed to shareholders
in October 2000. If the Plan is approved, it is expected that the reorganization
will take place in December 2000. The Series and National Municipals will each
bear their pro rata share of the costs of the reorganization, including cost of
proxy solicitation.
19
<PAGE>
Prudential Municipal Series Fund Ohio Series
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.33
--------
Income from investment operations
Net investment income .54
Net realized and unrealized gain (loss) on investment
transactions .02
--------
Total from investment operations .56
--------
Less distributions
Dividends from net investment income (.54)
Distributions in excess of net investment income (.01)
Distributions from net realized gains (.06)
--------
Total distributions (.61)
--------
Net asset value, end of year $ 11.28
--------
--------
TOTAL RETURN(b): 5.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $44,267
Average net assets (000) $45,671
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.12%
Expenses, excluding distribution and service (12b-1) fees .87%
Net investment income 4.86%
For Class A, B and C shares:
Portfolio turnover rate 26%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
20 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 12.31 $ 11.95 $ 11.70 $ 11.92
-------- -------- -------- --------
.54 .60 .63(a) .63(a)
(.71) .42 .27 (.15)
-------- -------- -------- --------
(.17) 1.02 .90 .48
-------- -------- -------- --------
(.54) (.60) (.63) (.63)
(.01) --(c) --(c) --
(.26) (.06) (.02) (.07)
-------- -------- -------- --------
(.81) (.66) (.65) (.70)
-------- -------- -------- --------
$ 11.33 $ 12.31 $ 11.95 $ 11.70
-------- -------- -------- --------
-------- -------- -------- --------
(1.53)% 8.80% 7.92% 4.02%
$ 46,775 $ 51,546 $ 50,977 $ 49,851
$ 50,833 $ 51,082 $ 51,641 $ 51,205
.97% .83% .80%(a) .80%(a)
.77% .73% .70%(a) .70%(a)
4.53% 4.93% 5.37%(a) 5.27%(a)
45% 30% 22% 35%
</TABLE>
See Notes to Financial Statements 21
<PAGE>
Prudential Municipal Series Fund Ohio Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-----------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.34
--------
Income from investment operations
Net investment income .51
Net realized and unrealized gain (loss) on investment
transactions .02
--------
Total from investment operations .53
--------
Less distributions
Dividends from net investment income (.51)
Distributions in excess of net investment income (.01)
Distributions from net realized gains (.06)
--------
Total distributions (.58)
--------
Net asset value, end of year $ 11.29
--------
--------
TOTAL RETURN(b): 4.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $16,148
Average net assets (000) $20,094
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.36%
Expenses, excluding distribution and service (12b-1) fees .87%
Net investment income 4.62%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
22 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 12.32 $ 11.96 $ 11.71 $ 11.93
-------- -------- -------- --------
.51 .55 .59(a) .58(a)
(.71) .42 .27 (.15)
-------- -------- -------- --------
(.20) .97 .86 .43
-------- -------- -------- --------
(.51) (.55) (.59) (.58)
(.01) --(c) --(c) --
(.26) (.06) (.02) (.07)
-------- -------- -------- --------
(.78) (.61) (.61) (.65)
-------- -------- -------- --------
$ 11.34 $ 12.32 $ 11.96 $ 11.71
-------- -------- -------- --------
-------- -------- -------- --------
(1.82)% 8.36% 7.49% 3.61%
$ 25,773 $ 35,064 $ 40,770 $ 50,998
$ 30,456 $ 37,848 $ 45,503 $ 57,909
1.27% 1.23% 1.20%(a) 1.20%(a)
.77% .73% .70%(a) .70%(a)
4.23% 4.54% 4.97%(a) 4.87%(a)
</TABLE>
See Notes to Financial Statements 23
<PAGE>
Prudential Municipal Series Fund Ohio Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.34
--------
Income from investment operations
Net investment income .48
Net realized and unrealized gain (loss) on investment
transactions .02
--------
Total from investment operations .50
--------
Less distributions
Dividends from net investment income (.48)
Distributions in excess of net investment income (.01)
Distributions from net realized gains (.06)
--------
Total distributions (.55)
--------
Net asset value, end of year $ 11.29
--------
--------
TOTAL RETURN(b): 4.64%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 178
Average net assets (000) $ 198
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.61%
Expenses, excluding distribution and service (12b-1) fees .87%
Net investment income 4.36%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(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 year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
24 See Notes to Financial Statements
<PAGE>
Prudential Municipal Series Fund Ohio Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
$12.32 $11.96 $11.71 $11.93
------- ------- ------- -------
.48 .52 .56(a) .55(a)
(.71) .42 .27 (.15)
------- ------- ------- -------
(.23) .94 .83 .40
------- ------- ------- -------
(.48) (.52) (.56) (.55)
(.01) --(c) --(c) --
(.26) (.06) (.02) (.07)
------- ------- ------- -------
(.75) (.58) (.58) (.62)
------- ------- ------- -------
$11.34 $12.32 $11.96 $11.71
------- ------- ------- -------
------- ------- ------- -------
(2.06)% 8.09% 7.22% 3.36%
$ 337 $ 183 $ 71 $ 44
$ 289 $ 149 $ 57 $ 97
1.52% 1.48% 1.45%(a) 1.45%(a)
.77% .73% .70%(a) .70%(a)
4.03% 4.26% 4.72%(a) 4.62%(a)
</TABLE>
See Notes to Financial Statements 25
<PAGE>
Prudential Municipal Series Fund Ohio Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Ohio Series
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 Municipal Series Fund,
Ohio Series (the 'Fund', one of the portfolios constituting Prudential Municipal
Series Fund) at August 31, 2000, 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 four years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. 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 auditing standards generally accepted in
the United States of America, 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 August 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the year
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified. As described in Note 6 to the
financial statements, on August 23, 2000 the Trustees approved an Agreement and
Plan of Reorganization, subject to shareholder approval, whereby the Fund would
be merged into Prudential National Municipals Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
26
<PAGE>
Prudential Municipal Series Fund Ohio Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 2000,
dividends paid from net investment income of $.54 per Class A share, $.51 per
Class B share and $.48 per Class C share were all federally tax-exempt interest
dividends. In addition, the Series paid to Class A, B and C shares $.005
(special taxable income and short-term capital gains) which is taxable as
ordinary income and a long-term capital gain distribution of $.06 per Class A, B
and C shares which is taxable as such.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to the federal tax status of the dividends and distributions
received by you in calendar year 2000.
27
<PAGE>
Prudential Municipal Series Fund Ohio Series
Prudential Mutual Funds
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
Large Capitalization Stock Funds
Prudential 20/20 Focus Fund
Prudential Equity Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Strategic Partners Focused Growth Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Value Fund
Small- to Mid-Capitalization Stock Funds
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential U.S. Emerging Growth Fund, Inc.
Target Funds
Small Capitalization Growth Fund
Small Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Sector Stock Funds
Prudential Natural Resources Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Global/International Stock Funds
Global Utility Fund, Inc.
Prudential Europe Growth Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Target Funds
International Equity Fund
balanced/allocation funds
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
<PAGE>
www.prudential.com (800) 225-1852
BOND FUNDS
Taxable Bond Funds
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 Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Prudential Total Return Bond Fund, Inc.
Target Funds
Total Return Bond Fund
Tax-Free Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global/International Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
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 Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Money Market Series
Tax-Free Money Market Funds
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
Prudential Tax-Free Money Fund, Inc.
Other Money Market Funds
Command Government Fund
Command Money Fund
Command Tax-Free Fund
<PAGE>
Prudential Municipal Series Fund Ohio Series
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this- they don't read annual and
semiannual reports. It's quite understandable. These annual and semiannual
reports are prepared to comply with federal regulations, and are often written
in language that is difficult to understand. So when most people run into those
particularly daunting sections of these reports, they don't read them.
We think that's a mistake
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:
Performance at a Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "Performance at a Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's performance.
It gives you an idea of how much the Fund has earned in an average year for a
given time period. Under the performance box, you'll see legends that explain
the performance information, whether fees and sales charges have been included
in returns, and the inception dates for the Fund's share classes.
See the performance comparison charts at the back of the report for more
performance information. Please keep in mind that past performance is not
indicative of future results.
<PAGE>
www.prudential.com (800) 225-1852
investment adviser's report
The portfolio manager, who invests your money for you, reports on successful-and
not-so-successful-strategies in this section of your report. Look for recent
purchases and sales here, as well as information about the sectors the portfolio
manager favors, and any changes that are on the drawing board.
Portfolio of Investments
This is where the report begins to appear technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the "Investment Adviser's Report" section that doesn't appear in
this listing because it was sold before the close of the reporting period.
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes), and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are being
paid or issued to you. The net asset value fluctuates daily, along with the
value of every security in the portfolio.
Statement of Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your money).
You'll also see capital gains here-both realized and unrealized.
<PAGE>
Prudential Municipal Series Fund Ohio Series
Getting the Most from Your Prudential Mutual Fund
Statement of Changes in Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it (through dividends and
distributions) and how that affects the net assets. This statement also shows
how money from investors flowed into and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can intimidate readers, but it does
contain useful information. The Notes provide a brief history and explanation of
your Fund's objectives. In addition, they outline how Prudential Mutual Funds
prices securities. The Notes also explain who manages and distributes the Fund's
shares and, more importantly, how much they are paid for doing so. Finally, the
Notes explain how many shares are outstanding and the number issued and redeemed
over the period.
Financial Highlights
This information contains many elements from prior pages, but on a per-share
basis. It is designed to help you understand how the Fund performed, and to
compare this year's performance and expenses to those of prior years.
Independent accountant's Report Once a year, an outside auditor looks over our
books and certifies that the financial statements are fairly presented and
comply with generally accepted accounting principles.
Tax Information
This is information that we report annually about how much of your total return
is taxable. Should you have any questions, you may want to consult a tax
adviser.
<PAGE>
www.prudential.com (800) 225-1852
Performance Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever is
shorter). To help you put that return in context, we are required to include the
performance of an unmanaged, broad-based securities index as well. The index
does not reflect the cost of buying the securities it contains or the cost of
managing a mutual fund. Of course, the index holdings do not mirror those of the
Fund-the index is a broad-based reference point commonly used by investors to
measure how well they are doing. A definition of the selected index is also
provided. Investors cannot invest directly in an index.
<PAGE>
Prudential Municipal Series Fund Ohio Series
Class A Growth of a $10,000 Investment
(GRAPH)
<TABLE>
<CAPTION>
Average Annual Total Returns as of 8/31/00
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C> <C> <C> <C>
With Sales
Charge 2.01% 4.17% (4.14) 6.22% (6.19) 6.11% (6.08)
Without Sales
Charge 5.17% 4.81% (4.77) 6.54% (6.52) 6.41% (6.39)
</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.The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return for the ten-year period. The graph compares a
$10,000 investment in the Prudential Municipal Series Fund/Ohio Series (Class A
shares) with a similar investment in the Lehman Brothers Municipal Bond Index
(the Index) by portraying the initial account value at the beginning of the
ten-year period of Class A shares, and the account value at the end of the
current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1990 for Class A shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
front-end sales charge of 3% was deducted from the initial $10,000 investment in
Class A shares; (b) all recurring fees (including management fees) were
deducted; and (c) all dividends and distributions were reinvested. The numbers
in parentheses ( ) show the Series' average annual total return without waiver
of management fees and/or expense subsidization. The Index is a weighted index
comprised of municipal bonds (general obligation bonds, revenue bonds, insured
bonds, and prerefunded bonds) selected by Lehman Brothers as representative of
the long-term, investment-grade municipal bond market. The Index is unmanaged,
and the total return includes the reinvestment of all dividends, but does not
include the effect of sales charges or operating expenses of a mutual fund. The
securities that comprise the Index may differ substantially from the securities
in the Series. The Index is not the only one that may be used to characterize
performance of municipal bond funds. Other indexes may portray different
comparative performance. Investors cannot invest directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class B Growth of a $10,000 Investment
(GRAPH)
<TABLE>
<CAPTION>
Average Annual Total Returns as of 8/31/00
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C> <C> <C> <C>
With Sales
Charge -0.10% 4.28% (4.24) 6.16% (6.13) 7.08% (7.00)
Without Sales
Charge 4.90% 4.44% (4.41) 6.16% (6.13) 7.08% (7.00)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return for the ten-year period. The graph compares a
$10,000 investment in the Prudential Municipal Series Fund/Ohio Series (Class B
shares) with a similar investment in the Lehman Brothers Municipal Bond Index
(the Index) by portraying the initial account value at the beginning of the
ten-year period of Class B shares, and the account value at the end of the
current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1990 for Class B shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
contingent deferred sales charge of 5%, 4%, 3%, 2%, 1%, and 1% for six years was
deducted from the value of the investment in Class B shares, assuming full
redemption on August 31, 2000; (b) all recurring fees (including management
fees) were deducted; and (c) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A shares, on a quarterly
basis, beginning approximately seven years after purchase. This conversion
feature is not reflected in the graph. The numbers in parentheses ( ) show the
Series' average annual total return without waiver of management fees and/or
expense subsidization. The Index is a weighted index comprised of municipal
bonds (general obligation bonds, revenue bonds, insured bonds, and prerefunded
bonds) selected by Lehman Brothers as representative of the long-term,
investment-grade municipal bond market. The Index is unmanaged, and the total
return includes the reinvestment of all dividends, but does not include the
effect of sales charges or operating expenses of a mutual fund. The securities
that comprise the Index may differ substantially from the securities in the
Series. The Index is not the only one that may be used to characterize
performance of municipal bond funds. Other indexes may portray different
comparative performance. Investors cannot invest directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Municipal Series Fund Ohio Series
Class C Growth of a $10,000 Investment
(GRAPH)
<TABLE>
<CAPTION>
Average Annual Total Returns as of 8/31/00
One Year Five Years Ten Years Since Inception
<S> <C> <C> <C> <C> <C> <C>
With Sales
Charge 2.59% 3.98% (3.94) N/A 4.43% (4.38)
Without Sales
Charge 4.64% 4.19% (4.15) N/A 4.60% (4.55)
</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. The best- and worst-year information
within the graph is designed to give you an idea of how much the Series' returns
can fluctuate from year to year by measuring the best and worst calendar years
in terms of total annual return since inception of the share class.The graph
compares a $10,000 investment in the Prudential Municipal Series Fund/Ohio
Series (Class C shares) with a similar investment in the Lehman Brothers
Municipal Bond Index (the Index) by portraying the initial account value at the
commencement of operations of Class C shares, and the account values at the end
of the current fiscal year (August 31, 2000), as measured on a quarterly basis,
beginning in August 1994 for Class C shares. For purposes of the graph, and
unless otherwise indicated, it has been assumed that (a) the maximum applicable
front-end sales charge of 1% was deducted from the initial $10,000 investment in
Class C shares; (b) the maximum applicable contingent deferred sales charge of
1% for 18 months was deducted from the value of the investment in Class C
shares, assuming full redemption on August 31, 2000; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested. The numbers in parentheses ( ) show the Series'
average annual total return without waiver of management fees and/or expense
subsidization.
The Index is a weighted index comprised of municipal bonds (general obligation
bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman
Brothers as representative of the long-term, investment-grade municipal bond
market. The Index is unmanaged, and the total return includes the reinvestment
of all dividends, but does not include the effect of sales charges or operating
expenses of a mutual fund. The securities that comprise the Index may differ
substantially from the securities in the Series. The Index is not the only one
that may be used to characterize performance of municipal bond funds. Other
indexes may portray different comparative performance. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
Annual Report August 31, 2000
When you invest through Prudential Mutual Funds, you receive financial advice
from a Prudential Securities Financial Advisor or Pruco Securities registered
representative. Your advisor or representative can provide you with the
following services:
There's No Reward Without Risk; but Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. Risk can be difficult to
gauge-sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction. There
are times when a market sector or asset class will lose value or provide
little in the way of total return. Managing your own expectations is easier
with help from someone who understands the markets and who knows you!
Keeping Up With the Joneses
A financial advisor or registered representative can help you wade through the
numerous available mutual funds to find the ones that fit your individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals-not at you personally. Your financial
advisor or registered representative will review your investment objectives with
you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance-not just based on
the current investment fad.
Buy Low, Sell High
Buying at the top of a market cycle and selling at the bottom are among the most
common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and should remind you that you're investing for the long
haul.
<PAGE>
For More Information
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's web site at:
http://www.prudential.com
Trustees
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Deborah A. Docs, Secretary
William V. Healey, Assistant Secretary
Manager
Prudential Investments
Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment
Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 8098
Philadelphia, PA 19101
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Fund Symbols NASDAQ CUSIP
Class A PROHX 74435M838
Class B PBOHX 74435M846
Class C PROCX 74435M499
MF123E
(ICON) Printed on Recycled Paper
<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), present and former officers,
directors, employees and agents of the Registrant shall be indemnified by the
Registrant against judgements, fines, settlements and expenses to the fullest
extent authorized and in the manner permitted, by applicable federal and state
law. 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, and pursuant to Section 10 of the Distribution Agreement (Exhibit
7(b) to the Registration Statement), in certain cases the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence in the performance of its
duties, 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 (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. Pursuant and
subject to the provisions of Article VII of the Registrant's By-Laws, the
Registrant shall indemnify each present and former director, officer, employee,
and agent of the Registrant against, or advance the expenses of any such person
for, the amount of any deductible provided in any liability insurance policy
maintained by the Registrant.
C-1
<PAGE>
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) (formerly known as Prudential Mutual Fund Management,
Inc.) 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. Section 9 of the
Management Agreement also holds PIFM liable for losses resulting from a breach
of fiduciary duty with respect to the receipt of compensation for services.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Commission under the 1940 Act so long as the
interpretation of Sections 17(h) and 17(i) of such Act remains in effect and is
consistently applied.
ITEM 16. EXHIBITS.
1. (a) 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).
(b) Articles Supplementary.**
(c) Articles Supplementary. Incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 27 to Registration Statement on Form N-1A
filed via EDGAR on November 19, 1998 (File No. 2-66407).
2. Amended and Restated By-Laws of Registrant.*
3. Not Applicable.
4. Agreement and Plan of Reorganizations filed herewith as
Attachment A 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
C-2
<PAGE>
Post-Effective Amendment No. 25 to Registration Statement on Form N-1A
filed via EDGAR on March 5, 1997 (File No. 2-66407).
(c) Amendment to Subadvisory Agreement dated as of November 18, 1999, by
and between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation. Incorporated by reference to Exhibit (d)(3) to
Post-Effective Amendment No. 30 to Registration Statement on Form N-1A
filed March 2, 2000 (File No. 2-66407).
7. (a) Distribution Agreement. Incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 27 to Registration Statement on Form N-1A
filed via EDGAR on November 19, 1998 (File No. 2-66407).
(b) Selected Dealer Agreement. Incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 27 to Registration Statement on Form N-1A
filed via EDGAR on November 19, 1998 (File No. 2-66407).
8. None.
9. (a) 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).
(b) Amendment to Custodian Contract/Agreement dated as of February 22, 1999
by and between the Registrant and State Street Bank and Trust Company.
Incorporated by reference to Exhibit (g)(2) to Post-Effective Amendment No.
30 to Registration Statement on Form N-1A filed via EDGAR on March 2, 2000
(File No. 2-66407).
10. (a) Distribution and Service Plan for Class A shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A filed via EDGAR on November 19, 1998
(File No. 2-66407).
(b) Distribution and Service Plan for Class B shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A filed via EDGAR on November 19, 1998
(File No. 2-66407).
(c) Distribution and Service Plan for Class C shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 27 to
Registration Statement on Form N-1A filed via EDGAR on November 19, 1998
(File No. 2-66407).
(d) Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 27 to Registration Statement on Form N-1A
filed via EDGAR on November 19, 1998 (File No. 2-66407).
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<PAGE>
11. Opinion and Consent of Counsel.**
12. Tax Opinions and Consents of Counsel.**
13. (a) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to Exhibit 9(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) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.).
Incorporated by reference to Exhibit (h)(2) to Post-Effective Amendment No.
30 to Registration Statement on Form N-1A filed via EDGAR on March 2, 2000
(File No. 2-66407).
14. Consent of Independent Accountants to Registrant and to Prudential
Municipal Series Fund.**
15. Not Applicable.
16. Not Applicable.
17. (a) Proxies, filed immediately after Prospectus and Proxy Statement.**
(b) Prospectus of the Registrant dated March 3, 2000.**
(c) Intentionally omitted.
(d) Supplement dated August 31, 2000 to Prospectus of the Registrant.*
(e) Supplement dated September 13, 2000 to Prospectus of the
Registrant.**
(f) Prospectus of Massachusetts Series of Prudential Municipal Series Fund
dated November 3, 2000.**
(g) Prospectus of North Carolina Series of Prudential Municipal Series Fund
dated November 3, 2000.**
(h) Prospectus of Ohio Series of Prudential Municipal Series Fund dated
November 3, 2000.**
(i) Supplement dated November 3, 2000 to Prospectuses of Massachusetts,
North Carolina and Ohio Series of Prudential Municipal Series Fund.**
(j) Supplement dated November 3, 2000 to Prospectuses of Massachusetts,
North Carolina and Ohio Series of Prudential Municipal Series Fund.**
(k) President's Letter, filed immediately preceding Prospectus and Proxy
Statement.*
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<PAGE>
(l) Statement of Additional Information of Prudential Municipal Series Fund
dated November 3, 2000.**
----------------------
* Incorporated by reference to identically numbered exhibit to Registrant's
Initial Registration Statement on Form N-14 filed via
EDGAR on September 28, 2000 (File No. 333-46832).
** Filed herewith.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-5
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of Newark, and State of New
Jersey, on the 31st day of October, 2000.
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
By: /s/ John R. Strangfeld
------------------------------------------------------
John R. Strangfeld, President
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eugene C. Dorsey Director October 31, 2000
---------------------------------------
EUGENE C. DORSEY
/s/ Delayne D. Gold Director October 31, 2000
---------------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Vice President and October 31, 2000
--------------------------------------- Director
ROBERT F. GUNIA
/s/ Thomas T. Mooney Director October 31, 2000
---------------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director October 31, 2000
---------------------------------------
STEPHEN P. MUNN
/s/ David R. Odenath Vice President and October 31, 2000
--------------------------------------- Director
DAVID R. ODENATH
/s/ Richard A. Redeker Director October 31, 2000
---------------------------------------
RICHARD A. REDEKER
/s/ John R. Strangfeld President October 31, 2000
--------------------------------------- and Director
JOHN R. STRANGFELD
/s/ Nancy Hays Teeters Director October 31, 2000
---------------------------------------
NANCY HAYS TEETERS
Director October 31, 2000
---------------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Principal Financial and October 31, 2000
--------------------------------------- Accounting Officer
GRACE C. TORRES
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
1.(b) Articles Supplementary.
4. Agreement and Plan of Reorganizations filed herewith as
Attachment A to the Prospectus and Proxy Statement.
11. Opinion and Consent of Counsel.
12. Tax Opinions and Consents of Counsel.
14. Consent of Independent Accountants to Registrant and to Prudential
Municipal Series Fund.
l7. (a) Proxies, filed immediately after Prospectus and Proxy Statement.
(b) Prospectus of the Registrant dated March 3, 2000.
(e) Supplement dated September 13, 2000 to Prospectus of the Registrant.
(f) Prospectus of Massachusetts Series of Prudential Municipal Series
Fund dated November 3, 2000.
(g) Prospectus of North Carolina Series of Prudential Municipal Series
Fund dated November 3, 2000.
(h) Prospectus of Ohio Series of Prudential Municipal Series Fund dated
November 3, 2000.
(i) Supplement dated November 3, 2000 to Prospectuses of Massachusetts,
North Carolina and Ohio Series of Prudential Municipal Series Fund.
(j) Supplement dated November 3, 2000 to Prospectuses of Massachusetts,
North Carolina and Ohio Series of Prudential Municipal Series Fund.
(l) Statement of Additional Information of Prudential Municipal Series
Fund dated November 3, 2000.
C-7
