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PRUDENTIAL MUNICIPAL SERIES FUND
(HAWAII INCOME SERIES)
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PROSPECTUS DATED SEPTEMBER 19, 1994
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Prudential Municipal Series Fund (the "Fund") (Hawaii Income Series) (the
"Series") is one of seventeen series of an open-end investment company, or
mutual fund. This Series is non-diversified and seeks to provide the maximum
amount of income that is exempt from Hawaii State and federal income taxes
consistent with the preservation of capital. The Series will invest primarily in
investment grade municipal obligations but may also invest a portion of its
assets in lower-quality municipal obligations or in non-rated securities which,
in the opinion of the Fund's investment adviser, are of comparable quality.
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies." The
Fund's address is One Seaport Plaza, New York, New York 10292, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Hawaii Income Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated August 1,
1994, and restated on September 19, 1994, which information is incorporated
herein by reference (is legally considered to be a part of this Prospectus) and
is available without charge upon request to the Fund at the address or telephone
number noted above.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end management investment company. Only the Hawaii Income Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Hawaii State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Hawaii State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay income exempt, in the opinion
of counsel, from Hawaii State and federal income taxes (Hawaii Obligations).
There can be no assurance that the Series' objective will be achieved. See
"How the Fund Invests--Investment Objective and Policies" at page 5.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Hawaii Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Hawaii Obligations. The Series may
invest up to 30% of its total assets in high yield securities, commonly
known as "junk bonds," which may be considered speculative and are subject
to the risk of an issuer's inability to meet principal and interest payments
on the obligations as well as price volatility. The Series may also invest
up to 5% of its total assets in Hawaii Obligations that are in default in
the payment of principal or interest. This 5% limitation is included in the
Series' 30% limitation on assets rated below investment grade. See "How the
Fund Invests--Investment Objective and Policies" at page 5. The Series is
non-diversified so that more than 5% of its total assets may be invested in
the securities of one or more issuers. Investment in a non-diversified
portfolio involves greater risk than investment in a diversified portfolio.
See "How the Fund Invests--Investment Objective and Policies--Special
Considerations" at page 9. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 8.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of August 31, 1994,
PMF served as manager or administrator to 66 investment companies, including
37 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 10.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and is paid an annual distribution and service
fee which is currently being charged at the rate of .10 of 1% of the average
daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily
net assets of the Class B shares and is paid an annual distribution and
service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 11.
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WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 24.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 12 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 16.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A
shares, Class B shares will automatically convert
to Class A shares (which are subject to lower
ongoing distribution-related expenses)
approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing
distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 18.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
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FUND EXPENSES
(HAWAII INCOME SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- ------------------------ -----------------
<S> <C> <C> <C>
None None
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................... 3%
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends.................................. None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever is
lower)................................................ None 5% during the first 1% on redemptions
year, decreasing by 1% made within one
annually to 1% in the year of purchase
fifth and sixth years
and 0% the seventh year*
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A SHARES CLASS B SHARES** CLASS C SHARES
------------------- ---------------------- -------------------
<S> <C> <C> <C>
(as a percentage of average net assets)
Management Fees (Before Reduction)..................... .50% .50% .50%
12b-1 Fees............................................. .10++ .50 .75++
Other Expenses (Before Reduction)...................... .88 .88 .88
----- ----- -----
Total Fund Operating Expenses (Before Reduction)....... 1.48% 1.88% 2.13%
----- ----- -----
----- ----- -----
Total Fund Operating Expenses (After Reduction)........ .50% .90% 1.15%
----- ----- -----
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
1 3
EXAMPLE* YEAR YEARS
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<S> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $ 35 $ 46
Class B................................................ $ 59 $ 59
Class C................................................ $ 22 $ 37
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 35 $ 46
Class B................................................ $ 9 $ 29
Class C................................................ $ 12 $ 37
<FN>
The above example is based on estimated amounts for the Series' fiscal year
ending August 31, 1995. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
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* Based on expenses expected to be incurred during the fiscal year ending
August 31, 1995, after consideration of expense reduction. The Manager has
agreed for the fiscal year ending August 31, 1995, to subsidize expenses
and waive management fees so that Total Fund Operating Expenses do not
exceed .50%, .90% and 1.15% of the average net assets of the Class A, Class
B and Class C shares, respectively. See "How the Fund is
Managed--Manager--Fee Waivers and Subsidy."
** Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1995. Total Fund Operating Expenses (before reduction) of the
Class A and Class C shares without such limitations would be 1.68% and
2.38%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
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HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END INVESTMENT COMPANY,
OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES. EACH SERIES OF THE FUND
IS MANAGED INDEPENDENTLY. THE HAWAII INCOME SERIES (THE SERIES) IS
NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM HAWAII STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL. See "Investment Objectives and Policies" in the
Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN HAWAII STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM HAWAII STATE AND FEDERAL INCOME TAXES
(HAWAII OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
ACHIEVE ITS INVESTMENT OBJECTIVE. Interest on certain municipal obligations may
be a preference item for purposes of the federal alternative minimum tax. The
Series may invest without limit in municipal obligations that are "private
activity bonds" (as defined in the Internal Revenue Code) the interest on which
would be a preference item for purposes of the federal alternative minimum tax.
See "Taxes, Dividends and Distributions." Hawaii law provides that dividends
paid by the Series are exempt from Hawaii State income tax for individuals who
reside in Hawaii to the extent such dividends are derived from interest payments
on Hawaii Obligations. Hawaii Obligations may include general obligation bonds
of the State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term Hawaii Obligations, and the dollar-weighted average maturity of the
Series' portfolio will generally range between 10-20 years. The Series may also
invest in certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Currently,
interest rates are much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio may be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
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 periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the
5
<PAGE>
construction of facilities (E.G., schools, dormitories, office buildings or
prisons) or the acquisition of equipment. The facilities are typically used by
the state or municipality pursuant to a lease with a financing authority.
Certain municipal lease obligations may trade infrequently. Accordingly, the
investment adviser will monitor the liquidity of municipal lease obligations
under the supervision of the Trustees. Municipal lease obligations will not be
considered illiquid for purposes of the Series' 15% limitation on illiquid
securities provided the investment adviser determines that there is a readily
available market for such securities. See "Other Investments and
Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN HAWAII OBLIGATIONS
WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST QUALITY GRADES
AS DETERMINED BY EITHER MOODY'S INVESTORS SERVICE (MOODY'S) (CURRENTLY AAA, AA,
A, BAA FOR BONDS, MIG 1, MIG 2, MIG 3, MIG 4 FOR NOTES AND P-1 FOR COMMERCIAL
PAPER) OR STANDARD & POOR'S RATINGS GROUP (S&P) (CURRENTLY AAA, AA, A, BBB FOR
BONDS, SP-1, SP-2 FOR NOTES AND A-1 FOR COMMERCIAL PAPER) OR, IF UNRATED, WILL
POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER, COMPARABLE
TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN HAWAII OBLIGATIONS
RATED BELOW BAA BY MOODY'S OR BELOW BBB BY S&P OR, IF NON-RATED, OF COMPARABLE
QUALITY, IN THE OPINION OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT
ANALYSIS. Securities rated Baa by Moody's are described by Moody's as being
investment grade but are also characterized as having speculative
characteristics. Securities rated below Baa by Moody's and below BBB by S&P are
considered speculative. See "Description of Security Ratings" in the Appendix.
Such lower-rated high yield securities are commonly referred to as "junk bonds."
Such securities generally offer a higher current yield than those in the higher
rating categories but also involve greater price volatility and risk of loss of
principal and income. See "Risk Factors Relating to Investing in High Yield
Municipal Obligations" below. Many issuers of lower-quality bonds choose not to
have their obligations rated and the Series may invest without further limit in
such unrated securities. Investors should carefully consider the relative risks
associated with investments in securities which carry lower ratings and in
comparable non-rated securities. As a general matter, bond prices and the
Series' net asset value will vary inversely with interest rate fluctuations.
THE SERIES MAY ALSO INVEST UP TO 5% OF ITS TOTAL ASSETS IN SECURITIES THAT ARE
IN DEFAULT IN THE PAYMENT OF PRINCIPAL OR INTEREST. Once bonds default, they may
represent good investment opportunities from, for example, an expected near-term
marked improvement in an issuer's financial condition or the ability to help the
issuer restructure their finances and become current on their payments. The
Prudential Investment Corporation currently has a team of professionals which
evaluates such defaulted issues. This 5% limitation is included in the Series'
30% limitation on assets rated below investment grade. The investment adviser
will assess the defaulted security's structure and assign it to the appropriate
maturity category. See "Investment Objectives and Policies--Risks of Investing
in Defaulted Securities" in the Fund's Statement of Additional Information.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN HAWAII OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that at least 80% of the income will be exempt from Hawaii State
and federal income taxes or the Series will have at least 80% of its total
assets invested in Hawaii Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper and general
obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Hawaii Obligations or may invest its
assets so that more than 20% of the income is subject to Hawaii State or federal
income taxes.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case
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of liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series, by payment of a premium for the put, by payment
of a higher purchase price for securities to which the put is attached or
through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put 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 (2) the put 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 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.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON HAWAII OBLIGATIONS WHICH
IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Hawaii Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
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 (I.E., high yield) securities,
commonly known 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. The
investment adviser considers both credit risk and market risk in making
investment decisions for the Series. Under circumstances where the Series owns
the majority of an issue, such market and credit risks may be greater. Investors
should carefully consider the relative risks of investing in high yield
municipal obligations and understand that such securities are not generally
meant for short-term investing.
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LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON, FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM 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 SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
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THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN HAWAII OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN HAWAII OBLIGATIONS TO THIS DEGREE. Hawaii's economy is
concentrated in retail trade and tourism and also includes construction,
agriculture and military operations. Tourism is a major factor in the economy,
with tourists coming from a variety of nations, which may cushion the effects of
any adverse economic situations in a single country. Agriculture, dominated by
pineapple and sugar production, has experienced increased foreign competition
and the State's economy has in recent years reflected the effects of the general
economic recession. Economic diversification projects are under way, including
expansion of containerized port facilities, aquaculture and other agricultural
products, but these projects have not yet had any significant positive effect on
the State's overall economy. If the issuers of any of the Hawaii Obligations are
unable to meet their financial obligations because of natural disasters or for
other reasons, the income derived by the Series, the ability to preserve or
realize appreciation of the Series' capital and the Series' liquidity could be
adversely affected.
THE SERIES IS "NON-DIVERSIFIED" SO THAT MORE THAN 5% OF ITS TOTAL ASSETS MAY
BE INVESTED IN THE SECURITIES OF ONE OR MORE ISSUERS. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series may not purchase securities (other than municipal obligations and
obligations guaranteed as to principal and interest by the U.S. Government or
its agencies or instrumentalities) if, as a result of such purchase, 25% or more
of the total assets of the Series (taken at current market value) would be
invested in any one industry.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
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PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less. High portfolio turnover may involve correspondingly greater
brokerage commissions and other costs which will be borne directly by the
portfolio.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES, WHO IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
The Series is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Trustees; (iii) the fees of the Fund's Custodian
and Transfer and Dividend Disbursing Agent; (iv) the fees of the Fund's legal
counsel and independent accountants; (v) brokerage commissions incurred in
connection with portfolio transactions; (vi) all taxes and charges of
governmental agencies; (vii) the reimbursement of organizational expenses; and
(viii) expenses related to shareholder communications.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. See "Manager" in the Statement of Additional Information.
As of August 31, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
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The current portfolio manager is Christian Smith, an Investment Associate of
Prudential Investment Advisors. Mr. Smith has responsibility for the day-to-day
management of the portfolio. He has managed the portfolio since inception and
has been employed by PIC in various capacities since 1988.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
For the fiscal year ending August 31, 1995, PMF has voluntarily agreed to
subsidize expenses and waive management fees so that total Series operating
expenses do not exceed .50%, .90% and 1.15% of the average net assets of the
Class A, Class B and Class C shares, respectively. The Series is not required to
reimburse PMF for any such subsidy or waiver. Thereafter, PMF may from time to
time agree to waive its management fee or a portion thereof and subsidize
certain operating expenses of the Series. Fee waivers and expense subsidies will
increase the Series' yield and total return. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series 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 Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1%
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of the average daily net assets of the Class C shares, and (ii) a service fee of
up to .25 of 1% of the average daily net assets of the Class C shares. The
service fee is used to pay for personal service and/or the maintenance of
shareholder accounts. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class C Plan to .75 of 1% of the
average daily net assets of the Class C shares for the fiscal year ending August
31, 1995. Prudential Securities also receives contingent deferred sales charges
from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NAV OF
THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the
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Series' portfolio securities do not materially affect the NAV. The New York
Stock Exchange is closed on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES INTENDS TO ELECT TO QUALIFY AND TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE SERIES WILL
NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE EXTENT NOT
DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL GAINS AND
LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
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(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
All dividends out of net taxable investment income, together with
distributions of net short-term capital gains in excess of net long-term capital
losses, will be taxable as ordinary income to the shareholder whether or not
reinvested. Any net capital gains (I.E., the excess of net long-term capital
gains over net short-term capital losses) distributed to shareholders will be
taxable as long-term capital gains to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individuals is 28%. The
maximum long-term capital gains rate for corporate shareholders currently is the
same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Hawaii law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on December 31, 1993. Dividends paid by the Series and derived from interest on
obligations which pay interest excludable from Hawaii income tax under Hawaii
law will be exempt from the Hawaii income tax (although not from the Hawaii
franchise tax). To the extent a portion of the dividends are derived from
interest on debt obligations other than those described directly above, such
portion will be subject to the Hawaii income tax even though it may be
excludable from
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gross income for federal income tax purposes. In addition, distributions of
short-term capital gains realized by the Series will be taxable to the
shareholders as ordinary income. Distributions of long-term capital gains will
be taxable as such to the shareholders regardless of how long they held their
shares.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or Hawaii purposes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gains distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each such class will bear its own distribution
charges, generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
15
<PAGE>
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently the Series is
offering three classes of shares, designated Class A, Class B and Class C
shares. In accordance with the Fund's Declaration of Trust, the Trustees may
authorize the creation of additional series and classes within such series, with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business trust and a Massachusetts
business corporation relates to shareholder liability. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the fund, which is not the
case with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares.The minimum subsequent investment is $100 for all classes. All
16
<PAGE>
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE
"ALTERNATE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (Hawaii Income Series), specifying
on the wire the account number assigned by PMFS and your name and identifying
the sales charge alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
17
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND THE
LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
-------------------------------------- --------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a for certain purchases
rate of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more 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.
18
<PAGE>
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------- ---------------------- ---------------------- --------------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No
19
<PAGE>
initial sales charges are imposed upon Class A shares acquired upon the
reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in
20
<PAGE>
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A
PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- -------------------------------------------------- -------------------------
<S> <C>
First............................................. 5.0%
Second............................................ 4.0%
Third............................................. 3.0%
Fourth............................................ 2.0%
Fifth............................................. 1.0%
Sixth............................................. 1.0%
Seventh........................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount
21
<PAGE>
of payments for the purchase of Series shares made during the preceding six
years; 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 THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. 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 (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
22
<PAGE>
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
23
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED
ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges."
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
24
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
A-1
<PAGE>
SHORT-TERM DEBT RATINGS
Moody's Commercial Short-Term Debt Ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity not exceeding one year.
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to muncipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Muncipal notes are rated SP-1,
SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS...................................................... 2
Risk Factors and Special Characteristics........................... 2
FUND EXPENSES........................................................ 4
HOW THE FUND INVESTS................................................. 5
Investment Objective and Policies.................................. 5
Other Investments and Policies..................................... 9
Investment Restrictions............................................ 10
HOW THE FUND IS MANAGED.............................................. 10
Manager............................................................ 10
Distributor........................................................ 11
Portfolio Transactions............................................. 12
Custodian and Transfer and Dividend Disbursing Agent............... 12
HOW THE FUND VALUES ITS SHARES....................................... 12
HOW THE FUND CALCULATES PERFORMANCE.................................. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 13
GENERAL INFORMATION.................................................. 15
Description of Shares.............................................. 15
Additional Information............................................. 16
SHAREHOLDER GUIDE.................................................... 16
How to Buy Shares of the Fund...................................... 16
Alternative Purchase Plan.......................................... 18
How to Sell Your Shares............................................ 20
Conversion Feature--Class B Shares................................. 22
How to Exchange Your Shares........................................ 23
Shareholder Services............................................... 24
DESCRIPTION OF SECURITY RATINGS...................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... B-1
</TABLE>
-------------------------------------------
MF165A
Class A: 74435M-47-3
CUSIP Nos.: Class B: 74435M-46-5
Class C: 74435M-45-7
PRUDENTIAL
MUNICIPAL
SERIES FUND
(HAWAII INCOME SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
- ------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 1, 1994 AND RESTATED ON SEPTEMBER 19, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) is an open-end investment company,
or mutual fund, consisting of seventeen series--the Arizona Series, the
Connecticut Money Market Series, the Florida Series, the Georgia Series, the
Hawaii Income Series, the Maryland Series, the Massachusetts Series, the
Massachusetts Money Market Series, the Michigan Series, the Minnesota Series,
the New Jersey Series, the New Jersey Money Market Series, the New York Series,
the New York Money Market Series, the North Carolina Series, the Ohio Series and
the Pennsylvania Series. An eighteenth series, the New York Income Series, is
not currently being offered. The objective of each series, other than the
Connecticut Money Market Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series and the New York Money Market Series (collectively,
the money market series), is to seek to provide to shareholders who are
residents of the respective state the maximum amount of income that is exempt
from federal and applicable state income taxes and, in the case of the New York
Series and the New York Income Series, also New York City 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
objective of the money market series is to seek to provide the highest level of
current income that is exempt from federal and applicable state income taxes
and, in the case of the New York Money Market Series, also New York City income
taxes, consistent with liquidity and the preservation of capital. All of the
series are diversified except the Florida Series, the Hawaii Income Series, the
New York Income Series, and the money market series, other than the New York
Money Market Series. There can be no assurance that any series' investment
objective will be achieved.
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information has been restated effective September
19, 1994 to reflect the addition of the Hawaii Income Series.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for each series of the Fund dated August 1,
1994 (October 29, 1993 for the money market series), and the Prospectus of the
Hawaii Income Series dated September 19, 1994, copies of which may be obtained
from the Fund upon request.
- --------------------------------------------------------------------------------
MF165B
<PAGE>
Subject to specific restatements set forth below of certain sections of the
Statement of Additional Information dated August 1, 1994 (SAI), all general
statements relating to the series should be read to include the Hawaii Income
Series.
All references in the SAI to the Fund as a diversified investment company
are restated as follows:
All of the series of the Fund, except the Connecticut Money Market Series,
the Florida Series, the Hawaii Income Series, the Massachusetts Money Market
Series, the New Jersey Money Market Series and the New York Income Series, are
diversified. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" in the Prospectuses of the Connecticut Money
Market Series, the Florida Series, the Hawaii Income Series, the Massachusetts
Money Market Series, the New Jersey Money Market Series and the New York Income
Series.
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES--IN GENERAL
The third paragraph is modified as follows:
Each series of the Fund, other than the money market series, will invest in
"investment grade" tax-exempt securities which on the date of investment are
rated within the four highest ratings of Moody's Investors Service (Moody's),
currently Aaa, Aa, A, Baa for bonds, MIG 1, MIG 2, MIG 3, MIG 4 for notes, and
P-1 for commercial paper, or of Standard & Poor's Ratings Group (S&P), currently
AAA, AA, A, BBB for bonds, SP-1, SP-2 for notes and A-1 for commercial paper.
The Hawaii Income Series may invest up to 30% of its total assets in Hawaii
Obligations rated below Baa by Moody's or below BBB by S&P or if non-rated, of
comparable quality, in the opinion of the Fund's investment adviser, based on
its credit analysis. The New York Income Series may invest up to 30% of its
total assets in New York Obligations rated below Baa by Moody's or below BBB by
S&P or if non-rated, of comparable quality, in the opinion of the Fund's
investment adviser, based on its credit analysis. The Hawaii Income Series may
invest up to 5% of its total assets in Hawaii Obligations which are in default
in the payment of principal or interest. In addition, the New York Income Series
may invest up to 5% of its total assets in New York Obligations which are in
default in the payment of principal or interest. The money market series will
invest in securities which, at the time of purchase, have a remaining maturity
of thirteen months or less and are rated (or issued by an issuer that is rated
with respect to a class of short-term debt obligations, or any security within
that class, that is comparable in priority and security with the security) in
one of the two highest rating categories by at least two nationally recognized
statistical rating organizations assigning a rating to the security or issuer
(or, if only one such rating organization assigned a rating, by that rating
organization). Each series may invest in tax-exempt securities which are not
rated if, based upon a credit analysis by the investment adviser under the
supervision of the Trustees, the investment adviser believes that such
securities are of comparable quality to other municipal securities that the
series may purchase. A description of the ratings is set forth under the heading
"Description of Tax-Exempt Security Ratings" in this Statement of Additional
Information and in the Prospectuses of the Hawaii Income Series and the New York
Income Series. The ratings of Moody's and S&P represent the respective opinions
of such firms of the qualities of the securities each undertakes to rate and
such ratings are general and are not absolute standards of quality. In
determining suitability of investment in a particular unrated security, the
investment adviser will take into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, credit enhancement by virtue of letter of credit or
other financial guaranty deemed suitable by the investment adviser and other
general conditions as may be relevant, including comparability to other issuers.
RISKS OF INVESTING IN DEFAULTED SECURITIES
The Hawaii Income Series may invest up to 5% of its total assets in Hawaii
Obligations that are in default in the payment of principal or interest. There
are a number of risks associated with investments in defaulted securities. These
risks include investment in an already troubled issuer, the possible incurrence
of costs associated with indemnifying the trustee for pursuing remedies (which
amount could equal the principal amount of the securities purchased) and
possible legal and consulting fees incurred to pursue remedies.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN TAX-EXEMPT SECURITIES
The following is a discussion of the general factors that might influence
the ability of the issuers in the various states to repay principal and interest
when due on the obligations contained in the portfolio of each series. Such
information is derived from sources that are generally available to investors
and is believed to be accurate, but has not been independently verified and may
not be complete.
HAWAII
Hawaii's separation from the mainland and dependence upon tourism makes it
unique among the States. In addition to the flow of tourists taking advantage of
the State's climate and beauty, other major sectors of the Hawaiian economy
include construction, retail trade, agriculture, and military operations, all of
which have been adversely affected by recent recessions in the U.S.
(particularly California) and Japan, and cutbacks in military spending. Hawaii's
economy experienced strong growth during the late 1980's, but since 1990 that
rate of growth has slowed considerably, marked by a decrease in Japanese
investment and construction and increased foreign competition in the production
of pineapples and sugar.
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Over the years, financial operations in the State have been sound, with
consistently favorable budget performance. Surpluses in excess of 5% of revenues
have regularly triggered constitutionally provided tax credits, even during
fiscal years 1992 and 1993 when revenue growth had slowed due to the recession.
However, because of continuing economic slowdown and growth in expenditures,
particularly Medicaid, the State anticipates lower surpluses over the next
biennium, ending in 1995.
Hawaii's economy remains vulnerable to both California's and Japan's
lingering recessions and the State government cutbacks also may adversely affect
economic growth. These factors, combined with the decline in construction,
suggest that continued stagnation in the near future is probable for Hawaii's
economy, which may well underperform that of the United States as a whole for
the year 1994.
INVESTMENT RESTRICTIONS
The Fund's Investment Restrictions are restated below to reflect the
addition of the Hawaii Income Series.
The Fund may not:
1. Purchase securities on margin but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions.
For the purpose of this restriction, the deposit or payment by the Fund
(except with respect to the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New York Money Market Series and the
New Jersey Money Market Series) of initial or maintenance margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may on behalf of a series borrow up to 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
the preference as to shares of a series in liquidation and as to dividends
over all other series of the Fund with respect to assets specifically
allocated to that series, the purchase and sale of futures contracts and
related options, collateral arrangements with respect to margin for futures
contracts, the writing of related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series) and
obligations of the Fund to Trustees pursuant to deferred compensation
arrangements, are not deemed to be a pledge of assets or the issuance of a
senior security. The Fund will not purchase portfolio securities if its
borrowings exceed 5% of the assets.
4. Purchase any security if as a result, with respect to 75% of a
series' total assets (except with respect to the Connecticut Money Market
Series, the Florida Series, the Hawaii Income Series, the Massachusetts
Money Market Series, the New Jersey Money Market Series and the New York
Income Series), more than 5% of the total assets of any series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and
interest either by the U.S. Government or its agencies or
instrumentalities).
5. Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, although it may purchase and sell financial
futures contracts and related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series),
securities which are secured by real estate and securities of companies
which invest or deal in real estate.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
7. Invest in interests in oil, gas or other mineral exploration or
development programs.
8. Make loans, except through repurchase agreements.
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<PAGE>
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or programs.
2. Purchase warrants if as a result the Fund would then have more than
5% of its net assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange
or American Stock Exchange will be limited to 2% of the Fund's net assets
(determined at the time of investment). For the purpose of this limitation,
warrants acquired in units or attached to securities are deemed to be
without value.
3. Purchase any interests in real estate limited partnerships which are
not readily marketable.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
5. Purchase the securities of any one issuer if any officer or trustee
of the Fund or the Manager or Subadviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuers.
6. Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years and equity securities of issuers which are not readily
marketable.
DISTRIBUTIONS AND TAX INFORMATION
STATE TAXATION
In the opinion of Hawaii tax counsel, distributions from the Hawaii Series
to Hawaii residents will not be subject to Hawaii income tax to the extent that
such distributions constitute exempt interest dividends under Section 852(b)(5)
of the Internal Revenue Code and are derived from income received by the Series
from obligations which pay interest excludable from Hawaii income tax under
Hawaii law. Other distributions, including capital gains distributions, exempt
interest dividends derived from obligations of states other than Hawaii and
their political subdivisions, and distributions that are taxable as dividends
for federal income tax purposes are not exempt from Hawaii income tax.
____Distributions from the Hawaii Series are not exempt from the Hawaii
Franchise Tax. This tax applies to banks, building and loan associations,
financial services loan companies, financial corporations, and small business
investment companies.
Persons or entities who are not Hawaii residents should generally not be
subject to Hawaiian income taxation on dividends and distributions made by the
Series but may be subject to other state and local taxes.
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