<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(ARIZONA SERIES)
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PROSPECTUS DATED AUGUST 1, 1994
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Prudential Municipal Series Fund (the "Fund") (Arizona Series) (the "Series") is
one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from Arizona State and federal income taxes consistent with the
preservation of capital and, in conjunction therewith, the Series may invest in
debt securities with the potential for capital gain. The net assets of the
Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations 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
Arizona 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, 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Arizona 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 Arizona State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Arizona
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 Arizona State
and federal income taxes (Arizona Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies" at page 7.
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 Arizona Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Arizona Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 11.
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 9.
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 June 30, 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 12.
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 13.
2
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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 19 and "Shareholder Guide--Shareholder Services"
at page 28.
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 15 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 19.
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 21.
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 23.
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 16.
3
<PAGE>
FUND EXPENSES
(ARIZONA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Management Fees............................... .50% .50% .50%
12b-1 Fees.................................... .10++ .50 .75++
Other Expenses................................ .32 .32 .32
--------------------- ------------------------- -------------------------
Total Fund Operating Expenses................. .92% 1.32% 1.57%
--------------------- ------------------------- -------------------------
--------------------- ------------------------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A............................................................................... $ 39 $ 58 $ 79 $ 140
Class B............................................................................... $ 63 $ 72 $ 82 $ 143
Class C**............................................................................. $ 26 $ 50 $ 86 $ 187
You would pay the following expenses on the same investment, assuming no redemption:
Class A............................................................................... $ 39 $ 58 $ 79 $ 140
Class B............................................................................... $ 13 $ 42 $ 72 $ 143
Class C**............................................................................. $ 16 $ 50 $ 86 $ 187
The above example with respect to Class A and Class B shares is based on restated data for the Series' fiscal year ended August
31, 1993. The above example with respect to Class C shares is based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31, 1993. 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.
<FN>
------------------
* Class B shares will automatically convert to Class A shares approximately seven years after purchase. See
"Shareholder Guide--Conversion Feature-- Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C shares had been in existence during
the fiscal year ended August 31, 1993.
+ 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,
1994. Total operating expenses of the Class A and Class C shares without such limitations would be 1.12%
and 1.82%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class A Shares)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on
data contained in the financial statements. No Class C shares were
outstanding during the periods indicated.
<TABLE>
<CAPTION>
CLASS A
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YEAR
ENDED
SIX MONTHS ENDED AUGUST 31, JANUARY 22, 1990*
FEBRUARY 28, 1994 ---------------------- THROUGH
(UNAUDITED) 1993 1992 1991 AUGUST 31, 1990
----------------- ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $12.44 $11.88 $11.32 $10.80 $10.99@
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------
Net investment income........................ .32 .67 .68 .69 .42
(.21) .68 .56 .52 (.19)@
Net realized and unrealized gain (loss) on
investment transactions.....................
------ ------ ------ ------ ------
Total from investment operations......... .11 1.35 1.24 1.21 .23@
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------
Dividends from net investment income......... (.32) (.67) (.68) (.69) (.42)
Distributions from net realized gains........ (.13) (.12) -- -- --
------ ------ ------ ------ ------
Total distributions...................... (.45) (.79) (.68) (.69) (.42)
------ ------ ------ ------ ------
Net asset value, end of period............... $12.10 $12.44 $11.88 $11.32 $10.80
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN+:............................... 1.03% 11.79% 11.23% 11.45% 2.01%@
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $7,396 $6,622 $2,146 $1,508 $ 436
Average net assets (000)..................... $6,979 $3,613 $1,758 $ 937 $ 260
Ratios to average net assets:
Expenses, including distribution fee....... .86%** .92% 1.02% 1.02% .96%**
Expenses, excluding distribution fee....... .76%** .82% .92% .92% .86%**
Net investment income...................... 5.31%** 5.58% 5.81% 6.13% 6.36%**
Portfolio turnover........................... 22% 14% 42% 25% 49%
<FN>
--------------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
@Restated.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on
data contained in the financial statements. No Class C shares were
outstanding during the periods indicated.
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 24,
ENDED 1984*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ---------------------------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, $ 12.44 $11.87 $ 11.32 $ 10.80 $ 10.97 $ 10.73 $ 10.81 $ 11.70 $ 10.59 $ 10.00
beginning of period.....
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------
Net investment income.... .30 .62 .63 .64 .65 .67 .70+ .71+ .80+ .76+
(.21) .69 .55 .52 (.17) .24 (.08) (.51) 1.18 .59
Net realized and
unrealized gain (loss)
on
investment
transactions............
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
Total from investment
operations.......... .09 1.31 1.18 1.16 .48 .91 .62 .20 1.98 1.35
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
LESS DISTRIBUTIONS
- -------------------------
Dividends from net
investment income....... (.30) (.62) (.63) (.64) (.65) (.67) (.70) (.71) (.80) (.76)
Distributions from net
realized gains.......... (.13) (.12) -- -- -- -- -- (.38) (.07) --
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
Total
distributions....... (.43) (.74) (.63) (.64) (.65) (.67) (.70) (1.09) (.87) (.76)
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
Net asset value, end of $12.10 $12.44 $11.87 $11.32 $10.80 $10.97 $10.73 $10.81 $11.70 $10.59
period..................
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
TOTAL RETURN+++:......... 0.82% 11.42% 10.68% 11.02% 4.49% 8.88% 6.03% 1.73% 20.32% 13.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $57,213 $58,155 $51,697 $57,209 $59,216 $59,266 $51,642 $50,344 $40,278 $18,963
Average net assets
(000)................... $58,055 $53,656 $53,477 $58,973 $60,359 $55,479 $50,692 $47,612 $31,088 $10,497
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.26%** 1.32% 1.42% 1.41% 1.30% 1.30% 1.23%+ 1.16%+ 1.12%+ 1.02%+**
Expenses, excluding
distribution fee...... .76%** .82% .92% .91% .82% .83% .76%+ .67%+ .63%+ .54%+**
Net investment
income................ 4.91%** 5.18% 5.42% 5.77% 5.99% 6.26% 6.60%+ 6.27%+ 6.81%+ 7.59%+**
Portfolio turnover....... 22% 14% 42% 25% 49% 62% 66% 50% 43% 54%
<FN>
--------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE ARIZONA SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM ARIZONA
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND,
IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. 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 ARIZONA 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 ARIZONA STATE AND FEDERAL INCOME TAXES
(ARIZONA 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." Under Arizona law, dividends paid by the Series are exempt from
Arizona income tax for resident individuals and corporations to the extent they
are derived from interest payments on Arizona Obligations. Arizona Obligations
could 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 obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would 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
7
<PAGE>
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 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.
ALL ARIZONA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Arizona Obligations will, at the time of
purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Arizona Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Arizona Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN ARIZONA 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 Arizona State
and federal income taxes or the Series will have at least 80% of its total
assets invested in Arizona 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 Arizona Obligations or may invest
its assets so that more than 20% of the income is subject to Arizona State or
federal income taxes.
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
8
<PAGE>
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 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 ARIZONA 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 Arizona 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.
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
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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 FOR 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.
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
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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 ARIZONA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
ARIZONA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF ARIZONA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Slow revenue growth
in recent years and a tremendous increase in expenditure growth for health and
welfare and prisons have eroded Arizona's financial flexibility. State budget
efforts for fiscal year 1993-1994 focused on business tax cuts that raised
concerns that the State may be undercutting its tax base. In addition, voter
approval in November 1992 of Proposition 108, which requires a two-thirds
majority in both houses of the legislature to pass tax or fee increases, has
substantially constrained the State's ability to raise revenues. If either
Arizona or any of its local governmental entities is unable to meet its
financial obligations, 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.
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.
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.
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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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were .92% and 1.32% for the Series' Class A and
Class B shares, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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 of the Series is Christian Smith, an Investment
Associate of Prudential Investment Advisors. Mr. Smith has responsibility for
the day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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 SERIES. 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 or 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $3,613
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $74,900 in initial sales charges.
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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% 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, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $406,900 under the Class B Plan and
received $268,279 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $42,500 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of Class A
and Class B shares, respectively. The Series records all payments made under the
Plans as expenses in the calculation of net investment income. No Class C shares
were outstanding during the fiscal year ended August 31, 1993. Prior to the date
of this Prospectus, the Class A and Class B Plans operated as "reimbursement
type" plans and, in the case of Class B, provided for the reimbursement of
distribution expenses incurred in current and prior years. See "Distributor" in
the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a
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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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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,
16
<PAGE>
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 is currently 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 Arizona law, dividends paid by the Series are exempt from Arizona income
tax for individuals who reside in Arizona and for corporations that are subject
to such tax to the extent such dividends are exempt from federal income tax
(except for possible application of the alternative minimum tax) and are derived
from interest payments on Arizona Obligations.
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 or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
17
<PAGE>
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 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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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.
18
<PAGE>
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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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.
19
<PAGE>
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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, 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) and the name of the Series.
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.
20
<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, 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 the .30 of 1% (currently Initial sales charge waived or
public offering price being charged at a reduced for certain purchases
rate of .10 of 1%)
CLASS B Maximum contingent deferred sales charge or .50 of 1% Shares convert to Class A shares
CDSC of 5% of the lesser of the amount approximately seven years after
invested or the redemption proceeds; declines purchase
to zero after six years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being Shares do not convert to another
amount invested or the redemption proceeds on charged at a rate of class
redemptions made within one year of purchase .75 of 1%)
</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.
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<PAGE>
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.
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 SALES CHARGE DEALER
AS PERCENTAGE AS PERCENTAGE CONCESSION AS
OF OFFERING OF AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE 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-
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<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges "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.
23
<PAGE>
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 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
24
<PAGE>
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
purchased 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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- ----------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF 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 was purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These
25
<PAGE>
distributions include: (i) in the case of a tax-deferred retirement plan, a
lump-sum or other distribution after retirement; (ii) in the case of an IRA or
Section 403(b) custodial account, a lump-sum or other distribution after
attaining age 59 1/2; and (iii) a tax-free return of an excess contribution or
plan distributions following the death or disability of the shareholder,
provided that the shares were purchased prior to death or disability. The waiver
does not apply in the case of a tax-free rollover or transfer of assets, other
than one following a separation from service (I.E., following voluntary or
involuntary termination of employment or following retirement). Under no
circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and PSI
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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.
26
<PAGE>
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature 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
27
<PAGE>
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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 share
holders 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 in 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.
28
<PAGE>
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at 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.
29
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend
Disbursing Agent............................. 15
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 21
How to Sell Your Shares....................... 23
Conversion Feature--Class B Shares............ 26
How to Exchange Your Shares................... 27
Shareholder Services.......................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF117A 444048O
Class A: 74435M-10-1
CUSIP Nos.: Class B: 74435M-20-0
Class C: 74435M-59-8
PROSPECTUS
August 1,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(ARIZONA SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(FLORIDA SERIES)
- ------------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Florida Series) (the "Series") is
one of sixteen 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 federal income taxes consistent with the preservation of capital
and to invest in securities which will enable its shares to be exempt from the
Florida intangibles tax and, in conjunction therewith, the Series may invest in
debt securities with the potential for capital gain. The net assets of the
Series will be invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
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
Florida 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in sixteen 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 Florida 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 federal income taxes consistent with the preservation of capital
and to invest in securities which will enable its shares to be exempt from
the Florida intangibles tax. It seeks to achieve this objective by investing
primarily in Florida 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, in the opinion of counsel, are
exempt from the Florida intangibles tax and which pay income exempt from
federal income tax (Florida Obligations). There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 6.
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 Florida Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Florida Obligations. 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.
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 more risk than investment in a
diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 10.
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 June 30, 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 11.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and has currently agreed to limit its
distribution fees to an annual rate of .10 of 1% of the average daily net
assets of the Class A shares, although currently the entire fee is waived.
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 at the rate of .75 of 1% of the average daily net assets of the
Class C shares. Prior to the date of this Prospectus, Class C shares were
called Class D shares.
See "How the Fund is Managed--Distributor" at page 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 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 19 and
"Shareholder Guide--Shareholder Services" at page 27.
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 14 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 19.
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 20.
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
22.
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 15.
3
<PAGE>
FUND EXPENSES
(FLORIDA SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------- ---------------------- ----------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......... 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the first 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the 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
(as a percentage of average net assets) CLASS A SHARES** CLASS B SHARES*** CLASS C SHARES**
----------------- ----------------------- -----------------
<S> <C> <C> <C>
Management Fees (Before Waiver)............... .50% .50% .50%
12b-1 Fees (Before Waiver).................... .10++ .50 .75
Other Expenses (Before Subsidy)............... .21 .21 .21
--
--- ---
Total Fund Operating Expenses (Before Waiver
and Subsidy)................................. .81% 1.21% 1.46%
--
--
--- ---
--- ---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
Class A............................................................. $ 38 $ 55 $ 74 $ 127
Class B............................................................. $ 62 $ 68 $ 76 $ 130
Class C............................................................. $ 25 $ 46 $ 80 $ 175
You would pay the following expenses on the same investment, assuming
no redemption:
Class A............................................................. $ 38 $ 55 $ 74 $ 127
Class B............................................................. $ 12 $ 38 $ 66 $ 130
Class C............................................................. $ 15 $ 46 $ 80 $ 175
The above example with respect to Class A and Class C shares is based on data for the Series' fiscal year ended
August 31, 1993. The above example with respect to Class B shares is based on expenses expected to have been
incurred if Class B shares had been in existence during the fiscal year ended August 31, 1993. 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.
<FN>
---------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Based on expenses incurred during the fiscal year ended August 31, 1993,
without taking into account the management and distribution fee waivers
and the subsidy of expenses of Class A shares. At the current level of
management fee waiver (60%), 12b-1 fee waiver (100%) for Class A shares
and other expense subsidy (100%), Management Fees, 12b-1 Fees, Other
Expenses and Total Fund Operating Expenses would be .20%, 0%, 0% and
.20%, respectively, of the average net assets of the Series' Class A
shares and .20%, .75%, 0% and .95%, respectively, of the average net
assets of the Series' Class C shares. With respect to Class C shares,
annual fund operating expenses are estimated based on expenses expected
to have been incurred if the Class C shares had been in existence for
the entire fiscal year ended August 31, 1993. See "How the Fund is
Managed--Manager-- Fee Waivers and Subsidy."
*** Estimated based on expenses expected to have been incurred if Class B
shares had been in existence during the fiscal year ended August 31,
1993.
+ 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 Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of the Series, the Distributor has
agreed to limit its distribution fees with respect to the Class A shares
of the Series to no more than .10 of 1% of the average daily net asset
value of the Class A shares of the Series for the fiscal year ending
August 31, 1994, although currently the entire 12b-1 fee is waived. Total
operating expenses without such limitation would be 1.01%. See "How the
Fund is Managed-- Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A and Class C share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements. No Class B shares were outstanding during
the periods indicated.
<TABLE>
<CAPTION>
CLASS A CLASS C
-------------------------------------------------- ---------------------------
SIX MONTHS DECEMBER 28, SIX MONTHS JULY 26,
ENDED YEAR ENDED 1990* ENDED 1993**
FEBRUARY 28, AUGUST 31, THROUGH FEBRUARY 28, THROUGH
1994 ------------------- AUGUST 31, 1994 AUGUST 31,
(UNAUDITED) 1993 1992 1991 (UNAUDITED) 1993
------------- -------- -------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 10.87 $ 10.27 $ 9.76 $ 9.55 $ 10.87 $ 10.58
------------- -------- -------- ------------ ------------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+....................... .30 .57 .65 .44 .26 .03
Net realized and unrealized gain on
investment transactions..................... (.24) .73 .51 .21 (.24) .29
------------- -------- -------- ------------ ------------- -----------
Total from investment operations......... .06 1.30 1.16 .65 .02 .32
------------- -------- -------- ------------ ------------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.30) (.57) (.65) (.44) (.26) (.03)
Distributions from net realized gains........ (.20) (.13) -- -- (.20) --
------------- -------- -------- ------------ ------------- -----------
Total distributions...................... (.50) (.70) (.65) (.44) (.46) (.03)
------------- -------- -------- ------------ ------------- -----------
Net asset value, end of period............... $ 10.43 $ 10.87 $ 10.27 $ 9.76 $ 10.43 $ 10.87
------------- -------- -------- ------------ ------------- -----------
------------- -------- -------- ------------ ------------- -----------
TOTAL RETURN++:.............................. .57% 13.78% 12.26% 6.90% .19% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $150,444 $148,900 $104,335 $63,929 $ 11,511 $ 3,132
Average net assets (000)..................... $152,774 $123,820 $ 82,893 $41,528 $ 7,893 $ 1,038
Ratios to average net assets+:
Expenses, including distribution fees...... .19%*** .20% .09% 0 .94%*** .95%***
Expenses, excluding distribution fees...... .19%*** .20% .09% 0 .19%*** .20%***
Net investment income...................... 5.55%*** 5.94% 6.41% 6.68%*** 4.87%*** 5.19%***
Portfolio turnover........................... 33% 68% 56% 39% 33% 68%
<FN>
---------------------
* Commencement of offering of Class A shares.
** Commencement of offering of Class C shares. Prior to August 1, 1994,
Class C shares were called Class D shares.
*** Annualized.
+ Net of expense subsidy and fee waiver.
++ Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
</TABLE>
5
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH SERIES OF THE FUND
IS MANAGED INDEPENDENTLY. THE FLORIDA SERIES (THE SERIES) IS NON-DIVERSIFIED AND
ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM
FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND TO INVEST
IN SECURITIES WHICH WILL ENABLE ITS SHARES TO BE EXEMPT FROM THE FLORIDA
INTANGIBLES TAX AND, IN CONJUNCTION THEREWITH, THE SERIES MAY ALSO INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. 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 FLORIDA 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, IN THE
OPINION OF COUNSEL, ARE EXEMPT FROM THE FLORIDA INTANGIBLES TAX AND WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAX (FLORIDA OBLIGATIONS). THERE CAN BE NO
ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Florida Obligations and certain types of U.S. Government securities and other
assets are exempt from the Florida intangibles tax. The Fund has obtained a
ruling from Florida authorities that, if on January 1 of any year the Series'
portfolio of assets consists solely of such exempt investments, then the Series'
shares will be exempt from the Florida intangibles tax payable in that year.
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." Florida Obligations could 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 Florida 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would allow the Series to demand payment of the
6
<PAGE>
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 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.
ALL FLORIDA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Florida Obligations will, at the time of
purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Florida Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Florida Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN FLORIDA OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that the Series will have at least 80% of its total assets
invested in Florida 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. 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 Florida Obligations or may invest its assets so that more
than 20% of the income is subject to federal income taxes.
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
7
<PAGE>
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 Fund has obtained a ruling from
Florida authorities that such municipal forward contracts qualify as assets
exempt from the Florida intangibles tax.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON FLORIDA 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 Florida 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.
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
8
<PAGE>
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.
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
9
<PAGE>
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 FLORIDA 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 SUCH OBLIGATIONS TO THIS DEGREE. Under the State
Constitution and applicable statutes, the State budget as a whole, and each
separate fund within the State budget, must be kept in balance from currently
available revenues during each State fiscal year. Estimated General Revenue and
Working Capital fund revenues of $13,582.7 million for 1993-94 (excluding
Hurricane Andrew related revenues and expenses) represent an increase of 8.4%
over revenues for 1992-93. This amount reflects a transfer of $190 million, out
of an estimated $220 million in non-recurring revenue due to Hurricane Andrew,
to a hurricane relief trust fund. Estimated Revenue for 1994-95 of $14,573.8
million represent an increase of 7.3% over 1993-94. This amount reflects a
transfer of $159 million in non-recurring revenue due to Hurricane Andrew, to a
hurricane relief trust fund. If the issuers of any of the Florida 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.
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.
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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets, net of expense subsidy and fee waivers, were
.20% and .95% for the Series' Class A and Class C shares, respectively. See
"Financial Highlights." No Class B shares were outstanding during the fiscal
year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee, net of waiver, of .20 of 1% of the Series' average net assets.
See "Fee Waivers and Subsidy" below and "Manager" in the Statement of Additional
Information.
As of June 30, 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
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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.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 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
During the fiscal year ended August 31, 1993, PMF voluntarily waived $371,767
(.30 of 1% of average net assets) of its management fee and subsidized all
operating expenses of the Class A shares and Class C shares of the Series.
Effective September 1, 1993, PMF agreed to waive 60% of its management fee and
to subsidize all operating expenses of the Class A shares and Class C shares of
the Series, and Prudential Mutual Fund Distributors, Inc. agreed to waive its
distribution fee with respect to the Class A shares of the Series. The Series is
not required to reimburse PMF or Prudential Mutual Fund Distributors, Inc. for
such fee waivers or expense subsidies. Thereafter, PMF may from time to time
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. 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 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 SERIES. 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), affiliated
broker-dealers, 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.
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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. 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, 1994, although
currently PMFD is waiving its fee.
For the fiscal year ended August 31, 1993, PMFD waived its distribution fee
under the Class A Plan. PMFD received approximately $1,760,000 in initial sales
charges.
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 .75 OF 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 at a rate 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 .50 of 1% of the
average daily net assets of the Class C shares, and (ii) a service fee of .25 of
1% of the average daily net assets of the Class C shares; provided that the
total distribution-related fee does not exceed .75 of 1%. The service fee is
used to pay for personal service and/or the maintenance of shareholder accounts.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the period July 26, 1993 through August 31, 1993, Prudential Securities
incurred distribution expenses of approximately $-0-under the Class C Plan and
received $767 from the Series under the Class C Plan. In addition, Prudential
Securities received no contingent deferred sales charges from redemptions of
Class C shares during this period. No Class B shares were outstanding during the
fiscal year ended August 31, 1993.
For the period July 26, 1993 through August 31, 1993, the Series paid
distribution expenses of .75 of 1% of the average daily net assets of the Class
C shares. The Series records all payments made under the Plans as expenses in
the calculation of net investment income. No Class B shares were outstanding
during the fiscal year ended August 31, 1993. Prior to the date of this
Prospectus, the Class A Plan operated as a "reimbursement type" plan. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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
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twelve periods and is shown as a percentage of the investment. The income earned
on the investment is also assumed to be reinvested at the end of the sixth
30-day period. The "tax equivalent yield" is calculated similarly to the
"yield," except that the yield is increased using a stated income tax rate to
demonstrate the taxable yield necessary to produce an after-tax yield equivalent
to the 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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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,
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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 is currently 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.
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Series will not be subject to any Florida state
income tax on distributions received from the Series. However, distributions are
likely to be taxable in whole or in part to corporate shareholders which are
subject to Florida corporate income tax.
Florida currently imposes an "intangibles tax" on certain securities and other
intangible assets owned by Florida residents. Florida Obligations and certain
types of U.S. Government securities and other assets are exempt from this
intangibles tax. The Fund has obtained a ruling from Florida authorities that,
if on January 1 of any year the Series' portfolio of assets consists solely of
such exempt investments, then the Series' shares will be exempt from the Florida
intangibles tax payable in that year. If the Series holds any other type of
assets on that date, then the entire value of the Series shares (except for that
portion of the value of the shares attributable to U.S. government obligations)
will be subject to the Florida intangibles tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or Florida purposes.
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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 also is 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 or 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., Attn: 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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
Prior to August 1, 1994, Class C shares were designated Class D shares. Each
class of shares represents an interest in the same assets of the Series
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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, 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 in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares 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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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.
18
<PAGE>
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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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, 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) and the name of the Series.
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.
19
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------ --------------------- ------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently Initial sales charge waived or
of the public offering price payable at a rate of reduced for certain purchases
.10 of 1%, although
waived)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of .75 of 1% Shares do not convert to another
the amount invested or the class
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the 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 (except in the case of Class A shares where the 12b-1 fee is
assumed to be .10 of 1%) 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.
20
<PAGE>
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.
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 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
21
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV PER
SHARE 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
22
<PAGE>
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 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. 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
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
23
<PAGE>
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
YEAR SINCE PURCHASE DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ -------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. In the case
of Class B shares, it will be assumed that the redemption is made first of
amounts representing shares acquired pursuant to the reinvestment of dividends
and distributions; then of amounts representing the increase in net asset value
above the total amount of payments for the purchase of 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. In
the case of Class C shares, it will be assumed that the redemption is made first
of shares acquired pursuant to reinvestment of dividends and distributions and
then of shares held beyond the applicable CDSC period.
CLASS B. 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 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.
CLASS C. For example, assume you purchased 1,000 Class C shares at $10 per
share for a cost of $10,000. Subsequently, you acquired 50 additional shares
through dividend reinvestment. Six months after the purchase, you decided to
redeem 200 shares. Assuming at the time of redemption the net asset value had
appreciated to $10.20 per share, the proceeds of the redemption would be $2,040.
Fifty shares would not be subject to charge because of dividend reinvestment.
With respect to the remaining 150 shares, the charge would be applied to the
original cost of $10 per share and not to the increase in net asset value per
share of $.20. Therefore, $1,500 of the $2,040 redemption proceeds would be
charged at a rate of 1%.
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.
24
<PAGE>
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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."
25
<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 AND CLASS B SHARES OF THE
SERIES MAY BE EXCHANGED FOR CLASS A AND CLASS B SHARES, RESPECTIVELY, OF THE
OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV.
Currently, there is no exchange privilege for Class C shares of the Series.
Commencing on August 15, 1994, Class C shares of the Series may be exchanged for
shares of Prudential Special Money Market Fund only. 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.
26
<PAGE>
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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 in 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
27
<PAGE>
- 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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 6
Investment Objective and Policies............. 6
Other Investments and Policies................ 10
Investment Restrictions....................... 11
HOW THE FUND IS MANAGED......................... 11
Manager....................................... 11
Distributor................................... 12
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 14
HOW THE FUND CALCULATES PERFORMANCE............. 14
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 15
GENERAL INFORMATION............................. 17
Description of Shares......................... 17
Additional Information........................ 18
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF148A 444-3351
Class A: 74435M-50-7
CUSIP Nos.: Class B:_74435M-60-6
Class C: 74435M-61-4
PRUDENTIAL
MUNICIPAL
SERIES FUND
(FLORIDA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PROSPECTUS
AUGUST 1,
1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(GEORGIA SERIES)
- ------------------------------------------------------
Prospectus dated August 1, 1994
- ------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Georgia Series) (the "Series") is
one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from Georgia State and federal income taxes consistent with the
preservation of capital and, in conjunction therewith, the Series may invest in
debt securities with the potential for capital gain. The net assets of the
Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations 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
Georgia 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Georgia 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 Georgia State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Georgia
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 Georgia State
and federal income taxes (Georgia Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies" at page 7.
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 Georgia Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Georgia Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 11.
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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide--Shareholder Services"
at page 27.
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 15 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 19.
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 20.
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 22.
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 16.
3
<PAGE>
FUND EXPENSES
(GEORGIA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a 3% None None
percentage of offering price)................
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 year, 1% on redemptions made
decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES** CLASS B SHARES** CLASS C SHARES***
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
.50% .50% .50%
Management Fees...............................
.10++ .50 .75++
12b-1 Fees....................................
.67 .67 .67
Other Expenses................................
--- --- ---
Total Fund Operating Expenses................. 1.27% 1.67% 1.92%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A............................................................................... $ 43 $ 69 $ 98 $ 179
Class B............................................................................... $ 67 $ 83 $ 101 $ 182
Class C***............................................................................ $ 29 $ 60 $ 104 $ 224
You would pay the following expenses on the same investment, assuming no redemption:
Class A............................................................................... $ 43 $ 69 $ 98 $ 179
Class B............................................................................... $ 17 $ 53 $ 91 $ 182
Class C***............................................................................ $ 19 $ 60 $ 104 $ 224
The above example with respect to Class A and Class B shares is based on
restated data for the Series' fiscal year ended August 31, 1993. The above
example with respect to Class C shares is based on expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended August 31, 1993. 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" include operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
-----------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The Manager has agreed to subsidize expenses so that Total Fund Operating
Expenses (exclusive of 12b-1 fees) do not exceed 1.40% and 1.80% of the
average net assets of the Class A shares and Class B shares, respectively.
No subsidy was required for the fiscal year ended August 31, 1993.
*** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31, 1993.
The Manager has agreed to subsidize expenses so that Total Fund Operating
Expenses do not exceed 2.05% of the average net assets of the Class C
shares.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the 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, 1994. Total operating expenses of the Class A and Class C shares
without such limitations would be 1.47% and 2.17%, respectively. See "How
the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
YEAR JANUARY 22,
SIX MONTHS ENDED 1990*
ENDED AUGUST 31, THROUGH
FEBRUARY 28, 1994 ------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
----------------- ------- ----- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.12 $11.69 $11.39 $11.05 $11.26
------ ------- ----- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .30 .62 .65 + .64 .41
Net realized and unrealized gain
(loss) on investment
transactions...................... (.28) .85 .54 .43 (.21)
------ ------- ----- ------- -----------
Total from investment
operations...................... .02 1.47 1.19 1.07 .20
------ ------- ----- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.30) (.62) (.65 ) (.64) (.41)
Distributions from net realized
gains............................. (.17) (.42) (.24 ) (.09) --
------ ------- ----- ------- -----------
Total distributions.............. (.47) (1.04) (.89 ) (.73) (.41)
------ ------- ----- ------- -----------
Net asset value, end of period..... $11.67 $12.12 $11.69 $11.39 $11.05
------ ------- ----- ------- -----------
------ ------- ----- ------- -----------
TOTAL RETURN++:.................... 0.20% 13.28% 10.84% 10.03% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $1,153 $1,107 $177 $ 102 $ 83
Average net assets (000)........... $1,136 $ 475 $155 $ 98 $ 21
Ratios to average net assets:
Expenses, including distribution
fee............................. 1.16%** 1.27% 1.24 %+ 1.70% 1.46%**
Expenses, excluding distribution
fee............................. 1.06%** 1.17% 1.14 %+ 1.60% 1.36%**
Net investment income............ 4.96%** 5.29% 5.68 %+ 5.67% 5.92%**
Portfolio turnover................. 11% 41% 58 % 33% 49%
<FN>
------------------
*Commencement of offering of Class A shares.
**Annualized.
+Net of expense subsidy.
++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase on the first day and a sale on the last day
of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1994 -----------------------------------------------------------------------------
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986
------------ ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.12 $11.69 $11.39 $11.05 $11.23 $10.97 $10.97 $11.82 $10.51
------------ ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .27 .57 .61+ .60 .65 .68 .73+ .76+ .84+
Net realized and
unrealized gain (loss)
on investment
transactions............ (.28) .85 .54 .43 (.18) .26 -- (.53) 1.31
------------ ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............ (.01) 1.42 1.15 1.03 .47 .94 .73 .23 2.15
------------ ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.27) (.57) (.61) (.60) (.65) (.68) (.73) (.76) (.84)
Distributions from net
realized gains.......... (.17) (.42) (.24) (.09) -- -- -- (.32) --
------------ ------- ------- ------- ------- ------- ------- ------- -------
Total distributions.... (.44) (.99) (.85) (.69) (.65) (.68) (.73) (1.08) (.84)
------------ ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $11.67 $12.12 $11.69 $11.39 $11.05 $11.23 $10.97 $10.97 $11.82
------------ ------- ------- ------- ------- ------- ------- ------- -------
------------ ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN+++:......... 0.00% 12.83% 10.40% 9.57% 4.18% 8.74% 6.98% 1.97% 21.22%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $20,865 $20,811 $17,702 $17,722 $20,310 $24,124 $25,088 $24,714 $24,719
Average net assets
(000)................... $21,080 $18,437 $17,436 $19,008 $22,614 $25,292 $23,426 $26,996 $20,022
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.56%** 1.67% 1.64%+ 2.08% 1.67% 1.58% 1.29%+ 1.18%+ 1.12%+
Expenses, excluding
distribution fee...... 1.06%** 1.17% 1.14%+ 1.58% 1.22% 1.20% .82%+ .74%+ .64%+
Net investment
income................ 4.56%** 4.89% 5.28%+ 5.36% 5.85% 6.02% 6.73%+ 6.89%+ 7.23%+
Portfolio turnover....... 11% 41% 58% 33% 49% 83% 67% 77% 57%
<CAPTION>
SEPTEMBER 25,
1984*
THROUGH
AUGUST 31,
1985
-------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $10.00
-------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .79+
Net realized and
unrealized gain (loss)
on investment
transactions............ .51
-------------
Total from investment
operations............ 1.30
-------------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.79)
Distributions from net
realized gains.......... --
-------------
Total distributions.... (.79)
-------------
Net asset value, end of
period.................. $10.51
-------------
-------------
TOTAL RETURN+++:......... 13.26%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $14,451
Average net assets
(000)................... $7,405
Ratios to average net
assets:
Expenses, including
distribution fee...... .93%+**
Expenses, excluding
distribution fee...... .45%+**
Net investment
income................ 7.64%+**
Portfolio turnover....... 64%
<FN>
---------------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE GEORGIA SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM GEORGIA
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND,
IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. 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 GEORGIA 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 GEORGIA STATE AND FEDERAL INCOME TAXES
(GEORGIA 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." Under Georgia law, dividends paid by the Series are exempt from
Georgia income tax for resident individuals and corporations to the extent they
are derived from interest payments on Georgia Obligations. Georgia Obligations
could 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 obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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
7
<PAGE>
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 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.
ALL GEORGIA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Georgia Obligations will, at the time of
purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Georgia Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Georgia Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN GEORGIA 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 Georgia and
federal income taxes or the Series will have at least 80% of its total assets
invested in Georgia 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 Georgia Obligations or may invest its assets so that more
than 20% of the income is subject to Georgia State or federal income taxes.
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 of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums
8
<PAGE>
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 GEORGIA 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 Georgia 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.
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).
9
<PAGE>
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 FOR 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.
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.
10
<PAGE>
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN GEORGIA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
GEORGIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF GEORGIA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Georgia's financial
operations in recent years have been favorable with strong revenue gains and
increases in reserve levels recorded through most of the 1980's. However, a
revenue slowdown occurred in fiscal year 1990 and continued into fiscal year
1991. Audited results for fiscal year 1993 indicate a year-end surplus of $37.1
million and the fiscal 1994 budget increases appropriations by 8.6%, inclusive
of the new state lottery, while overall revenues are expected to grow by 9.4%
over the previous fiscal year. If either Georgia or any of its local
governmental agencies is unable to meet its financial obligations, 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.
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.
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.
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
11
<PAGE>
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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets, net of subsidy, were 1.27% and 1.67% for the
Series' Class A and Class B shares, respectively. See "Financial Highlights." No
Class C shares were outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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FEE WAIVER AND SUBSIDY
Effective September 1, 1993, PMF agreed to subsidize certain expenses of the
Series to limit total expenses (exclusive of 12b-1 fees) of the Class A and
Class B shares to no more than 1.40% and 1.80%, respectively. In addition, PMF
has agreed to subsidize certain expenses of the Series to limit total expenses
(exclusive of 12b-1 fees) of the Class C shares to no more than 2.05%.No subsidy
was required for the fiscal year ended August 31, 1993. The Series is not
required to reimburse PMF for any such subsidy. Thereafter, PMF may from time to
time 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. 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 SERIES. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments under the
Class A Plan. This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended August 31, 1993, PMFD also received approximately
$25,400 in initial sales charges.
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
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to .25 of 1% of the average daily net assets of the Class B shares; provided
that the total distribution-related fee does not exceed .50 of 1%. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending August 31, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $179,100 under the Class B Plan and
received $92,185 from the Series under the Class B Plan. In addition, Prudential
Securities received approximately $4,000 in contingent deferred sales charges
from redemptions of Class B shares during this period. No Class C shares were
outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
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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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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 is currently the
same as the maximum tax rate for ordinary income.
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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.
Assuming the Series qualifies as a regulated investment company under the
Internal Revenue Code, then, under existing Georgia law, shareholders of the
Series will not be subject to Georgia income taxes on distributions from the
Series to the extent that such distributions represent "exempt-interest
dividends" for federal income tax purposes that are attributable to Georgia
Obligations. Distributions, if any, derived from capital gains or other sources
generally will be taxable to shareholders of the Series for Georgia income tax
purposes. For purposes of the Georgia intangibles tax, shares of the Series
likely are taxable (at the rate of 10 cents per $1,000 in value) to shareholders
who are otherwise subject to such tax.
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 or 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 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."
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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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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 in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares 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.
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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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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.
19
<PAGE>
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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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.
20
<PAGE>
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.
If you qualify for a reduced sales charge on Class A shares, if 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 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
21
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
22
<PAGE>
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 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.
23
<PAGE>
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 purchased
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------------ -------------------------
<S> <C>
First............................................................. 5.0%
Second............................................................ 4.0%
Third............................................................. 3.0%
Fourth............................................................ 2.0%
Fifth............................................................. 1.0%
Sixth............................................................. 1.0%
Seventh........................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
24
<PAGE>
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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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
25
<PAGE>
purchase of 100 shares was subsequently made at $11 per share (for a total of
$1,100), 95.24 shares would convert approximately seven years from the initial
purchase (I.E., $1,000 divided by $2,100 (47.62%) multiplied by 200 shares
equals 95.24 shares). The Manager reserves the right to modify the formula for
determining the number of Eligible Shares in the future as it deems appropriate
on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature 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
26
<PAGE>
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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 in 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
27
<PAGE>
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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES
PERFORMANCE.................................. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF118A 444049Y
Class A: 74435M-30-9
CUSIP Nos.: Class B: 74435M-40-8
Class C: 74435M-58-0
PRUDENTIAL
MUNICIPAL
SERIES FUND
(GEORGIA SERIES)
- --------------------------------------
[Logo]
<PAGE>
PROSPECTUS
August 1,
1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MARYLAND SERIES)
- ----------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Maryland Series) (the "Series")
is one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from Maryland State and federal income taxes consistent with the
preservation of capital and, in conjunction therewith, the Series may invest in
debt securities with the potential for capital gain. The net assets of the
Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations 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
Maryland 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Maryland 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 Maryland State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Maryland
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 Maryland
State and federal income taxes (Maryland Obligations). There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests-- Investment Objective and Policies" at page 7.
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 Maryland Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Maryland Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 11.
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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide--Shareholder Services"
at page 28.
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 the 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 15 and "Shareholder Guide--How to Buy Shares of
the Fund" at page 19.
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 20.
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 22.
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 16.
3
<PAGE>
FUND EXPENSES
(MARYLAND SERIES)
<TABLE>
<CAPTION>
CLASS A CLASS C
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES SHARES
------------- ---------------- -------------
<S> <C> <C> <C>
3% None None
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................
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 1% on
first year, redemptions
decreasing by 1% made within
annually to 1% one year of
in the fifth and purchase
sixth years and
0% the seventh
year*
Redemption Fees................. None None None
Exchange Fee.................... None None None
<CAPTION>
CLASS C
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS B SHARES SHARES**
SHARES ---------------- -------------
-------------
<S> <C> <C> <C>
(as a percentage of average net
assets)
Management Fees................. .50% .50% .50%
12b-1 Fees...................... .10++ .50 .75++
Other Expenses.................. .36 .36 .36
Total Fund Operating Expenses... .96% 1.36% 1.61%
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A............................................................................... $ 40 $ 60 $ 81 $ 144
Class B............................................................................... $ 64 $ 73 $ 84 $ 147
Class C**............................................................................. $ 26 $ 51 $ 88 $ 191
You would pay the following expenses on the same investment, assuming no redemption:
Class A............................................................................... $ 40 $ 60 $ 81 $ 144
Class B............................................................................... $ 14 $ 43 $ 74 $ 147
Class C**............................................................................. $ 16 $ 51 $ 88 $ 191
The above example with respect to Class A and Class B shares is based on data for the Series' fiscal year ended August 31,
1993. The above example with respect to Class C shares is based on expenses expected to have been incurred if Class C shares
had been in existence during the fiscal year ended August 31, 1993. 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" include operating expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agency and custodian fees.
<FN>
- ------------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
**Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31,
1993.
+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 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, 1994. Total operating expenses of the Class A and Class
C shares without such limitations would be 1.16% and 1.86%, respectively.
See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods presented. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED 1990*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
------------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $11.64 $11.11 $10.67 $10.23 $10.44
------- ----- ----- ----- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .29 .62 .63 .67 .40
Net realized and unrealized gain
(loss) on investment
transactions...................... (.27) .65 .44 .44 (.21)
------- ----- ----- ----- -------
Total from investment
operations.................... .02 1.27 1.07 1.11 .19
------------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.29) (.62) (.63) (.67) (.40)
Distributions from net realized
gains............................. (.21) (.12) -- -- --
--------- ----- ----- ----- -------
Total distributions............ (.50) (.74) (.63) (.67) (.40)
------- ----- ----- ----- -------
Net asset value, end of period..... $11.16 $11.64 $11.11 $10.67 $10.23
------- ----- ----- ----- -------
--------- ----- ----- ----- --------
TOTAL RETURN+:..................... 0.27% 11.89% 10.35% 10.84% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $3,099 $2,930 $1,335 $ 804 $ 349
Average net assets (000)........... $3,002 $2,068 $1,080 $ 518 $ 141
Ratios to average net assets:
Expenses, including distribution
fee............................. .90%** .96% .96% 1.10% 1.01%**
Expenses, excluding distribution
fee............................. .80%** .86% .86% 1.00% .91%**
Net investment income............ 5.17%** 5.51% 5.80% 6.07% 6.31%**
Portfolio turnover................. 22% 41% 34% 18% 46%
<FN>
---------------------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
1994 -----------------------------------------------------------------
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988
--------------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23 $ 10.29
--------------- ----------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .27 .58 .59 .63 .62 .65 .69+
Net realized and unrealized gain
(loss) on investment
transactions...................... (.26) .65 .44 .45 (.25) .25 (.06)
------- ----- ----- ----- ----- ----- -----
Total from investment
operations.................... .01 1.23 1.03 1.08 .37 .90 .63
------- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.27) (.58) (.59) (.63) (.62) (.65) (.69)
Distributions from net realized
gains............................. (.21) (.12) -- -- -- -- --
------- ----- ----- ----- ----- ----- -----
Total distributions............ (.48) (.70) (.59) (.63) (.62) (.65) (.69)
------- ----- ----- ----- ----- ----- -----
Net asset value, end of period..... $ 11.18 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23
------- ----- ----- ----- ----- ----- -----
--------- ----- ----- ----- ----- ----- -----
TOTAL RETURN+++:................... 0.16% 11.43% 9.90% 10.49% 3.58% 9.17% 6.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 56,115 $ 57,598 $ 51,313 $ 51,110 $ 48,226 $ 47,409 $ 39,154
Average net assets (000)........... $ 57,805 $ 53,780 $ 50,970 $ 48,422 $ 48,573 $ 44,243 $ 35,675
Ratios to average net assets:
Expenses, including distribution
fee............................. 1.30%** 1.36% 1.37% 1.49% 1.40% 1.37% 1.24%+
Expenses, excluding distribution
fee............................. .80%** .86% .87% .99% .92% .90% .75%+
Net investment income............ 4.77%** 5.11% 5.42% 5.70% 5.95% 6.26% 6.67%+
Portfolio turnover................. 22% 41% 34% 18% 46% 47% 46%
<CAPTION>
JANUARY 22,
1985*
THROUGH
AUGUST 31,
1987 1986 1985
-------- -------- ---------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 10.72 $ 9.93 $ 10.00
-------- -------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .68+ .76+ .46+
Net realized and unrealized gain
(loss) on investment
transactions...................... (.43) .79 (.07)
----- ----- -------
Total from investment
operations.................... .25 1.55 .39
----- ----- -------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.68) (.76) (.46)
Distributions from net realized
gains............................. -- -- --
----- ----- -------
Total distributions............ (.68) (.76) (.46)
----- ----- -------
Net asset value, end of period..... $ 10.29 $ 10.72 $ 9.93
----- ----- -------
----- ----- ---------
TOTAL RETURN+++:................... 2.29% 16.15% 3.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 33,287 $ 23,744 $ 9,941
Average net assets (000)........... $ 30,537 $ 16,968 $ 6,234
Ratios to average net assets:
Expenses, including distribution
fee............................. 1.16%+ 1.01%+ .87%+**
Expenses, excluding distribution
fee............................. .67%+ .52%+ .39%+**
Net investment income............ 6.26%+ 6.90%+ 7.13%+**
Portfolio turnover................. 35% 30% 58%
<FN>
-------------------------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE MARYLAND SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM MARYLAND
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND,
IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. 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 MARYLAND 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 MARYLAND STATE AND FEDERAL INCOME TAXES
(MARYLAND 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." Under Maryland law, dividends paid by the Series are exempt from
Maryland personal income tax for resident individuals to the extent they are
derived from interest payments on and, in some cases, gain from the sale of
Maryland Obligations. Maryland Obligations could 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 obligations, and the dollar-weighted average maturity of the
Series' portfolio will generally range between 10-20 years. The Series also may
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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would 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
7
<PAGE>
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 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.
ALL MARYLAND OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Maryland Obligations will, at the time of
purchase, be 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 securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Maryland Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Maryland Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MARYLAND 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 Maryland
State and federal income taxes or the Series will have at least 80% of its total
assets invested in Maryland 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 Maryland Obligations or may invest
its assets so that more than 20% of the income is subject to Maryland State or
federal income taxes.
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
8
<PAGE>
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 MARYLAND 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 Maryland 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.
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
9
<PAGE>
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 FOR 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.
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
10
<PAGE>
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 MARYLAND OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MARYLAND OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MARYLAND OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. During the three
fiscal years from 1991 through 1993, the State's finances were severely affected
by the national recession. Nevertheless, the State closed fiscal year 1993 with
a $10.5 million operating surplus on a budgetary basis. On a GAAP basis, the
State's General Fund moved from a deficit of $121.7 million as of June 30, 1992
to a positive balance of $113.9 million on June 30, 1993. The 1995 budget
continues the trend of increased budgetary reserves. By the end of fiscal year
1995, Maryland anticipates a $221 million reserve representing approximately 3%
of General Fund revenues. If either Maryland or any of its local governmental
entities is unable to meet its financial obligations, 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.
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.
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.
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
11
<PAGE>
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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were .96% and 1.36% for the Series' Class A and
Class B shares, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
Statement of Additional Information.
As of June 30, 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 SERVICE. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
12
<PAGE>
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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 SERIES. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $2,068
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $58,200 in initial sales charges.
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
13
<PAGE>
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $398,100 under the Class B Plan and
received $268,900 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $26,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
14
<PAGE>
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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
15
<PAGE>
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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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 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.
16
<PAGE>
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 shareholders 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 Maryland law, dividends paid by the Series are exempt from Maryland
personal income tax for individuals who reside in Maryland to the extent such
dividends are exempt from federal income tax (except for possible application of
the alternative minimum tax) and are derived from interest payments on Maryland
Obligations. In addition, capital gains distributions attributable to those
Maryland Obligations issued by the State of Maryland or its political
subdivisions are exempt from Maryland personal income tax.
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 also is 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 or 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 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
17
<PAGE>
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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
Each class of shares represents an interest in the same assets of the Series and
are 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, 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
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<PAGE>
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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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.
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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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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.
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<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the 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.
If you qualify for a reduced sales charge on Class A shares, if 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 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
<FN>
</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
21
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
22
<PAGE>
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 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.
23
<PAGE>
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 purchased
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
--------------------------------- -------------------------
<S> <C>
First............................ 5.0%
Second........................... 4.0%
Third............................ 3.0%
Fourth........................... 2.0%
Fifth............................ 1.0%
Sixth............................ 1.0%
Seventh.......................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the
lowest possible rate. It will be assumed that the redemption is made first of
amounts representing shares acquired pursuant to the reinvestment of dividends
and distributions; then of amounts representing the increase in net asset value
above the total amount of payments for the purchase of Series shares made during
the preceding six years (five years for Class B shares purchased prior to
January 22, 1990); then of amounts representing the cost of shares held beyond
the applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
24
<PAGE>
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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Pruchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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.
25
<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature 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.
26
<PAGE>
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, 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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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.
27
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in 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
charge 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at 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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS......................................................... 2
Risk Factors and Special Characteristics.............................. 2
FUND EXPENSES........................................................... 4
FINANCIAL HIGHLIGHTS.................................................... 5
HOW THE FUND INVESTS.................................................... 7
Investment Objective and Policies..................................... 7
Other Investments and Policies........................................ 11
Investment Restrictions............................................... 12
HOW THE FUND IS MANAGED................................................. 12
Manager............................................................... 12
Distributor........................................................... 13
Portfolio Transactions................................................ 14
Custodian and Transfer and Dividend Disbursing Agent.................. 14
HOW THE FUND VALUES ITS SHARES.......................................... 15
HOW THE FUND CALCULATES PERFORMANCE..................................... 15
TAXES, DIVIDENDS AND DISTRIBUTIONS...................................... 16
GENERAL INFORMATION..................................................... 18
Description of Shares................................................. 18
Additional Information................................................ 19
SHAREHOLDER GUIDE....................................................... 19
How to Buy Shares of the Fund......................................... 19
Alternative Purchase Plan............................................. 20
How to Sell Your Shares............................................... 22
Conversion Feature -- Class B Shares.................................. 25
How to Exchange Your Shares........................................... 26
Shareholder Services.................................................. 28
THE PRUDENTIAL MUTUAL FUND FAMILY....................................... A-1
- -------------------------------------------
MF 125A 44404BU
Class A: 74435M-70-5
CUSIP Nos.: Class B: 74435M-80-4
Class C: 74435M-57-2
PROSPECTUS
AUGUST 1,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MARYLAND SERIES)
- -------------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS SERIES)
- ----------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Massachusetts Series) (the
"Series") is one of sixteen series of an open-end investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from Massachusetts state and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations 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
Massachusetts 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Massachusetts 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 Massachusetts state and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Massachusetts 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 Massachusetts state and federal income taxes (Massachusetts Obligations).
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at page
7.
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 Massachusetts Obligations. This
degree of investment concentration makes the Series particularly susceptible to
factors adversely affecting issuers of Massachusetts Obligations. See "How the
Fund Invests--Investment Objective and Policies-- Special Considerations" at
page 11. 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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide--Shareholder Services"
at page 27.
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 15 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 19.
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 20.
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 22.
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 16.
3
<PAGE>
FUND EXPENSES
(Massachusetts Series)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- ----------------------
Maximum Sales Load
Imposed on Purchases
(as a percentage of 3% None None
offering price)......
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 5% during the first year, 1% on redemptions made
is lower)............ None decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees....... None None None
Exchange Fee.......... None None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
--------------------- ------------------------- ----------------------
<S> <C> <C> <C>
Management Fees..... .50% .50% .50%
12b-1 Fees.......... .10++ .50 .75++
Other Expenses...... .35 .35 .35
--
--- ---
Total Fund Operating
Expenses........... .95% 1.35% 1.60%
--
--
--- ---
--- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A...................................... $39 $59 $81 $143
Class B...................................... $64 $73 $84 $146
Class C**.................................... $26 $50 $87 $190
You would pay the following expenses on the same
investment, assuming no redemption:
Class A...................................... $39 $59 $81 $143
Class B...................................... $14 $43 $74 $146
Class C**.................................... $16 $50 $87 $190
The above example with respect to Class A and Class B shares is based on data for the Series'
fiscal year ended August 31, 1993. The above example with respect to Class C shares is based on
expenses expected to have been incurred if Class C shares had been in existence during the fiscal
year ended August 31, 1993. 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.
<FN>
- ------------------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C shares
had been in existence during the fiscal year ended August 31, 1993.
+ 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, 1994. Total operating expenses of the Class A and Class C shares without
such limitations would be 1.15 and 1.85%, respectively. See "How the Fund is
Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED YEAR ENDED 1990*
FEBRUARY 28, AUGUST 31, THROUGH
1994 ------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
------------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.17 $11.50 $10.94 $10.44 $ 10.70
------ ------ ------ ------ -----------
Income from investment
operations
Net investment income.... .33 .68 .69 .70 .41
Net realized and
unrealized gain (loss)
on
investment
transactions............ (.26) .67 .56 .50 (.26)
------ ------ ------ ------ -----------
Total from investment
operations............ .07 1.35 1.25 1.20 .15
------ ------ ------ ------ -----------
Less distributions
Dividends from net
investment income....... (.33) (.68) (.69) (.70) (.41)
Distributions from net
realized gains.......... (.07) -- -- -- --
------ ------ ------ ------ -----------
Total distributions.... (.40) (.68) (.69) (.70) (.41)
------ ------ ------ ------ -----------
Net asset value, end of
period.................. $ 11.84 $12.17 $11.50 $10.94 $ 10.44
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
TOTAL RETURN+:........... 0.68% 12.10% 11.76% 11.81% 1.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 2,641 $2,325 $ 903 $ 665 $ 257
Average net assets
(000)................... $ 2,704 $1,336 $ 770 $ 344 $ 127
Ratios to average net
assets:
Expenses, including
distribution fee...... .86%** .95% .99% 1.05% 1.04%**
Expenses, excluding
distribution fee...... .76%** .85% .89% .95% .95%**
Net investment
income................ 5.53%** 5.79% 6.14% 6.53% 6.60%**
Portfolio turnover....... 8% 56% 32% 34% 33%
<FN>
- ----------------------------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 25,
ENDED 1984*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------------------------------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------------- ------ ------- ------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $12.17 $11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53 $ 10.58 $ 11.47 $ 10.46 $ 10.00
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Income from
investment
operations
Net investment
income............. .31 .63 .64 .65 .65 .68 .71+ .71+ .77+ .76+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.26) .68 .55 .50 (.30) .21 (.05) (.67) 1.02 .46
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total from
investment
operations....... .05 1.31 1.19 1.15 .35 .89 .66 .04 1.79 1.22
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Less distributions
Dividends from net
investment
income............. (.31) (.63) (.64) (.65) (.65) (.68) (.71) (.71) (.77) (.76)
Distributions from
net realized
gains.............. (.07) -- -- -- -- -- -- (.22) (.01) --
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total
distributions.... (.38) (.63) (.64) (.65) (.65) (.68) (.71) (.93) (.78) (.76)
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Net asset value, end
of period.......... $11.84 $12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53 $ 10.58 $ 11.47 $ 10.46
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
TOTAL RETURN+++:.... 0.48% 11.77% 11.23% 11.38% 3.40% 8.67% 6.54% 0.31% 17.94% 12.39%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... 6$0,683 $61,121 $53,449 $49,641 $50,575 $52,754 $ 45,278 $ 40,655 $ 33,041 $15,799
Average net assets
(000).............. 6$1,829 $55,965 $50,607 $49,083 $52,974 $49,841 $ 41,357 $ 38,462 $ 25,655 $ 8,848
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.26%** 1.35% 1.39% 1.45% 1.37% 1.34% 1.22%+ 1.15%+ 1.15%+ .93%+**
Expenses,
excluding
distribution
fee.............. .76%** .85% .89% .95% .90% .87% .72%+ .65%+ .67%+ .45%+**
Net investment
income........... 5.13%** 5.39% 5.74% 6.13% 6.21% 6.24% 6.76%+ 6.34%+ 6.85%+ 7.53%+**
Portfolio
turnover........... 8% 56% 32% 34% 33% 23% 41% 116% 55% 21%
<FN>
- ----------------------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE MASSACHUSETTS SERIES (THE SERIES) IS DIVERSIFIED AND
ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM
MASSACHUSETTS STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES
WITH THE POTENTIAL FOR CAPITAL GAIN. 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 MASSACHUSETTS 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 MASSACHUSETTS STATE AND FEDERAL INCOME
TAXES (MASSACHUSETTS 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." Under Massachusetts law, dividends paid by the Series are exempt
from Massachusetts personal income tax for resident individuals and other
resident noncorporate shareholders to the extent they are derived from interest
payments on Massachusetts Obligations or from long-term capital gains on certain
Massachusetts Obligations. Massachusetts Obligations could include general
obligation bonds of the Commonwealth, 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 obligations, and the dollar-weighted
average maturity of the Series' portfolio will generally range between 10-20
years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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
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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 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.
ALL MASSACHUSETTS OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT
GRADE" SECURITIES. In other words, all of the Massachusetts Obligations will, at
the time of purchase, be 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 securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Massachusetts Obligations
which, in the opinion of the investment adviser, offer the opportunity for
capital appreciation. This may occur, for example, when the investment adviser
believes that the issuer of a particular Massachusetts Obligation might receive
an upgraded credit standing, thereby increasing the market value of the bonds it
has issued or when the investment adviser believes that interest rates might
decline. As a general matter, bond prices and the Series' net asset value will
vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MASSACHUSETTS 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
Massachusetts and federal income taxes or the Series will have at least 80% of
its total assets invested in Massachusetts 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 Massachusetts Obligations or may
invest its assets so that more than 20% of the income is subject to
Massachusetts state or federal income taxes.
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 MASSACHUSETTS
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 Massachusetts 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.
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
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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 FOR 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.
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
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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 MASSACHUSETTS OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED
FROM MASSACHUSETTS OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
AFFECTING ISSUERS OF MASSACHUSETTS OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE.
The recent economic downturn had serious adverse effects on Massachusetts'
financial operations leading to a massive accumulated deficit of $1.45 billion
at the close of fiscal 1990. Since that time, Massachusetts has adopted more
conservative revenue forecasting procedures and has moderated spending growth,
resulting in the achievement of balanced budgets in both fiscal 1991-1992 and
fiscal 1992-1993. On a statutory accounting basis, the Commonwealth reported
that the Budgeted Operating Funds ended fiscal year 1993 with balances of $562.5
million. Nevertheless, ongoing spending pressures, continued economic adversity,
a heavy debt load, and recent reform legislation estimated to require spending
of $1.2 billion over three years on school reform, pose significant obstacles to
continued progress. If either Massachusetts or any of its local governmental
entities is unable to meet its financial obligations, 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.
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.
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.
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
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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, SUBADVISOR 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 SUBADVISOR FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were .95% and 1.35%, for the Series' Class A
and Class B shares, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended August 31, 1993.
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 NET ASSETS OF THE
SERIES. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended August 31, 1993, the Series paid PMF a management fee
of .50 of 1% of the Series' average net assets. See "Manager" in the Statement
of Additional Information.
As of June 30, 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 SUBADVISOR), 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.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
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PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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 SERIES. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $1,336
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $43,400 in initial sales charges.
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
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.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $490,100 under the Class B Plan and
received $279,824 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $32,100 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
15
<PAGE>
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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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 is currently the
same as the maximum tax rate for ordinary income.
16
<PAGE>
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 Massachusetts law, dividends paid by the Series are exempt from
Massachusetts personal income tax for individuals and other noncorporate
shareholders resident in Massachusetts to the extent such dividends are excluded
from gross income for federal income tax purposes and are derived from interest
payments on Massachusetts Obligations or are capital gain dividends for federal
income tax purposes and are derived from long-term capital gains on certain
Massachusetts Obligations.
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 or 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 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
17
<PAGE>
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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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
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<PAGE>
A MEETING UPON A VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF
VOTING ON THE REMOVAL OF ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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.
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<PAGE>
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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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.
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<PAGE>
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.
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
investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
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<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
22
<PAGE>
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 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
23
<PAGE>
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 of the Series 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 purchased 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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ ---------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
24
<PAGE>
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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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.
25
<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995 but
as soon as 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.
26
<PAGE>
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, 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 THE 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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 in 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
27
<PAGE>
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" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at 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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF119A___________________________________________________________________44404AW
A: 74435M-65-5
CUSIP Nos.: B: 74435M-66-3
C: 74435M-56-4
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MASSACHUSETTS SERIES)
- --------------------------------------
[Logo]
<PAGE>
PROSPECTUS
August 1, 1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MICHIGAN SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Michigan Series) (the "Series")
is one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from Michigan State and federal income taxes consistent with the
preservation of capital and, in conjunction therewith, the Series may invest in
debt securities with the potential for capital gain. The net assets of the
Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations which, in the opinion of the Fund's investment adviser, are of
comparable quality. There can be no assurances 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
Michigan Series that a prospective investor should to 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Michigan 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 Michigan State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Michigan
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 Michigan
State and federal income taxes (Michigan Obligations). There can be no
assurances that the Series' investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies" at page 7.
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 Michigan Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Michigan Obligations. See "How the Fund
Invests--Investment Objective and Policies-- Special Considerations" at page 10.
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 9.
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 June 30, 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 12.
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 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 18 and "Shareholder Guide--Shareholder Services"
at page 26.
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 14 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 18.
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 19.
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 21.
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 15.
3
<PAGE>
FUND EXPENSES
(MICHIGAN SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- -------------------- ---------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)........................ 3% None None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends................................. None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever is
lower)............................................... None 5% during the first 1% on
year, decreasing by redemptions
1% annually to 1% in made within one
the fifth and sixth year of
years and 0% the purchase
seventh year*
Redemption Fees....................................... None None None
Exchange Fee.......................................... None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES**
----------------- ------------------------ -------------------
<S> <C> <C> <C>
Management Fees....................................... .50% .50% .50%
12b-1 Fees............................................ .10++ .50 .75++
Other Expenses........................................ .46 .46 .46
--- --- ---
Total Fund Operating Expenses......................... 1.06% 1.46% 1.71%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A................................................................ $40 $ 63 $ 87 $156
Class B................................................................ $65 $ 76 $ 90 $159
Class C**.............................................................. $27 $ 54 $ 93 $202
You would pay the following expenses on the same investment, assuming no
redemption:
Class A................................................................ $40 $ 63 $ 87 $156
Class B................................................................ $15 $ 46 $ 80 $159
Class C**.............................................................. $17 $ 54 $ 93 $202
The above example with respect to Class A and Class B shares is based on data
for the Series' fiscal year ended August 31, 1993. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the fiscal year ended August 31,
1993. 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" include operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31, 1993.
+ 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, 1994. Total operating expenses of the Class A and Class C shares
without such limitations would be 1.26% and 1.96%, respectively. See "How
the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED 1990*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
------------- ------ ------- ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.51 $11.90 $ 11.30 $10.81 $11.02
------ ------ ------- ------ -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .32 .67 .68 .67 .41
Net realized and unrealized gain
(loss) on investment
transactions...................... (.22) .71 .60 .49 (.21)
------ ------ ------- ------ -----------
Total from investment
operations.................... .10 1.38 1.28 1.16 .20
------ ------ ------- ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.32) (.67) (.68) (.67) (.41)
Distributions from net realized
gains............................. (.07) (.10) -- -- --
------ ------ ------- ------ -----------
Total distributions............ (.39) (.77) (.68) (.67) (.41)
------ ------ ------- ------ -----------
Net asset value, end of period..... $12.22 $12.51 $ 11.90 $11.30 $10.81
------ ------ ------- ------ -----------
------ ------ ------- ------ -----------
TOTAL RETURN+:..................... 0.93% 11.95% 11.63% 11.04% 1.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $4,689 $3,814 $ 1,618 $ 835 $ 501
Average net assets (000)........... $4,348 $2,285 $ 1,235 $ 694 $ 365
Ratios to average net assets:
Expenses, including distribution
fee............................. .87%** 1.06% .98% 1.09% 1.09%**
Expenses, excluding distribution
fee............................. .77%** .96% .88% .99% .99%**
Net investment income............ 5.24%** 6.15% 5.82% 6.09% 6.25%**
Portfolio turnover................. 4% 14% 30% 62% 55%
<FN>
- ------------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 22,
ENDED 1984*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.03 $ 10.57 $ 10.85 $ 11.94 $ 10.50 $10.00
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .30 .62 .63 .63 .65 .68 .72+ .73+ .82+ .77+
Net realized and
unrealized gain (loss)
on investment
transactions........... (.22) .71 .60 .49 (.22) .46 (.28) (.44) 1.44 .50
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
Total from
investment
operations......... .08 1.33 1.23 1.12 .43 1.14 .44 .29 2.26 1.27
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.30) (.62) (.63) (.63) (.65) (.68) (.72) (.73) (.82) (.77)
Distributions from net
realized gains......... (.07) (.10) -- -- -- -- -- (.65) -- --
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
Total
distributions...... (.37) (.72) (.63) (.63) (.65) (.68) (.72) (1.38) (.82) (.77)
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
Net asset value, end of
period................. $ 12.22 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.03 $ 10.57 $ 10.85 $ 11.94 $10.50
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
------------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
TOTAL RETURN+++:........ 0.72% 11.51% 11.18% 10.60% 4.02% 11.08% 4.34% 2.52% 22.38% 12.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)........... $74,140 $70,302 $56,095 $59,400 $49,923 $47,025 $40,489 $40,597 $32,139 $16,811
Average net assets
(000).................. $72,936 $61,548 $52,137 $50,809 $48,694 $43,957 $39,246 $39,088 $25,698 $37,263
Ratios to average net
assets:
Expenses, including
distribution fee..... 1.27%** 1.46% 1.38% 1.49% 1.44% 1.35% 1.20%+ 1.13%+ 1.14%+ .92%+**
Expenses, excluding
distribution fee..... .77%** .96% .88% .99% .97% .96% .72%+ .66%+ .66%+ .44%+**
Net investment
income............... 4.84%** 5.75% 5.42% 5.66% 5.95% 6.20% 6.85%+ 6.40%+ 7.07%+ 7.53%+**
Portfolio turnover...... 4% 14% 30% 62% 55% 36% 156% 105% 123% 36%
<FN>
- ------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE MICHIGAN SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM MICHIGAN
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND,
IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. 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 MICHIGAN 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 MICHIGAN STATE AND FEDERAL INCOME TAXES
(MICHIGAN 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." Under Michigan law, dividends paid by the Series are exempt from
Michigan income tax and single business tax for resident individuals and
corporations to the extent they are derived from interest payments on Michigan
Obligations. Michigan Obligations could 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 obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would 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 the 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
7
<PAGE>
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) 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.
ALL MICHIGAN OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Michigan Obligations will, at the time of
purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Michigan Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Michigan Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MICHIGAN 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 Michigan
State and federal income taxes or the Series will have at least 80% of its total
assets invested in Michigan 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, 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 Michigan Obligations or may invest its assets so that more
than 20% of the income is subject to Michigan State or federal income taxes.
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 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
8
<PAGE>
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 MICHIGAN 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 Michigan 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.
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.
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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 FOR 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.
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 MICHIGAN OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MICHIGAN OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MICHIGAN OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Michigan
encountered financial difficulties during the late 1980's, largely as a result
of poor conditions in the automotive industry, but has recovered from the
prolonged downturn in production levels in this sector. The State Senate's
Fiscal Agency forecast predicts continued improvement in the economy of Michigan
through 1995, largely due to the improvement in motor vehicle sales and growth
in the State's service industry, wholesale and retail trade and construction
sector. Despite budget problems of over-estimation of revenues and
under-estimation of expenses and the resulting drawdown on the State's Budget
Stabilization Fund in recent years, for fiscal 1993 the State achieved a budget
surplus as a result of accounting adjustments and other payment deferrals. In
July 1993 the Michigan Legislature eliminated the ability of school districts to
levy property taxes for operations. In response, in 1994 voters approved a
proposal that replaces this school funding property tax system with certain new
excise taxes and an increased sales tax. The market value and the marketability
of Michigan Obligations
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may be affected adversely by the same factors that affect Michigan's economy
generally. If either Michigan or any of its local governmental entities is
unable to meet its financial obligations, 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.
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.
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.
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.
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For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were 1.06% and 1.46% for the Series' Class A
and Class B shares, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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.
The current portfolio manager of the Series is Christian Smith, an Investment
Associate of Prudential Investment Advisors. Mr. Smith has responsibility for
the day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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 SERIES. 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
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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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $2,285
under the Class A Plan This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended August 31, 1993, PMFD also received approximately
$80,600 in initial sales charges.
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% 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, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $719,700 under the Class B Plan and
received $307,738 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $43,500 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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
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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 NET
ASSET VALUE 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 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 NAVs and
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.
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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 AND 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 yield 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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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
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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 is currently 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 constitute 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 Michigan law, dividends paid by the Series that are derived from
interest payments attributable to Michigan Obligations are exempt from Michigan
income tax and any income taxes imposed by cities in Michigan for individuals
who reside in Michigan and from the Michigan single business tax for
corporations that are subject to such tax to the extent such dividends are
exempt from federal income tax (except for possible application of the
alternative minimum tax). An investment in the Series, to the extent
attributable to interest on Michigan Obligations, will also be excluded from the
Michigan intangibles tax.
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.
16
<PAGE>
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or 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 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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
Each class of shares represents an interest in the same assets of the Series and
are 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, 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
17
<PAGE>
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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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.
18
<PAGE>
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, 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) and the name of the Series.
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.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------------- --------------------------- -------------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of the .30 of 1% (currently being Initial sales charge waived or reduced for
public offering price charged at a rate of .10 of certain purchases
1%)
CLASS B Maximum contingent deferred sales charge or .50 of 1% Shares convert to Class A shares
CDSC of 5% of the lesser of the amount approximately seven years after purchase
invested or the redemption proceeds;
declines to zero after six years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being charged Shares do not convert to another class
amount invested or the redemption proceeds at a rate of .75 of 1%)
on redemptions made within one year of
purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the 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.
19
<PAGE>
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.
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 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
20
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV PER
SHARE 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.
21
<PAGE>
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 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
22
<PAGE>
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
purchased 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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- --------------------------------------------------- -----------------------
<S> <C>
First.............................................. 5.0%
Second............................................. 4.0%
Third.............................................. 3.0%
Fourth............................................. 2.0%
Fifth.............................................. 1.0%
Sixth.............................................. 1.0%
Seventh............................................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF 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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement,
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2, and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemption
resulting from the termination of a tax-deferred
23
<PAGE>
retirement plan, unless such redemptions otherwise qualify for a waiver as
described above. In the case of Direct Account and PSI or Subsidiary Prototype
Benefit Plans, the CDSC will be waived on redemptions which represent borrowings
from such plans. Shares purchased with amounts used to repay a loan from such
plans on which a CDSC was not previously deducted will thereafter be subject to
a CDSC without regard to the time such amounts were previously invested. In the
case of a 401(k) plan, the CDSC will also be waived upon the redemption of
shares purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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."
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
24
<PAGE>
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 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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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
25
<PAGE>
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 in 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at 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.
26
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those contained
in this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 11
HOW THE FUND IS MANAGED......................... 11
Manager....................................... 12
Distributor................................... 12
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 14
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 15
GENERAL INFORMATION............................. 17
Description of Shares......................... 17
Additional Information........................ 18
SHAREHOLDER GUIDE............................... 18
How to Buy Shares of the Fund................. 18
Alternative Purchase Plan..................... 19
How to Sell Your Shares....................... 21
Conversion Feature--Class B Shares............ 24
How to Exchange Your Shares................... 25
Shareholder Services.......................... 26
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF 120A 44404CS
Class A: 74435M-67-1
CUSIP Nos.: Class B: 74435M-68-9
Class C: 74435M-55-6
PRUDENTIAL
MUNICIPAL SERIES
FUND
(MICHIGAN SERIES)
- -------------------------------------------
[LOGO]
<PAGE>
PROSPECTUS
AUGUST 1,
1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MINNESOTA SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Minnesota Series) (the "Series")
is one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from Minnesota personal income and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations 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
Minnesota 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Minnesota 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 Minnesota personal income and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Minnesota State, municipal and local government obligations and
obligations of certain Indian tribal governments which pay income exempt, in the
opinion of counsel, from regular Minnesota personal income and federal income
taxes (Minnesota Obligations). There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 7.
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 Minnesota Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Minnesota Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 11.
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 10.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide--Shareholder Services"
at page 27.
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 15 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 19.
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 20.
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 22.
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 16.
3
<PAGE>
FUND EXPENSES
(MINNESOTA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------- ---------------------- ---------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage 3% None None
of offering price).....................................
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 year
annually to 1% in the of purchase
fifth and sixth years
and 0% the seventh
year*
Redemption Fees......................................... None None None
Exchange Fee............................................ None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
--------------- ---------------------- ---------------------
<S> <C> <C> <C>
Management Fees......................................... .50% .50% .50%
12b-1 Fees.............................................. .10++ .50 .75++
Other Expenses.......................................... .69 .69 .69
--- --- ---
Total Fund Operating Expenses........................... 1.29% 1.69% 1.94%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
Class A ................................................................ $ 43 $ 70 $ 99 $ 181
Class B ................................................................ $ 67 $ 83 $ 102 $ 184
Class C**............................................................... $ 30 $ 61 $ 105 $ 226
You would pay the following expenses on the same investment, assuming no
redemption:
Class A ................................................................ $ 43 $ 70 $ 99 $ 181
Class B ................................................................ $ 17 $ 53 $ 92 $ 184
Class C**............................................................... $ 20 $ 61 $ 105 $ 226
The above example with respect to Class A and Class B shares is based on data
for the Series' fiscal year ended August 31, 1993. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the fiscal year ended August 31,
1993. 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.
<FN>
------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
**Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31,
1993.
+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, 1994. Total operating expenses of the Class A and Class
C shares without such limitations would be 1.49% and 2.19%, respectively.
See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class A Shares)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on
data contained in the financial statements. No Class C shares were
outstanding during the periods indicated.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED 1990*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
------------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $12.33 $11.78 $11.40 $10.98 $11.14
------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .30 .62 .66 .64 .39
Net realized and
unrealized gain (loss)
on investment
transactions............ (.18) .57 .38 .42 (.16)
------ ------ ------ ------ -----------
Total from investment
operations.......... .12 1.19 1.04 1.06 .23
------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.30) (.62) (.66) (.64) (.39)
Distributions from net
realized gains.......... (.09) (.02) -- -- --
------ ------ ------ ------ -----------
Total
distributions....... (.39) (.64) (.66) (.64) (.39)
------ ------ ------ ------ -----------
Net asset value, end of
period.................. $12.06 $12.33 $11.78 $11.40 $10.98
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
TOTAL RETURN+:........... 0.99% 10.45% 9.38% 9.93% 2.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $1,319 $894 $402 $229 $130
Average net assets
(000)................... $1,034 $616 $291 $202 $ 87
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.17%** 1.29% 1.22% 1.41% 1.46%**
Expenses, excluding
distribution fees..... 1.07%** 1.19% 1.11% 1.31% 1.33%**
Net investment
income................ 4.84%** 5.15% 5.69% 5.73% 5.80%**
Portfolio turnover....... 14% 27% 32% 56% 30%
<FN>
-----------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on
data contained in the financial statements. No Class C shares were
outstanding during the periods indicated.
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------------------
SIX MONTHS OCTOBER 4,
ENDED 1984*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ----------------------------------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $12.33 $11.78 $11.41 $10.98 $11.14 $10.80 $11.03 $11.56 $10.47 $10.00
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income................ .27 .58 .61 .60 .62 .66+ .72+ .72+ .79+ .68+
Net realized and
unrealized gain (loss)
on investment
transactions.......... (.18) .57 .37 .43 (.16) .34 (.23) (.34) 1.12 .47
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
Total from
investment
operations........ .09 1.15 .98 1.03 .46 1.00 .49 .38 1.91 1.15
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment income..... (.27) (.58) (.61) (.60) (.62) (.66) (.72) (.72) (.79) (.68)
Distributions from net
realized gains........ (.09) (.02) -- -- -- -- -- (.19) (.03) --
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
Total
distributions..... (.36) (.60) (.61) (.60) (.62) (.66) (.72) (.91) (.82) (.68)
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
Net asset value, end of
period................ $12.06 $12.33 $11.78 $11.41 $10.98 $11.14 $10.80 $11.03 $11.56 $10.47
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
------------ ------- ------- ------- ------- ------- ------- ------- ------- -----------
TOTAL RETURN+++:....... 0.79% 9.99% 8.83% 9.64% 4.20% 9.51% 4.68% 3.39% 18.96% 12.44%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000).......... $26,686 $26,565 $24,746 $23,600 $24,080 $22,933 $19,202 $16,868 $9,936 $4,280
Average net assets
(000)................. $26,775 $25,387 $24,038 $23,997 $23,558 $21,198 $17,692 $13,865 $7,290 $2,329
Ratios to average net
assets:
Expenses, including
distribution fee.... 1.57%** 1.69% 1.62% 1.81% 1.78% 1.64%+ 1.08%+ .96%+ .97%+ .89%**+
Expenses, excluding
distribution fees... 1.07%** 1.19% 1.12% 1.31% 1.28% 1.17%+ .58%+ .48%+ .48%+ .42%**+
Net investment
income.............. 4.44%** 4.75% 5.29% 5.33% 5.49% 5.87%+ 6.65%+ 6.18%+ 6.84%+ 7.17%**+
Portfolio turnover..... 14% 27% 32% 56% 30% 31% 71% 103% 27% 30%
<FN>
----------------------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE MINNESOTA SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM MINNESOTA
PERSONAL INCOME AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES
WITH THE POTENTIAL FOR CAPITAL GAIN. 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 MINNESOTA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF CERTAIN INDIAN TRIBAL GOVERNMENTS
WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL, FROM REGULAR MINNESOTA
PERSONAL INCOME AND FEDERAL INCOME TAXES (MINNESOTA 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 and Minnesota alternative minimum taxes. 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 and Minnesota alternative minimum
taxes. See "Taxes, Dividends and Distributions." Under Minnesota law,
exempt-interest dividends paid by the Series that are derived from interest
income on Minnesota Obligations are excluded from the Minnesota taxable net
income of individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents 95% or more of the exempt-interest dividends paid by the Series. The
Series intends to comply with this requirement. Minnesota Obligations could
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 obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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
7
<PAGE>
adjustment in the interest rate based on prevailing market rates and generally
would 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 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.
ALL MINNESOTA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Minnesota Obligations will, at the time
of purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Minnesota Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Minnesota Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes
that interest rates might decline. As a general matter, bond prices and the
Series' net asset value will vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MINNESOTA 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 regular
Minnesota State personal income and federal income taxes or the Series will have
at least 80% of its total assets invested in Minnesota 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,
8
<PAGE>
the Series may invest more than 20% of the value of its assets in debt
securities other than Minnesota Obligations or may invest its assets so that
more than 20% of the income is subject to Minnesota personal income or federal
income taxes. In all cases, however, the Series intends to comply with the 95%
test discussed above.
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 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 MINNESOTA 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 Minnesota 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.
9
<PAGE>
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 FOR 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.
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
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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 MINNESOTA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MINNESOTA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MINNESOTA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. The Minnesota
Department of Finance has projected a State General Fund balance of $130 million
at the end of the current biennium, June 30, 1995, plus a budget reserve of $500
million. Total projected expenditures and transfers for the biennium are $16.9
billion. Recently, however, the Minnesota Supreme Court has determined that the
State must pay bank excise tax refunds and interest, over a four-year period, in
amounts estimated to exceed $188 million. If either Minnesota or any of its
local governmental entities is unable to meet its financial obligations, 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.
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.
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.
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
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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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were 1.29% and 1.69% for the Series' Class A
and Class B shares, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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.
The current portfolio manager of the Series is Christian Smith, an Investment
Associate of Prudential Investment Advisors. Mr. Smith has responsibility for
the day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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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 SERIES. 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. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $616
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $18,000 in initial sales charges.
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% 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, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
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For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $227,500 under the Class B Plan and
received $126,935 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $25,300 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS 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
(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.
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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 Minnesota law, exempt-interest dividends paid by the Series that are
derived from interest income on Minnesota Obligations are excluded from the
Minnesota taxable net income of individuals, estates and trusts, provided that
the portion of the exempt-interest dividends from such Minnesota sources paid to
all shareholders represents 95% or more of the exempt-interest dividends paid by
the Series. In certain cases, however, exempt-interest dividends that are paid
by the Series will be subject to the Minnesota alternative minimum tax.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions.
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 also is 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 distributions are paid, will
be calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
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
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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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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 in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares 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.
18
<PAGE>
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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.
19
<PAGE>
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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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.
20
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in 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.
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 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
21
<PAGE>
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.
In the case of pension, profitsharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
22
<PAGE>
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 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.
23
<PAGE>
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 purchased
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 INVESTED OR
YEAR SINCE PURCHASE PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- --------------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
24
<PAGE>
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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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
25
<PAGE>
purchase of 100 shares was subsequently made at $11 per share (for a total of
$1,100), 95.24 shares would convert approximately seven years from the initial
purchase (I.E., $1,000 divided by $2,100 (47.62%) multiplied by 200 shares
equals 95.24 shares). The Manager reserves the right to modify the formula for
determining the number of Eligible Shares in the future as it deems appropriate
on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after the 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
26
<PAGE>
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 THE 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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 in 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" above.
27
<PAGE>
-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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- ------------------------------------------------
MF121A 44404DQ
Class A: 74435M-69-7
CUSIP Nos.:Class B: 74435M-71-3
Class C: 74435M-54-9
PROSPECTUS
August 1, 1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MINNESOTA SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW JERSEY SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New Jersey Series) (the "Series")
is one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from New Jersey State income tax and federal income tax
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations 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 New
Jersey 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in sixteen 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 New Jersey 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 New Jersey State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in New Jersey 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 New Jersey State and federal income taxes (New Jersey
Obligations). There can be no assurance that the Series' investment objective
will be achieved. See "How the Fund Invests--Investment Objective and
Policies" at page 7.
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 New Jersey Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of New Jersey Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at
page 11. 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 10.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder
Guide--Shareholder Services" at page 28.
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 15 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 19.
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 21.
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 23.
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 16.
3
<PAGE>
FUND EXPENSES
(NEW JERSEY SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ---------------------------- --------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as 3% None None
a percentage of offering price)...........
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 year, 1% on redemptions
decreasing by 1% annually to made within one year
1% in the fifth and sixth of purchase
years and 0% the seventh
year*
Redemption Fees............................ None None None
Exchange Fee............................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES** CLASS B SHARES** CLASS C SHARES***
----------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Management Fees (Before Waiver)............. .50% .50% .50%
12b-1 Fees.................................. .10++ .50 .75++
Other Expenses.............................. .14 .14 .14
Total Fund Operating Expenses (Before
Waiver).................................... .74% 1.14% 1.39%
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption
at the end of each time period:
Class A.......................... $37 $53 $70 $119
Class B.......................... $62 $66 $73 $122
Class C***....................... $24 $44 $76 $167
You would pay the following expenses
on the same investment, assuming no
redemption:
Class A.......................... $37 $53 $70 $119
Class B.......................... $12 $36 $63 $122
Class C***....................... $14 $44 $76 $167
The above example with respect to Class A and Class B shares is based on restated
data for the Series' fiscal year ended August 31, 1993. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the fiscal year ended August 31,
1993. 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" include operating expenses of the
Series, such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian fees.
<FN>
- ------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
** Based on expenses incurred during the fiscal year ended August 31, 1993,
without taking into account the partial management fee waiver. At the
current level of management fee waiver (25%), Management Fees would be .375%
for both Class A and Class B shares and annual Total Fund Operating Expenses
would be .615% for Class A shares and 1.015% for Class B shares. See "How
the Fund is Managed--Manager--Fee Waivers and Subsidy."
*** Estimated based on expenses expected to have been incurred if Class C shares
had been in existence during the fiscal year ended August 31, 1993.
+ 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, 1994. Total operating expenses of the Class A and Class C shares without
such limitations would be .94% and 1.64%, respectively. See "How the Fund is
Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
SIX
MONTHS
ENDED JANUARY 22,
FEBRUARY 1990*
28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.30
--------- --------- --------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+...................................... .31 .64 .67 .69 .41
Net realized and unrealized gain (loss) on investment
transactions............................................... (.25) .71 .51 .59 (.14)
--------- --------- --------- --------- -----------
Total from investment operations........................ .06 1.35 1.18 1.28 .27
--------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.31) (.64) (.67) (.69) (.41)
Distributions from net realized capital gains............... (.18) (.12) (.09) (.02) --
--------- --------- --------- --------- -----------
Total distributions..................................... (.49) (.76) (.76) (.71) (.41)
--------- --------- --------- --------- -----------
Net asset value, end of period.............................. $ 11.31 $ 11.74 $ 11.15 $ 10.73 $ 10.16
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
TOTAL RETURN++:............................................. 0.53% 12.57% 11.35% 12.96% 2.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $15,647 $15,501 $ 11,941 $ 8,041 $ 3,616
Average net assets (000).................................... $15,717 $13,444 $ 9,759 $ 5,637 $ 1,902
Ratios to average net assets:+
Expenses, including distribution fees..................... .57%** .61% .48% .29% .20%**
Expenses, excluding distribution fees..................... .47%** .51% .38% .19% .10%**
Net investment income..................................... 5.31%** 5.63% 6.14% 6.58% 6.79%**
Portfolio turnover.......................................... 14% 32% 38% 116% 87%
<FN>
- ------------------
* Commencement of offering of Class A shares.
** Annualized.
+ Net of expense subsidy and fee waiver.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------
SIX
MONTHS
ENDED MARCH 4,
FEBRUARY 1988*
28, YEAR ENDED AUGUST 31, THROUGH
1994 ----------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988
--------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95 $ 10.00
--------- --------- --------- --------- --------- --------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+.................. .28 .59 .63 .65 .67 .73 .36
Net realized and unrealized gain (loss)
on investment transactions............. (.25) .71 .51 .59 (.14) .38 (.05)
--------- --------- --------- --------- --------- --------- ------------
Total from investment operations.... .03 1.30 1.14 1.24 .53 1.11 .31
--------- --------- --------- --------- --------- --------- ------------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.28) (.59) (.63) (.65) (.67) (.73) (.36)
Distributions from net realized capital
gains.................................. (.18) (.12) (.09) (.02) (.03) -- --
--------- --------- --------- --------- --------- --------- ------------
Total distributions................. (.46) (.71) (.72) (.67) (.70) (.73) (.36)
--------- --------- --------- --------- --------- --------- ------------
Net asset value, end of period.......... $ 11.31 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
TOTAL RETURN+++:........................ 0.32% 12.12% 10.93% 12.52% 5.28% 11.48% 3.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $353,656 $351,878 $295,781 $244,322 $180,636 $125,650 $ 28,815
Average net assets (000)................ $357,559 $316,372 $269,318 $208,893 $155,162 $ 79,269 $ 19,806
Ratios to average net assets:+
Expenses, including distribution
fees................................. .97%** 1.01% .88% .69% .50% .20% 0%
Expenses, excluding distribution
fees................................. .47%** .51% .38% .19% .10% .14% 0%
Net investment income................. 4.91%** 5.23% 5.74% 6.18% 6.50% 6.55% 6.27%**
Portfolio turnover...................... 14% 32% 38% 116% 87% 20% 96%
<FN>
- ------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy and fee waiver.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE NEW JERSEY SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM NEW
JERSEY STATE INCOME TAX AND FEDERAL INCOME TAX CONSISTENT WITH THE PRESERVATION
OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT
SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. 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 NEW JERSEY 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 NEW JERSEY STATE INCOME TAX AND FEDERAL
INCOME TAX (NEW JERSEY 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." Under New Jersey law, as long as the Series qualifies as a
"qualified investment fund," dividends paid by the Series are exempt from New
Jersey income tax for resident individuals and New Jersey trusts and estates to
the extent such dividends are derived from interest payments on and gain
realized from the sale or exchange of New Jersey Obligations and other
obligations exempt from State and local taxation by the laws of New Jersey or
the United States. New Jersey Obligations could 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 obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would 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
7
<PAGE>
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 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.
ALL NEW JERSEY OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the New Jersey Obligations will, at the time
of purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase New Jersey Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular New Jersey Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW JERSEY OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of its total assets will be invested in
New Jersey 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 New Jersey Obligations or may invest its assets so that
more than 20% of the income is subject to New Jersey or federal income taxes.
However, the Series must invest at least 80% of the aggregate principal amount
of all its investments (excluding cash, cash items and receivables, and
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indices related thereto that are related to the Series'
business of investing in securities (Related Financial Instruments)) in
obligations exempt from New Jersey personal income tax in order for its
distributions to remain exempt from such tax.
8
<PAGE>
If the Series fails to qualify as a "qualified investment fund" under New
Jersey law, distributions to its shareholders will be subject to New Jersey
income tax. To meet the requirements for a "qualified investment fund," the
Series must have 100% of its investments in interest bearing obligations,
obligations issued at a discount, cash and cash items, including receivables,
and Related Financial Instruments.
THE SERIES IS AUTHORIZED TO 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. The Series may acquire puts on securities in its
portfolio 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 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 securities. 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 NEW JERSEY 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 New Jersey Obligations held by the Series reduces
credit risk by providing that
9
<PAGE>
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.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON. THE SERIES
MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON TO THE EXTENT THEY
ARE RELATED FINANCIAL INSTRUMENTS 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 FOR 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
10
<PAGE>
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.
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 NEW JERSEY OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
NEW JERSEY OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF NEW JERSEY OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL
FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. The economic
slowdown which began in 1989 translated into revenue shortfalls and operating
deficits in fiscal 1989, 1990 and 1991. Surplus balances, which had peaked at
over $1.2 billion in fiscal 1988, fell to $116 million by fiscal year-end 1991.
The challenge to balance the fiscal year 1993 budget was made greater by the
1992 1% reduction in the State sales tax. The State's governor is keeping a
campaign promise to reduce the State income tax by 10% per year for the next
three years, beginning with the fiscal year 1995 budget. A balanced budget was
achieved by delaying a $1.1 billion contribution to the State employees' pension
fund. This move, on top of heavy borrowing by the previous administration, has
caused concern among some analysts that the State bond rating may be adversely
affected. The 1995 budget, which slightly reduces total spending to $15.3
billion, is already under serious pressure by a recent State Supreme Court
decision requiring New Jersey to correct a school funding disparity by 1996. If
either New Jersey or any of its local governmental entities is unable to meet
its financial obligations, 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.
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.
11
<PAGE>
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.
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.
For the year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets, net of management fee waivers, were .61% and
1.01% for the Series' Class A and Class B shares, respectively. See "Financial
Highlights." No Class C shares were outstanding during the fiscal year ended
August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee, net of waiver, of .375 of 1% of the Series' average net assets.
See "Fee Waivers and Subsidy" below and "Manager" in the Statement of Additional
Information.
As of June 30, 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
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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.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990 and prior thereto was employed as an analyst by Keystone
Group since 1986.
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
During the fiscal year ended August 31, 1993, PMF voluntarily waived $412,271
(.13% of average net assets) of its management fee. PMF has agreed to waive 25%
of its management fee for the fiscal year ending August 31, 1994. The Series is
not required to reimburse PMF for such waiver. Thereafter, PMF may from time to
time 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. 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 SERIES. 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
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.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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $13,444
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $150,000 in initial sales charges.
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% 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, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $3,136,000 under the Class B Plan and
received $1,581,862 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $451,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND SALES LITERATURE.
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"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 yield 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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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.
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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 is currently 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 New Jersey law, as long as the Series qualifies as a "qualified
investment fund," dividends paid by the Series are exempt from New Jersey income
tax for resident individuals and New Jersey trusts and estates to the extent
such dividends are derived from interest payments on, and gain realized from the
sale or exchange of, New Jersey Obligations and other obligations exempt from
state and local taxation by the laws of New Jersey and the United States.
Dividends paid to corporate shareholders will be subject to the New Jersey
Corporation Business tax or corporation income tax and may increase liability
under the federal alternative minimum tax.
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
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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 or 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 distributions are paid, will
be calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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
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SEC permitting the issuance and sale of multiple classes of shares. Currently,
the Series is offering three classes, 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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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.
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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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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, 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) and the name of the Series.
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.
20
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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.
21
<PAGE>
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.
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 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-
22
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
23
<PAGE>
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 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 your 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 purchased
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.
24
<PAGE>
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ ------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF 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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI
25
<PAGE>
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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."
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
26
<PAGE>
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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
27
<PAGE>
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 in 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and
semi-annual reports. The financial statements appearing in annual reports
are audited by independent accountants. In order to reduce duplicate
mailing and printing expenses, the Fund will provide one annual and
semi-annual shareholder report and annual prospectus per household. You
may request additional copies of such reports by calling (800) 225-1852 or
by writing to the Fund at 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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................ 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 7
Investment Objective and Policies....................................... 7
Other Investments and Policies.......................................... 11
Investment Restrictions................................................. 12
HOW THE FUND IS MANAGED................................................... 12
Manager................................................................. 12
Distributor............................................................. 13
Portfolio Transactions.................................................. 15
Custodian and Transfer and Dividend Disbursing Agent.................... 15
HOW THE FUND VALUES ITS SHARES............................................ 15
HOW THE FUND CALCULATES PERFORMANCE....................................... 15
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 16
GENERAL INFORMATION....................................................... 18
Description of Shares................................................... 18
Additional Information.................................................. 19
SHAREHOLDER GUIDE......................................................... 19
How to Buy Shares of the Fund........................................... 19
Alternative Purchase Plan............................................... 21
How to Sell Your Shares................................................. 23
Conversion Feature--Class B Shares...................................... 26
How to Exchange Your Shares............................................. 27
Shareholder Services.................................................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... A-1
-------------------------------------------
MF138A 642873R
Cusip Class A: 74435M-78-8
Nos.: Class B: 74435M-79-6
Class C: 74435M-53-1
[LOGO]
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW JERSEY SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PROSPECTUS
AUGUST 1, 1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Series) (the "Series")
is one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from New York State, New York City and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations 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 New
York 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, which
information is incorporated herein by reference (is legally considered a part of
this Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 New York 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 New York State, New York City and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in New York 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 New York State, New York City and federal income taxes (New York
Obligations). There can be no assurance that the Series' investment objective
will be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 7.
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 New York Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of New York Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 11.
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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide-- Shareholder
Services" at page 27.
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 15 and "Shareholder Guide-- How to Buy Shares of the
Fund" at page 19.
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 20.
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 22.
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 16.
3
<PAGE>
FUND EXPENSES
(NEW YORK SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- -------------------- ---------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a 3% None None
percentage of offering price)...................
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
year, decreasing by redemptions
1% annually to 1% in made within one
the fifth and sixth year of
years and 0% the purchase
seventh year*
Redemption Fees.................................. None None None
Exchange Fee..................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
------------------ ------------------------ -------------------
<S> <C> <C> <C>
Management Fees.................................. .50% .50% .50%
12b-1 Fees....................................... .10++ .50 .75++
Other Expenses................................... .14 .14 .14
-- ---
---
Total Fund Operating Expenses.................... .74% 1.14% 1.39%
-- ---
-- ---
---
---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--------------------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return
and (2) redemption at the end of
each time period:
Class A...................... $37 $ 53 $ 70 $119
Class B...................... $62 $ 66 $ 73 $122
Class C**.................... $24 $ 44 $ 76 $167
You would pay the following
expenses on the same investment,
assuming no redemption:
Class A...................... $37 $ 53 $ 70 $119
Class B...................... $12 $ 36 $ 63 $122
Class C**.................... $14 $ 44 $ 76 $167
The above example with respect to Class A and Class B shares is based on
data for the Series' fiscal year ended August 31, 1993. The above
example with respect to Class C shares is based on expenses expected to
have been incurred if Class C shares had been in existence during the
fiscal year ended August 31, 1993. 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" include operating expenses of the Series, such as Trustees'
and professional fees, registration fees, reports to shareholders and
transfer agency and custodian fees.
<FN>
------------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
**Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31, 1993.
+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, 1994. Total operating expenses of Class A and Class C shares
without such limitations would be .94% and 1.64%, respectively. See "How
the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED AUGUST 31, JANUARY 22,
FEBRUARY 28, 1990* THROUGH
1994 ----------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
------------ ------- ------ ------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $12.54 $11.75 $11.08 $10.62 $10.81
------ ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------------
Net investment income......... .34 .70 .71 .72 .42
(.26) .79 .67 .46 (.19)
Net realized and unrealized
gain (loss) on investment
transactions.................
------ ------- ------ ------ ------
Total from investment
operations................. .08 1.49 1.38 1.18 .23
------ ------- ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------------
Dividends from net investment
income....................... (.34) (.70) (.71) (.72) (.42)
------ ------- ------ ------ ------
$12.28 $12.54 $11.75 $11.08 $10.62
Net asset value, end of
period.......................
------ ------- ------ ------ ------
------ ------- ------ ------ ------
TOTAL RETURN+:................ 0.68% 13.06% 12.73% 11.49% 2.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $15,105 $11,821 $6,057 $2,729 $1,174
Average net assets (000)...... $13,078 $ 8,755 $4,024 $1,579 $588
Ratios to average net assets:
Expenses, including
distribution fee........... .73%** .74% .74% .71% .78%**
Expenses, excluding
distribution fee........... .63%** .64% .64% .61% .68%**
Net investment income....... 5.43%** 5.78% 6.19% 6.61% 6.41%**
Portfolio turnover............ 23% 44% 45% 78% 127%
<FN>
---------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 13,
ENDED 1994*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------------------------------------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $12.54 $11.75 $11.08 $10.62 $10.88 $10.59 $10.79 $12.07 $10.88 $10.00
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
INCOME FROM
INVESTMENT
OPERATIONS
- --------------------
Net investment
income............. .31 .65 .66 .67 .65 .65 .71 .72 .83 .76+
(.26) .79 .67 .46 (.26) .29 (.20) (.81) 1.30 .88
Net realized and
unrealized gain
(loss) on
investment
transactions.......
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
Total from
investment
operations....... .05 1.44 1.33 1.13 .39 .94 .51 (.09) 2.13 1.64
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
LESS DISTRIBUTIONS
- --------------------
Dividends from net
investment income.. (.31) (.65) (.66) (.67) (.65) (.65) (.71) (.72) (.83) (.76)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- (.47) (.11) --
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
Total
distributions.... (.31) (.65) (.66) (.67) (.65) (.65) (.71) (1.19) (.94) (.76)
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
$12.28 $12.54 $11.75 $11.08 $10.62 $10.88 $10.59 $10.79 $12.07 $10.88
Net asset value, end
of period..........
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
------------ -------- -------- -------- -------- -------- -------- -------- -------- ---------------
TOTAL RETURN+++:.... 0.47% 12.61% 12.32% 10.96% 3.73% 9.33% 4.93% (0.89)% 20.53% 16.82%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $358,484 $358,607 $316,472 $293,942 $313,606 $340,728 $307,458 $313,663 $246,302 $118,107
Average net assets
(000).............. $363,382 $330,823 $303,016 $295,285 $332,580 $353,225 $298,290 $299,963 $191,966 $66,800
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.13%** 1.14% 1.14% 1.11% 1.17% 1.05% 1.10% 1.06% 1.08% 1.21%+**
Expenses,
excluding
distribution
fee.............. .63%** .64% .64% .61% .67% .64% .62% .57% .60% .73%+**
Net investment
income........... 5.03%** 5.38% 5.79% 6.21% 6.10% 5.77% 6.72% 6.21% 6.90% 7.47%+**
Portfolio
turnover........... 23% 44% 45% 78% 127% 96% 91% 246% 131% 65%
<FN>
-----------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less then a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE NEW YORK SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM NEW YORK
STATE, NEW YORK CITY AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION
OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT
SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. 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 NEW YORK 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 NEW YORK STATE, NEW YORK CITY AND
FEDERAL INCOME TAXES (NEW YORK 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." Under New York law, dividends paid by the Series are exempt from
New York State and New York City income tax for resident individuals to the
extent they are derived from interest payments on New York Obligations. New York
Obligations could 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 obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would 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
7
<PAGE>
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 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.
ALL NEW YORK OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the New York Obligations will, at the time of
purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase New York Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular New York Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW YORK 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 New York
State, New York City and federal income taxes or the Series will have at least
80% of its total assets invested in New York 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 New York City or New York 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 New York
Obligations or may invest its assets so that more than 20% of the income is
subject to New York State, New York City or federal income taxes.
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 of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to
8
<PAGE>
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 NEW YORK 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 New York 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.
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).
9
<PAGE>
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 FOR 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.
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.
10
<PAGE>
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NEW YORK OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW
YORK OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS
OF NEW YORK OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT IS
NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. New York's budgets for
fiscal years 1992-1993 and 1993-1994 have produced cash surpluses for the first
time since fiscal year 1987-1988. The 1994-1995 budget is projected to be
balanced. Notwithstanding this budget performance, there can be no assurances
that the State will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain State
programs at current levels. To address any potential budgetary imbalance, the
State may need to take significant actions to align recurring receipts and
disbursements in future fiscal years. If either New York State or any of its
local governmental entities is unable to meet its financial obligations, 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.
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.
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.
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.
11
<PAGE>
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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average daily net assets were .74% and 1.14% for the Series' Class
A and Class B shares, respectively. See "Financial Highlights." No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
12
<PAGE>
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 SERIES. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $8,755
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $239,500 in initial sales charges.
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% 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
13
<PAGE>
assets of the Class C shares for the fiscal year ending August 31, 1994.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $2,653,700, under the Class B Plan and
received $1,654,116, from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $285,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
14
<PAGE>
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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
15
<PAGE>
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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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 is currently 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
16
<PAGE>
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) exchanges 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 New York law, dividends paid by the Series are exempt from New York
State and New York City income taxes for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
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 also is required on taxable dividends and
capital gains distributions made by the Series unless it is reasonably expected
that at least 95% at 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 or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTION
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. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1993, of approximately
$528,400. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
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 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
17
<PAGE>
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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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
18
<PAGE>
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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall 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 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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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.
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<PAGE>
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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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.
20
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in 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.
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 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.
21
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
22
<PAGE>
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 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 or the
contingent deferred sales charge previously paid.
23
<PAGE>
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 purchased
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- -------------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
24
<PAGE>
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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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.
25
<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature 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.
26
<PAGE>
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, 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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 in 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.
27
<PAGE>
-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" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at 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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- ------------------------------------------------
MF 122A 44404EO
Class A: 74435M-74-7
CUSIP Nos.: Class B: 74435M-75-4
Class C: 74435M-52-3
PRUDENTIAL
MUNICIPAL SERIES
FUND
(NEW YORK SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PROSPECTUS
AUGUST 1, 1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NORTH CAROLINA SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (North Carolina Series) (the
"Series") is one of sixteen series of an open-end investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from North Carolina State and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations 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
North Carolina 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in sixteen 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 North Carolina 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 North Carolina State and federal income taxes consistent with
the preservation of capital. It seeks to achieve this objective by investing
primarily in North Carolina 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 North Carolina State and federal
income taxes (North Carolina Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 7.
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 North Carolina Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of North Carolina
Obligations. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 11. 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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 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 19 and
"Shareholder Guide--Shareholder Services" at page 27.
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 15 and "Shareholder Guide-- How to Buy
Shares of the Fund" at page 19.
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 20.
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
22.
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 16.
3
<PAGE>
FUND EXPENSES
(NORTH CAROLINA SERIES)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------ --------------------- ---------------------
Maximum Sales Load Imposed on Purchases (as a 3% None None
percentage of offering price)...................
Maximum Sales Load or Deferred Sales Load Imposed None None None
on Reinvested Dividends.........................
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever None 5% during the first 1% on redemptions
is lower)....................................... year, decreasing by made within one year
1% annually to 1% in of purchase
the fifth and sixth
years and 0% the
seventh year*
None None None
Redemption Fees..................................
None None None
Exchange Fee.....................................
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
-------------- --------------- -----------------
<S> <C> <C> <C>
Management Fees.......................... .50% .50 % .50 %
12b-1 Fees............................... .10++ .50 .75 ++
Other Expenses........................... .27 .27 .27
--- --- ---
Total Fund Operating Expenses............ .87% 1.27 % 1.52 %
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and
(2) redemption at the end of each
time period:
Class A........................ $39 $ 57 $ 77 $134
Class B........................ $63 $ 70 $ 80 $137
Class C**...................... $25 $ 48 $ 83 $181
You would pay the following
expenses on the same investment,
assuming no redemption:
Class A........................ $53 $ 72 $ 91 $147
Class B........................ $13 $ 40 $ 70 $137
Class C**...................... $15 $ 48 $ 83 $181
The above example with respect to Class A and Class B shares is based on
data for the Series' fiscal year ended August 31, 1993. The above example
with respect to Class C shares is based on expenses expected to have been
incurred if Class C shares had been in existence during the fiscal year
ended August 31, 1993. 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.
<FN>
------------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
**Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31, 1993.
+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, 1994. Total operating expenses of the Class A and Class
C shares without such limitations would be 1.07% and 1.77, respectively.
See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------
SIX MONTHS JANUARY 22,
ENDED YEAR ENDED 1990*
FEBRUARY 28, AUGUST 31, THROUGH
1994 ------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
------------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $12.04 $11.37 $10.86 $10.45 $10.63
------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------------
Net investment income......... .31 .65 .67 .67 .41
Net realized and unrealized
gain (loss) on investment
transactions................. (.25) .67 .51 .41 (.18)
------ ------ ------ ------ -----------
Total from investment
operations............... .06 1.32 1.18 1.08 .23
------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
- ------------------------------
Dividends from net investment
income....................... (.31) (.65) (.67) (.67) (.41)
Distributions from net
realized gains............... (.22) -- -- -- --
------ ------ ------ ------ -----------
Total distributions....... (.53) (.65) (.67) (.67) (.41)
------ ------ ------ ------ -----------
Net asset value, end of
period....................... $11.57 $12.04 $11.37 $10.86 $10.45
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
TOTAL RETURN+:................ 0.50% 11.99% 11.12% 10.63% 2.09%
RATIOS/SUPPLEMENTAL DATA:
Net asset, end of period
(000)........................ $2,270 $1,777 $ 917 $ 362 $ 58
Average net assets (000)...... $1,956 $1,316 $ 612 $ 246 $ 32
Ratios to average net assets:
Expenses, including
distribution fee........... .83%** .87% .91% .99% 1.00%**
Expenses, excluding
distribution fee........... .73%** .77% .81% .89% .90%**
Net investment income....... 5.20%** 5.55% 5.90% 6.24% 6.24%**
Portfolio turnover............ 6% 38% 36% 27% 24%
<FN>
- ------------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------------------------
SIX MONTHS FEBRUARY 13,
ENDED 1985*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ----------------------------------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------------ ------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35 $ 10.59 $ 11.32 $ 10.04 $10.00
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM
INVESTMENT
OPERATIONS
- --------------------
Net investment
income............. .29 .60 .62 .63 .64 .65 .69+ .70+ .78+ .41+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.25) .68 .51 .41 (.20) .30 (.24) (.61) 1.31 .04
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from
investment
operations..... .04 1.28 1.13 1.04 .44 .95 .45 .09 2.09 .45
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
- --------------------
Dividends from net
investment
income............. (.29) (.60) (.62) (.63) (.64) (.65) (.69) (.70) (.78) (.41)
Distributions from
net realized
gains.............. (.22) -- -- -- -- -- -- (.12) (.03) --
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
Total
distributions... (.51) (.60) (.62) (.63) (.64) (.65) (.69) (.82) (.81) (.41)
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end
of period.......... $ 11.58 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35 $ 10.59 $ 11.32 $10.04
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
------------ ------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN+++:.... 0.30% 11.62% 10.64% 10.17% 4.28% 9.39% 4.47% .74% 21.61% 4.28%
RATIOS/SUPPLEMENTAL
DATA:
Net asset, end of
period (000)....... $75,144 $75,515 $63,573 $59,875 $57,429 $34,222 $44,076 $39,477 $25,395 $8,172
Average net assets
(000).............. $76,293 $67,997 $60,751 $59,071 $56,745 $49,868 $40,442 $35,368 $17,261 $5,775
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.23%** 1.27% 1.31% 1.39% 1.38% 1.39% 1.13%+ 1.06%+ 1.00%+ .85%+**
Expenses,
excluding
distribution
fee.............. .73%** .77% .81% .89% .89% .89% .64%+ .57%+ .52%+ .37%+**
Net investment
income........... 4.78%** 5.18% 5.58% 5.88% 5.96% 6.06% 6.58%+ 6.15%+ 6.72%+ 6.87%+**
Portfolio
turnover........... 6% 38% 36% 27% 24% 47% 66% 37% 34% 35%
<FN>
- ------------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE NORTH CAROLINA SERIES (THE SERIES) IS DIVERSIFIED AND
ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM NORTH
CAROLINA STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES
WITH THE POTENTIAL FOR CAPITAL GAIN. 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 NORTH CAROLINA STATE, MUNICIPAL AND LOCAL
GOVERNMENTAL 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 NORTH CAROLINA STATE AND FEDERAL INCOME
TAXES (NORTH CAROLINA 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." Under North Carolina law, dividends distributed by the Series
and attributable to interest on obligations issued by North Carolina and its
political subdivisions are exempt from North Carolina individual, trust and
estate income taxes. See "Taxes, Dividends and Distributions." North Carolina
Obligations could 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 obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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
7
<PAGE>
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 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.
ALL NORTH CAROLINA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT
GRADE" SECURITIES. In other words, all of the North Carolina Obligations will,
at the time of purchase, be 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 securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase North Carolina Obligations
which, in the opinion of the investment adviser, offer the opportunity for
capital appreciation. This may occur, for example, when the investment adviser
believes that the issuer of a particular North Carolina Obligation might receive
an upgraded credit standing, thereby increasing the market value of the bonds it
has issued or when the investment adviser believes that interest rates might
decline. As a general matter, bond prices and the Series' net asset value will
vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NORTH CAROLINA 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 North
Carolina and federal income taxes or the Series will have at least 80% of its
total assets invested in North Carolina 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 North Carolina Obligations or may
invest its assets so that more than 20% of the income is subject to North
Carolina State or federal income taxes.
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 NORTH CAROLINA
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 North Carolina 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.
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
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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 FOR 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. Finally, the Series must eliminate all of
its positions in futures contracts and options thereon by December 31 of each
year in order to comply with requirements for exemption from the North Carolina
intangibles tax.
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.
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
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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 NORTH CAROLINA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED
FROM NORTH CAROLINA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
AFFECTING ISSUERS OF NORTH CAROLINA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE.
Despite stressful periods during the latest recession that depleted fund
reserves and ended with General Fund deficits, prudent steps were taken to
control fiscal decline with resulting operating surpluses in fiscal 1992 and
1993. For fiscal 1994, restrained expenditure growth combined with conservative
revenue assumptions again yielded positive results. If either North Carolina or
any of its local governmental entities is unable to meet its financial
obligations, 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.
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.
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.
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.
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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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were .87% and 1.27% for the Series' Class A and
Class B shares, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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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 SERIES. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $1,316
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $29,600 in initial sales charges.
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% 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, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
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For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $699,700 under the Class B Plan and
received $339,983 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $66,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
15
<PAGE>
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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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 is currently 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
16
<PAGE>
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.
In the opinion of North Carolina tax counsel, distributions will not be
subject to North Carolina income tax if made to individual shareholders resident
in North Carolina or to trusts or estates subject to North Carolina income tax
to the extent such distributions are either (i) exempt from federal income tax
and attributable to interest on obligations of North Carolina or its political
subdivisions; nonprofit educational institutions organized or chartered under
the laws of North Carolina; or Guam, Puerto Rico or the United States Virgin
Islands including the governments thereof and their agencies, instrumentalities,
and authorities or (ii) attributable to interest on direct obligations of the
United States.
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 also is 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 or 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 distributions are paid, will
be calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
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
17
<PAGE>
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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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 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.
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<PAGE>
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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
19
<PAGE>
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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</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
20
<PAGE>
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.
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 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.
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<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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 ADVISOR. 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.
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<PAGE>
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 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.
23
<PAGE>
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 purchased
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- ----------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF 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
24
<PAGE>
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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include (i) in the case of a tax-deferred
retirement plan, a lump-sum or other distribution after retirement; (ii) in the
case of an IRA or Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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
25
<PAGE>
approximately seven years from the initial purchase (I.E., $1,000 divided by
$2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The Manager
reserves the right to modify the formula for determining the number of Eligible
Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature 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
26
<PAGE>
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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 and
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities 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 in 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 in any amount.
Withdrawals of Class B and Class C shares may be subject to a CDSC. See "How
to Sell Your Shares--Contingent Deferred Sales Charges."
27
<PAGE>
- 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.
28
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
PAGE
---
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend
Disbursing Agent............................. 14
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
- -------------------------------------------
MF 126A 44404HI
Class A: 74435M-81-2
CUSIP Nos.: Class B: 74435M-82-0
Class C: 74435M-51-5
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NORTH CAROLINA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(OHIO SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Ohio Series) (the "Series") is
one of sixteen series of an open-end investment company, or mutual fund. This
Series is diversified and is designed to provide the maximum amount of income
that is exempt from Ohio State and federal income taxes consistent with the
preservation of capital and, in conjunction therewith, the Series may invest in
debt securities with the potential for capital gain. The net assets of the
Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations 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 Ohio
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, which
information is incorporated herein by reference (is legally considered a part of
this Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Ohio 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 Ohio State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Ohio
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 Ohio State
and federal income taxes (Ohio Obligations). There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 7.
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 Ohio Obligations. This degree of
investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Ohio Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 11.
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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide--Shareholder Services"
at page 28.
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 15 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 19.
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 21.
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 23.
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 16.
3
<PAGE>
FUND EXPENSES
(OHIO SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------- ------------------- -------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)...................... 3% None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends............................ None None None
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 made within one
1% annually to 1% year of purchase
in the 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 CLASS B CLASS C
(as a percentage of average net assets) SHARES SHARES SHARES**
------------- ------------- ---------------
<S> <C> <C> <C>
Management Fees....................... .50% .50% .50%
12b-1 Fees............................ .10++ .50 .75++
Other Expenses........................ .24 .24 .24
---------------- ---------------- ---------------
Total Fund Operating Expenses......... .84% 1.24% 1.49%
---------------- ---------------- ---------------
---------------- ---------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- -------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A............................................................... $ 38 $ 56 $ 75 $ 131
Class B............................................................... $ 63 $ 69 $ 78 $ 134
Class C**............................................................. $ 25 $ 47 $ 81 $ 178
You would pay the following expenses on the same investment, assuming no
redemption:
Class A............................................................... $ 38 $ 56 $ 75 $ 131
Class B............................................................... $ 13 $ 39 $ 68 $ 134
Class C**............................................................. $ 15 $ 47 $ 81 $ 178
The above example with respect to Class A and Class B shares is based on data for the Series' fiscal
year ended August 31, 1993. The above example with respect to Class C shares is based on expenses
expected to have been incurred if Class C shares had been in existence during the fiscal year ended
August 31, 1993. 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.
<FN>
- ----------------
* Class B shares will automatically convert to Class A shares approximately seven years after
purchase. See "Shareholder Guide--Conversion Feature-- Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C shares had been in existence
during the fiscal year ended August 31, 1993.
+ 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, 1994. Total operating expenses of the Class A and Class B shares
without such limitations would be 1.04% and 1.74%, respectively. See "How the Fund is
Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
SIX MONTHS
ENDED JANUARY 22,
FEBRUARY YEAR ENDED 1990*
28, AUGUST 31, THROUGH
1994 ------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
----------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $12.38 $11.69 $11.17 $10.71 $10.85
----------- ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .33 .69 .70 .70 .47
Net realized and
unrealized gain (loss)
on investment
transactions............ (.22) .69 .52 .46 (.14)
----------- ------ ------ ------ -----------
Total from investment
operations.......... .11 1.38 1.22 1.16 .33
----------- ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.33) (.69) (.70) (.70) (.47)
----------- ------ ------ ------ -----------
Net asset value, end of
period.................. $12.16 $12.38 $11.69 $11.17 $10.71
----------- ------ ------ ------ -----------
----------- ------ ------ ------ -----------
TOTAL RETURN+:........... 0.96% 12.12% 11.26% 11.06% 2.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $4,649 $4,647 $2,095 $923 $462
Average net assets
(000)................... $4,863 $2,904 $1,289 $615 $289
Ratios to average net
assets:
Expenses, including
distribution fee...... .80%** .84% .81% .93% .96%**
Expenses, excluding
distribution fee...... .70%** .74% .71% .83% .86%**
Net investment
income................ 5.39%** 5.73% 6.34% 6.34% 6.51%**
Portfolio turnover....... 9% 28% 37% 37% 24%
<FN>
- --------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 20,
ENDED 1984*
FEBRUARY 28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------------------------------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
-------------- ------ ------- ------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 12.38 $11.70 $ 11.18 $ 10.71 $ 10.85 $10.53 $ 10.89 $ 11.70 $ 10.69 $ 10.00
-------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .31 .65 .65 .65 .66 .67 .71 .74+ .82+ .74+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.22) .68 .52 .47 (.14) .32 (.36) (.66) 1.14 .69
-------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total from
investment
operations..... .09 1.33 1.17 1.12 .52 .99 .35 .08 1.96 1.43
-------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.31) (.65) (.65) (.65) (.66) (.67) (.71) (.74) (.82) (.74)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- (.15) (.13) --
-------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total
distributions... (.31) (.65) (.65) (.65) (.66) (.67) (.71) (.89) (.95) (.74)
-------------- ------ ------- ------- ------- ------- -------- -------- --------
Net asset value, end
of period.......... $12.16 $12.38 $11.70 $11.18 $10.71 $10.85 $10.53 $10.89 $11.70 $10.69
-------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
-------------- ------ ------- ------- ------- ------- -------- -------- -------- -------
TOTAL RETURN+++:.... 0.75% 11.58% 10.79% 10.74% 4.87% 9.68% 3.52% 0.64% 19.34% 14.58%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $124,108 $121,937 $102,199 $92,572 $89,183 $87,426 $73,972 $75,833 $51,587 $22,331
Average net assets
(000).............. $124,581 $110,053 $96,178 $90,437 $89,302 $81,613 $72,333 $69,995 $38,725 $12,729
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.20%** 1.24% 1.21% 1.33% 1.32% 1.32% 1.24% 1.15%+ 1.13%+ 1.15%+**
Expenses,
excluding
distribution
fee.............. .70%** .74% .71% .83% .84% .84% .75% .66%+ .65%+ .68%+**
Net investment
income........... 4.99%** 5.33% 5.73% 5.94% 6.08% 6.17% 6.79% 6.43%+ 6.98%+ 7.34%+**
Portfolio
turnover........... 9% 28% 37% 37% 24% 41% 127% 120% 50% 72%
<FN>
- --------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE OHIO SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM OHIO
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND,
IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. 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 OHIO 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 OHIO STATE AND FEDERAL INCOME TAXES (OHIO 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." Under Ohio law, dividends paid by the Series are exempt from
Ohio personal income tax and Ohio school district income taxes for resident
individuals to the extent they are derived from interest payments on Ohio
Obligations. Ohio Obligations could 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 obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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
7
<PAGE>
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 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.
ALL OHIO OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Ohio Obligations will, at the time of
purchase, be 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
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Ohio Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Ohio Obligation might receive an upgraded credit
standing, thereby increasing the market value of the bonds it has issued or when
the investment adviser believes that interest rates might decline. As a general
matter, bond prices and the Series' net asset value will vary inversely with
interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN OHIO 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 Ohio State and
federal income taxes or the Series will have at least 80% of its total assets
invested in Ohio 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 Ohio Obligations or may invest its assets so that more
than 20% of the income is subject to Ohio State or federal income taxes.
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
8
<PAGE>
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 OHIO 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 Ohio 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.
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
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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 FOR 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.
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
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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 OHIO OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM OHIO
OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF
OHIO OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Ohio has encountered financial
difficulties over some of the past several years. While Ohio has faced revenue
shortfalls, the State has acted promptly in addressing budgetary shortfalls with
spending reductions and by expanding the sales tax base. The 1994-1995 biennial
budget enacted in July 1993 anticipates an increase in spending and includes all
General Revenue Fund appropriations for biennial State debt service and lease
rental payments. If either Ohio or any of its local governmental entities is
unable to meet its financial obligations, 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.
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.
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.
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
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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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were .84% and 1.24%, for the Series' Class A
and Class B shares, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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.
The current portfolio manager of the Series is Christian Smith, an Investment
Associate of Prudential Investment Advisors. Mr. Smith has responsibility for
the day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
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PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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 SERIES. 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. 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $2,904
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $84,100 in initial sales charges.
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
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to .25 of 1% of the average daily net assets of the Class B shares; provided
that the total distribution-related fee does not exceed .50 of 1%. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending August 31, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $987,600 under the Class B Plan and
received $550,265 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $40,300 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
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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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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."
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All dividends 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 is currently 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 Ohio law, dividends paid by the Series are exempt from the Ohio personal
income tax, Ohio school district income taxes and Ohio municipal income taxes
for individuals who are otherwise subject to such taxes to the extent such
dividends are derived from interest payments on Ohio Obligations, provided that
the Series continues to qualify as a regulated investment company for federal
income tax purposes and that at all times at least 50% of the value of the total
assets of the Series consists of obligations issued by or on behalf of the State
of Ohio, political subdivisions thereof and agencies and instrumentalities of
the State or its political subdivisions, or similar obligations of other states
or their subdivisions. Subject to the same regulated investment company and 50%
requirements, such dividends are also exempt from the net income base of the
Ohio corporation franchise tax to the extent such dividends are excluded from
gross income for federal income tax purposes or are derived from interest
payments on Ohio Obligations.
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 also is 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.
17
<PAGE>
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. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1993 of approximately
$1,051,400. No capital gains distribution is expected to be paid to shareholders
until net gains have been realized in excess of such carryforward. 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
the 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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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
18
<PAGE>
SEC permitting the issuance and sale of multiple classes of shares. Currently,
the Series is offering three classes, 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 in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares 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 corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of
19
<PAGE>
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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, 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) and the name of the Series.
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.
20
<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, 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 DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------------- --------------------------- -------------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of the .30 of 1% (currently being Initial sales charge waived or reduced for
public offering price charged at a rate of .10 of certain purchases
1%)
CLASS B Maximum contingent deferred sales charge or .50 of 1% Shares convert to Class A shares
CDSC of 5% of the lesser of the amount approximately seven years after purchase
invested or the redemption proceeds;
declines to zero after six years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being charged Shares do not convert to another class
amount invested or the redemption proceeds at a rate of
on redemptions made within one year of .75 of 1%)
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 Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the 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.
21
<PAGE>
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.
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 AS
PERCENTAGE OF PERCENTAGE OF 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
22
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES 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
23
<PAGE>
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 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 purchased
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.
24
<PAGE>
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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------------------- -------------------------
<S> <C>
First............................................................................. 5.0%
Second............................................................................ 4.0%
Third............................................................................. 3.0%
Fourth............................................................................ 2.0%
Fifth............................................................................. 1.0%
Sixth............................................................................. 1.0%
Seventh........................................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust 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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred
25
<PAGE>
retirement plan, unless such redemptions otherwise qualify for a waiver as
described above. In the case of Direct Account and PSI or Subsidiary Prototype
Benefit Plans, the CDSC will be waived on redemptions which represent borrowings
from such plans. Shares purchased with amounts used to repay a loan from such
plans on which a CDSC was not previously deducted will thereafter be subject to
a CDSC without regard to the time such amounts were previously invested. In the
case of a 401(k) plan, the CDSC will also be waived upon the redemption of
shares purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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 to $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to
26
<PAGE>
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.
27
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 distribtutions, (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 in 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at 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.
28
<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
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund
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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................ 2
Risk Factors and Special Characteristics..... 2
FUND EXPENSES.................................. 4
FINANCIAL HIGHLIGHTS........................... 5
HOW THE FUND INVESTS........................... 7
Investment Objective and Policies............ 7
Other Investments and Policies............... 11
Investment Restrictions...................... 12
HOW THE FUND IS MANAGED........................ 12
Manager...................................... 12
Distributor.................................. 13
Portfolio Transactions....................... 14
Custodian and Transfer and Dividend
Disbursing Agent............................ 15
HOW THE FUND VALUES ITS SHARES................. 15
HOW THE FUND CALCULATES PERFORMANCE............ 15
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 16
GENERAL INFORMATION............................ 18
Description of Shares........................ 18
Additional Information....................... 19
SHAREHOLDER GUIDE.............................. 19
How to Buy Shares of the Fund................ 19
Alternative Purchase Plan.................... 21
How to Sell Your Shares...................... 23
Conversion Feature--Class B Shares........... 26
How to Exchange Your Shares.................. 27
Shareholder Services......................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
</TABLE>
- -------------------------------------------
MF 123A 44404FM
Class A: 74435M-83-8
CUSIP Nos.: Class B: 74435M-84-6
Class C: 74435M-49-9
PRUDENTIAL
MUNICIPAL SERIES
FUND
(OHIO SERIES)
- --------------------------------------
[Logo]
<PAGE>
PROSPECTUS
August 1,
1994
<PAGE>
Prudential Municipal Series Fund
(Pennsylvania Series)
- ----------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Pennsylvania Series)
(the "Series") is one of sixteen series of an open-end investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from Pennsylvania personal income tax and
federal income tax consistent with the preservation of capital and, in
conjunction therewith, the Series may invest in debt securities with the
potential for capital gain. The net assets of the Series are invested in
obligations within the four highest ratings of either Moody's Investors Service
or Standard & Poor's Ratings Group or in unrated obligations 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
Pennsylvania 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, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
sixteen 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 Pennsylvania 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 Commonwealth of Pennsylvania personal income tax and federal income tax
consistent with the preservation of capital. It seeks to achieve this objective
by investing primarily in Pennsylvania 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 Commonwealth of Pennsylvania personal income tax and
federal income tax (Pennsylvania Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 7.
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 Pennsylvania Obligations. This
degree of investment concentration makes the Series particularly susceptible to
factors adversely affecting issuers of Pennsylvania Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at page
11. 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 9.
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 June 30, 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 12.
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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
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 19 and "Shareholder Guide--Shareholder Services"
at page 27.
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 15 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 19.
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 20.
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 22.
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 16.
3
<PAGE>
FUND EXPENSES
(PENNSYLVANIA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------------- --------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
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 made within one year
1% annually to 1% in of purchase
the fifth and sixth
years and 0% the
seventh year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES**
-------------- -------------------- --------------------
<S> <C> <C> <C>
Management Fees............................... .50% .50% .50%
12b-1 Fees.................................... .10++ .50 .75++
Other Expenses................................ .18 .18 .18
-- ------
---
Total Fund Operating Expenses................. .78% 1.18% 1.43%
-- ------
-- ------
---
---
</TABLE>
<TABLE>
<CAPTION>
10
EXAMPLE 1 YEAR 3 YEARS 5 YEARS YEARS
----------- ----------- ----------- ---
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period:
Class A........................................................... $ 38 $ 54 $ 72 $124
Class B........................................................... $ 62 $ 67 $ 75 $127
Class C**......................................................... $ 25 $ 45 $ 78 $171
You would pay the following expenses on the same investment, assuming
no redemption:
Class A........................................................... $ 38 $ 54 $ 72 $124
Class B........................................................... $ 12 $ 37 $ 65 $127
Class C**......................................................... $ 15 $ 45 $ 78 $171
The above example with respect to Class A and Class B shares is based on
restated data for the Series' fiscal year ended August 31, 1993. The above
example with respect to Class C shares is based on expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended August 31, 1993. 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" include operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
- ------------------
* Class B shares will automatically convert to Class A shares approximately seven years after purchase. See
"Shareholder Guide--Conversion Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C shares had been in existence during
the fiscal year ended August 31, 1993.
+ 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, 1994. Total operating expenses of the Class A and Class C shares without such limitations would be
.98% and 1.68%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
SIX
MONTHS
ENDED JANUARY 22,
FEBRUARY 1990*
28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period......... $ 11.21 $ 10.55 $ 9.96 $ 9.60 $ 9.63
-------- -------- -------- -------- -----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income......... .30 .62 .62 .62+ .38+
Net realized and
unrealized gain
(loss) on
investment
transactions... (.21) .70 .59 .39 (.23)
-------- -------- -------- -------- -----------
Total from
investment
operations... .09 1.32 1.21 1.01 .15
-------- -------- -------- -------- -----------
LESS
DISTRIBUTIONS
Dividends from
net investment
income......... (.30) (.62) (.62) (.62) (.38)
Distributions
from net
realized
gains.......... (.11) (.04) -- (.03) --
-------- -------- -------- -------- -----------
Total
distributions... (.41) (.66) (.62) (.65) (.38)
-------- -------- -------- -------- -----------
Net asset value,
end of
period......... $ 10.89 $ 11.21 $ 10.55 $ 9.96 $ 9.60
-------- -------- -------- -------- -----------
-------- -------- -------- -------- -----------
TOTAL
RETURN++:...... 0.85% 12.86% 12.44% 10.82% 1.43%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000).......... $10,795 $ 9,342 $ 5,908 $ 3,521 $ 1,823
Average net
assets (000)... $10,197 $ 7,354 $ 4,439 $ 2,366 $ 977
Ratios to
average net
assets:
Expenses,
including
distribution
fee.......... .74%** .78% .81% .83% .78%**+
Expenses,
excluding
distribution
fee.......... .64%** .68% .71% .74% .68%**+
Net investment
income....... 5.45%** 5.69% 5.99% 6.32% 6.51%**+
Portfolio
turnover....... 8% 13% 25% 62% 37%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
+ Net of expense subsidy/management fee waiver.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------
SIX
MONTHS
ENDED APRIL 3,
FEBRUARY 1987*
28, YEAR ENDED AUGUST 31, THROUGH
1994 ----------------------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987
--------- --------- --------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period......... $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47 $ 9.73 $ 10.00
--------- --------- --------- --------- --------- --------- ---------- ------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income......... .28 .57 .58 .58+ .61+ .65+ .67+ + .26
Net realized and
unrealized gain
(loss) on
investment
transactions... (.21) .71 .58 .39 (.21) .34 (.26) (.27)
--------- --------- --------- --------- --------- --------- ---------- ------------
Total from
investment
operations... .07 1.28 1.16 .97 .40 .99 .41 (.01)
--------- --------- --------- --------- --------- --------- ---------- ------------
LESS
DISTRIBUTIONS
Dividends from
net investment
income......... (.28) (.57) (.58) (.58) (.61) (.65) (.67) (.26)
Distributions
from net
realized
gains.......... (.11) (.04) -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------- ------------
Total
distributions... (.39) (.61) (.58) (.61) (.61) (.65) (.67) (.26)
--------- --------- --------- --------- --------- --------- ---------- ------------
Net asset value,
end of
period......... $ 10.89 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47 $ 9.73
--------- --------- --------- --------- --------- --------- ---------- ------------
--------- --------- --------- --------- --------- --------- ---------- ------------
TOTAL
RETURN+++:..... 0.65% 12.54% 11.92% 10.39% 4.08% 10.75% 4.53% (0.15)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000).......... $274,718 $ 263,752 $ 206,028 $ 170,162 $ 150,824 $ 118,280 $ 52,503 $16,340
Average net
assets (000)... $272,306 $ 229,955 $ 186,113 $ 146,591 $ 141,183 $ 86,496 $ 35,700 $ 4,403
Ratios to
average net
assets:
Expenses,
including
distribution
fee.......... 1.14%** 1.18% 1.21% 1.23%+ 1.02%+ .77%+ .53%+ 0%**+
Expenses,
excluding
distribution
fee.......... .64%** .68% .71% .74%+ .53%+ .29%+ .06%+ 0%**+
Net investment
income....... 5.05%** 5.29% 5.59% 5.94%+ 6.05%+ 6.27%+ 6.66%+ 5.54%**+
Portfolio
turnover....... 8% 13% 25% 62% 37% 11% 137% 42%
<FN>
- ---------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
6
<PAGE>
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 SIXTEEN SEPARATE SERIES. EACH OF THESE SERIES IS
MANAGED INDEPENDENTLY. THE PENNSYLVANIA SERIES (THE SERIES) IS DIVERSIFIED AND
ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM
COMMONWEALTH OF PENNSYLVANIA PERSONAL INCOME TAX AND FEDERAL INCOME TAX
CONSISTENT WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE
SERIES MAY INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. 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 PENNSYLVANIA, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS OR GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM COMMONWEALTH OF PENNSYLVANIA PERSONAL
INCOME TAX AND FEDERAL INCOME TAX (PENNSYLVANIA 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." Under Pennsylvania law, dividends paid by the Series are exempt
from Pennsylvania personal income tax for resident individuals to the extent
they are derived from interest payments on Pennsylvania Obligations.
Pennsylvania Obligations could include general obligation bonds of the
Commonwealth, 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 obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may 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. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might 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 would 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
7
<PAGE>
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 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.
ALL PENNSYLVANIA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT
GRADE" SECURITIES. In other words, all of the Pennsylvania Obligations will, at
the time of purchase, be 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 securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Pennsylvania Obligations
which, in the opinion of the investment adviser, offer the opportunity for
capital appreciation. This may occur, for example, when the investment adviser
believes that the issuer of a particular Pennsylvania Obligation might receive
an upgraded credit standing, thereby increasing the market value of the bonds it
has issued or when the investment adviser believes that interest rates might
decline. As a general matter, bond prices and the Series' net asset value will
vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN PENNSYLVANIA 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
Pennsylvania and federal income taxes or the Series will have at least 80% of
its total assets invested in Pennsylvania 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 or when there is a scarcity of bonds exempt from
Pennsylvania tax, the Series may invest more than 20% of the value of its assets
in debt securities other than Pennsylvania Obligations or may invest its assets
so that more than 20% of the income is subject to Pennsylvania or federal income
taxes.
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
8
<PAGE>
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 securities. 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 PENNSYLVANIA 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 Pennsylvania 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.
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
9
<PAGE>
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 FOR 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.
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
10
<PAGE>
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 PENNSYLVANIA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
PENNSYLVANIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF PENNSYLVANIA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL
FUND THAT IS NOT CONCENTRATED IN THESE ISSUERS TO THIS DEGREE. The Commonwealth
of Pennsylvania has not been immune to the problems of the Northeast as the
recent national recession reduced tax revenue growth contributing to budget
shortfalls and reduced cash balances. Financial operations improved in fiscal
1992 with the help of large tax increases and tax base broadening measures and
numerous cost reduction measures implemented throughout the year. Pennsylvania
focused on expenditure reduction in fiscal year 1993 as appropriations (less
lapses) represented a 1.1% increase over fiscal 1992 appropriations. For fiscal
1994, spending increased significantly funded, in part, by utilization of the
prior year surplus and through a projected 3.7% growth in revenue. The fiscal
1995 budget, which includes some tax reductions, provides for an increase in
spending of 3.2% and draws on the projected surplus from fiscal 1993. If either
Pennsylvania or any of its local government entities is unable to meet its
financial obligations, 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.
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.
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.
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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.
For the fiscal year ended August 31, 1993, total expenses of the Series as a
percentage of average net assets were .78% and 1.18% for the Series' Class A and
Class B shares, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended August 31, 1993.
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. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of June 30, 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 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.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
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PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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 SERIES. 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 financial institutions which are registered 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 asset
value of the Class A shares for the fiscal year ending August 31, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $7,354
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1993, PMFD also received
approximately $141,300 in initial sales charges.
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
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.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1994. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1993, Prudential Securities incurred
distribution expenses of approximately $2,841,200 under the Class B Plan and
received $1,149,777 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $228,200 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993. Prior to
the date of this Prospectus, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
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.
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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 NET
ASSET VALUE 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 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 NAVs and
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 AND 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 yield 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
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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 HAS ELECTED TO QUALIFY AND INTENDS 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
(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
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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 Pennsylvania law, dividends paid by the Series are exempt from
Pennsylvania income tax for individuals who are subject to Pennsylvania personal
income tax to the extent such dividends are derived from interest payments on
Pennsylvania Obligations.
Dividends paid by the Series are also exempt from the Philadelphia School
District investment net income tax for individuals who are residents of the City
of Philadelphia to the extent such dividends are derived from interest payments
on Pennsylvania Obligations or to the extent such dividends are designated as
capital gain dividends for federal income tax 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 or 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 class will bear its own distribution charges,
generally resulting in lower dividends for the 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
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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 of both 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 Series, an investor should carefully consider the
impact of taxable dividends or 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,
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.
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, 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 in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares 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.
18
<PAGE>
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the 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
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 NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
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
19
<PAGE>
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, 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) and the name of the Series.
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.
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, 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
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% the lesser of the 1% (currently being Shares do not convert to another class
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
20
<PAGE>
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.
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 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.
21
<PAGE>
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.
In the case of pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans) whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
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 initial sales charges are imposed upon
Class A shares purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" 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
22
<PAGE>
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 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
23
<PAGE>
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 purchased 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
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------------ ----------------------
<S> <C>
First............................................................. 5.0%
Second............................................................ 4.0%
Third............................................................. 3.0%
Fourth............................................................ 2.0%
Fifth............................................................. 1.0%
Sixth............................................................. 1.0%
Seventh........................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF 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 on or prior to death or
disability.
24
<PAGE>
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement,
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2, and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. 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.
25
<PAGE>
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature 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 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.
26
<PAGE>
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.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, 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 in 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" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at 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.
27
<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
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 7
Investment Objective and Policies............. 7
Other Investments and Policies................ 11
Investment Restrictions....................... 12
HOW THE FUND IS MANAGED......................... 12
Manager....................................... 12
Distributor................................... 13
Portfolio Transactions........................ 14
Custodian and Transfer and Dividend Disbursing
Agent........................................ 14
HOW THE FUND VALUES ITS SHARES.................. 15
HOW THE FUND CALCULATES PERFORMANCE............. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 16
GENERAL INFORMATION............................. 18
Description of Shares......................... 18
Additional Information........................ 19
SHAREHOLDER GUIDE............................... 19
How to Buy Shares of the Fund................. 19
Alternative Purchase Plan..................... 20
How to Sell Your Shares....................... 22
Conversion Feature--Class B Shares............ 25
How to Exchange Your Shares................... 26
Shareholder Services.......................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF132A 4440349
Class A: 74435M-87-9
CUSIP Nos.: Class B: 74435M-88-7
Class C: 74435M-48-1
Prudential
Municipal
Series Fund
(Pennsylvania Series)
- --------------------------------------
[LOGO]
<PAGE>
PROSPECTUS
AUGUST 1,
1994
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
- ------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 1, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) is an open-end investment company,
or mutual fund, consisting of sixteen series--the Arizona Series, the
Connecticut Money Market Series, the Florida Series, the Georgia 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.
A seventeenth 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 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. See "Investment
Objectives and Policies."
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 is not a prospectus and should be read
in conjunction with the Prospectuses of each series of the Fund dated August 1,
1994 (October 29, 1993 for the money market series), copies of which may be
obtained from the Fund upon request.
- --------------------------------------------------------------------------------
117B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
-------------------------------------------------------------------------------------------
CONNECTICUT MASSACHUSETTS
MONEY MONEY
PAGE ARIZONA MARKET FLORIDA GEORGIA MARYLAND MASSACHUSETTS MARKET MICHIGAN MINNESOTA
---- ------- ----------- ------- ------- -------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Information........... B-1 18 14 17 18 18 18 14 17 18
Investment Objectives and
Policies..................... B-1 7 6 6 7 7 7 6 7 7
In General.................. B-1 -- -- -- -- -- -- -- -- --
Tax-Exempt Securities....... B-3 7 6 6 7 7 7 6 7 7
Risks of Investing in
Defaulted Securities....... B-4 -- -- -- -- -- -- -- -- --
Special Considerations
Regarding Investments in
Tax-Exempt Securities...... B-4 11 9 10 11 11 11 7 10 11
Floating Rate and Variable
Rate Securities............ B-14 7 7 6 7 7 7 5 7 7
Put Options................. B-15 8 8 7 8 8 8 6 8 9
Financial Futures Contracts
and Options Thereon........ B-15 9 -- 8 9 9 9 -- 9 10
When-Issued and Delayed
Delivery Securities........ B-17 9 8 8 9 9 9 6 9 9
Portfolio Turnover.......... B-18 11 -- 11 11 11 11 -- 11 11
Illiquid Securities......... B-19 12 -- 11 11 11 11 -- 11 11
Repurchase Agreements....... B-19 11 9 10 11 11 11 9 11 11
Investment Restrictions....... B-20 12 10 11 12 12 12 11 11 12
Trustees and Officers......... B-21 12 10 11 12 12 12 10 11 12
Manager....................... B-25 12 10 11 12 12 12 10 12 12
Distributor................... B-28 13 11 12 13 13 13 10 12 13
Portfolio Transactions and
Brokerage.................... B-31 14 11 14 14 14 14 11 14 14
Purchase and Redemption of
Fund Shares.................. B-33 19 15 19 19 19 19 15 18 19
Specimen Price Make-Up...... B-33 -- -- -- -- -- -- -- -- --
Reduction and Waiver of
Initial Sales
Charges--Class A Shares.... B-34 22 -- 21 21 21 22 -- 20 21
Waiver of the Contingent
Deferred Sales Charge--
Class B Shares............. B-36 25 24 25 25 25 23 25
Quantity Discount--Class B
Shares Purchased Prior to
August 1, 1994............. B-36 26 -- 25 25 25 24 25
Shareholder Investment
Account...................... B-37 28 22 27 27 28 27 21 26 27
Automatic Reinvestment of
Dividends and/or
Distributions.............. B-37 28 22 27 27 28 27 21 26 27
Exchange Privilege.......... B-37 27 21 26 26 26 26 20 25 26
Dollar Cost Averaging....... B-38 -- -- -- -- -- -- -- -- --
Automatic Savings
Accumulation Plan (ASAP)... B-39 28 22 27 27 28 27 21 26 27
Systematic Withdrawal
Plan....................... B-39 29 22 27 27 28 28 22 26 27
How to Redeem Shares of the
Money Market Series........ B-40 -- 19 -- -- -- -- 18 -- --
Net Asset Value............... B-41 15 12 14 15 15 15 9 14 15
Performance Information....... B-42 15 6 14 15 15 15 6 15 15
Distributions and Tax
Information.................. B-47 16 13 15 16 16 16 12 15 16
Distributions............... B-47 18 14 17 17 17 17 13 17 17
Federal Taxation............ B-47 16 13 15 16 16 16 12 15 16
State Taxation.............. B-50 17 13 16 17 17 17 13 16 17
Organization and
Capitalization............... B-57 18 14 17 18 18 18 14 17 18
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants...... B-58 15 12 14 14 14 14 11 14 14
Description of Tax-Exempt
Security Ratings............. B-59 -- -- -- -- -- -- -- -- --
Financial Statements.......... B-60 5 5 5 5 5 5 5 5 5
</TABLE>
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
-----------------------------------------------------------------------
NEW JERSEY NEW YORK
NEW MONEY NEW YORK MONEY NORTH
PAGE JERSEY MARKET NEW YORK INCOME MARKET CAROLINA OHIO PENNSYLVANIA
---- ------ ---------- -------- -------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Information.......................... B-1 18 14 18 15 13 18 18 18
Investment Objectives and Policies........... B-1 7 6 7 5 6 7 7 7
In General................................. B-1 -- -- -- -- -- -- -- --
Tax-Exempt Securities...................... B-3 7 6 7 5 6 7 7 7
Risks of Investing in Defaulted
Securities................................ B-4 -- -- -- 7 -- -- -- --
Special Considerations Regarding
Investments in Tax-Exempt Securities...... B-4 11 9 11 9 8 11 11 11
Floating Rate and Variable Rate
Securities................................ B-14 7 7 7 5 7 7 7 7
Put Options................................ B-15 9 8 8 6 7 8 8 8
Financial Futures Contracts and Options
Thereon................................... B-15 10 -- 9 8 -- 9 9 9
When-Issued and Delayed Delivery
Securities................................ B-17 9 8 9 7 8 9 9 9
Portfolio Turnover......................... B-18 12 -- 11 10 -- 11 11 11
Illiquid Securities........................ B-19 12 -- 11 10 -- 11 11 12
Repurchase Agreements...................... B-19 11 9 11 9 9 11 11 11
Investment Restrictions...................... B-20 12 10 12 10 9 12 12 12
Trustees and Officers........................ B-21 12 10 12 10 9 12 12 12
Manager...................................... B-25 12 10 12 10 9 12 12 12
Distributor.................................. B-28 13 11 13 11 10 13 13 13
Portfolio Transactions and Brokerage......... B-31 15 11 14 12 10 14 14 14
Purchase and Redemption of Fund Shares....... B-33 19 15 19 16 14 19 19 19
Specimen Price Make-Up..................... B-33 -- -- -- -- -- -- -- --
Reduction and Waiver of Initial Sales
Charges--Class A Shares................... B-34 22 -- 22 17 -- 21 22 21
Waiver of the Contingent Deferred Sales
Charge-- Class B Shares................... B-36 25 25 24 25 24
Quantity Discount--Class B Shares Purchased
Prior to August 1, 1994................... B-36 26 -- 25 -- -- 25 26 25
Shareholder Investment Account............... B-37 28 22 27 20 20 27 28 27
Automatic Reinvestment of Dividends and/or
Distributions............................. B-37 28 22 27 20 20 27 28 27
Exchange Privilege......................... B-37 27 21 26 19 19 26 27 26
Dollar Cost Averaging...................... B-38 -- -- -- -- -- -- -- --
Automatic Savings Accumulation Plan
(ASAP).................................... B-39 28 22 28 20 20 27 28 27
Systematic Withdrawal Plan................. B-39 28 22 28 20 21 27 28 27
How to Redeem Shares of the Money Market
Series.................................... B-40 -- 19 -- -- 17 -- -- --
Net Asset Value.............................. B-41 15 12 15 12 11 15 15 15
Performance Information...................... B-42 15 6 15 13 6 15 15 15
Distributions and Tax Information............ B-47 16 13 16 13 12 16 16 16
Distributions.............................. B-47 18 14 17 15 13 17 18 17
Federal Taxation........................... B-47 16 13 16 13 12 16 16 16
State Taxation............................. B-50 17 13 17 14 12 17 17 17
Organization and Capitalization.............. B-57 18 14 18 15 13 18 18 18
Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants........... B-58 15 12 14 12 11 14 15 14
Description of Tax-Exempt Security Ratings... B-59 -- -- -- -- -- -- --
Financial Statements......................... B-60 5 5 5 -- 5 5 5 5
</TABLE>
<PAGE>
GENERAL INFORMATION
The Fund was organized on May 18, 1984. On February 28, 1991, the Trustees
approved an amendment to the Declaration of Trust to change the Fund's name from
Prudential-Bache Municipal Series Fund to Prudential Municipal Series Fund.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
Prudential Municipal Series Fund (the Fund) is an open-end management
investment company consisting of sixteen separate series: the Arizona Series,
the Connecticut Money Market Series, the Florida Series, the Georgia 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.
A seventeenth series, the New York Income Series, is not currently being
offered. A separate Prospectus has been prepared for each series. This Statement
of Additional Information is applicable to all series. The investment objective
of each series, other than 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. Opportunities for capital gain may exist, for example, when
securities are believed to be undervalued or when the likelihood of redemption
by the issuer at a price above the purchase price indicates capital gain
potential. The investment objective of each money market series is 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 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 will achieve its
objective or that all income from any series will be exempt from all federal,
state or local income taxes.
The investment objective of a series may not be changed without the approval
of the holders of a majority of the outstanding voting securities of such
series. A "majority of the outstanding voting securities" of a series when used
in this Statement of Additional Information means the lesser of (i) 67% of the
voting shares of a series represented at a meeting at which more than 50% of the
outstanding voting shares of a series are present in person or represented by
proxy or (ii) more than 50% of the outstanding voting shares of a series.
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 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. 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. 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
B-1
<PAGE>
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.
Under normal market conditions, each series will attempt to invest
substantially all and, as a matter of fundamental policy, will invest at least
80% of the value of its assets in securities the interest on which is exempt
from state and federal income taxes or the series' assets will be invested so
that at least 80% of the income will be exempt from state and federal income
taxes, except that, as a matter of fundamental policy, during normal market
conditions the Florida Series', the New Jersey Series' and the New Jersey Money
Market Series' assets will be invested so that at least 80% of their total
assets will be invested in Florida Obligations (as defined in the Florida
Series' Prospectus) and New Jersey Obligations (as defined in the New Jersey
Series' and the New Jersey Money Market Series' Prospectuses), respectively, and
except that, as a matter of fundamental policy, during normal market conditions
the Connecticut Money Market Series' and the Massachusetts Money Market Series'
assets will be invested so that at least 80% of their total assets will be
invested in municipal securities which pay income exempt from federal income
taxes. These latter securities primarily will be Connecticut Obligations (as
defined in the Connecticut Money Market Series' Prospectus) and Massachusetts
Obligations (as defined in the Massachusetts Money Market Series' Prospectus),
respectively, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Connecticut Obligations and Massachusetts
Obligations, respectively, that also meet the Series' credit quality and average
weighted maturity requirements, to purchase Connecticut Obligations and
Massachusetts Obligations, respectively. Each series will continuously monitor
the 80% tests to ensure that either the asset investment or the income test is
met at all times, except for temporary defensive measures during abnormal market
conditions.
A series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax, pending the investment or reinvestment in tax-exempt securities of
proceeds of sales of shares or sales of portfolio securities or in order to
avoid the necessity of liquidating portfolio investments to meet redemptions of
shares by investors or where market conditions due to rising interest rates or
other adverse factors warrant temporary investing. Investments (other than those
of the money market series) in taxable securities may include: obligations of
the U.S. Government, its agencies or instrumentalities; other debt securities
rated within the four highest grades by either Moody's or S&P or, if unrated,
judged by the investment adviser to possess comparable creditworthiness;
commercial paper rated in the highest grade by either of such rating services
(P-1 or A-1, respectively); certificates of deposit and bankers' acceptances;
and repurchase agreements with respect to any of the foregoing investments. The
money market series may also invest in the taxable securities listed above,
except that their debt securities, if rated, will be rated within 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). No
series intends to invest more than 5% of its assets in any one of the foregoing
taxable securities. A series may also hold its assets in other cash equivalents
or in cash.
Each series except for the Florida Series, the New York Income Series and
the money market series, other than the New York Money Market Series, is
classified as a "diversified" investment company under the Investment Company
Act of 1940 (the Investment Company Act). This means that with respect to 75% of
these series' assets, (1) no series may invest more than 5% of its total assets
in the securities of any one issuer (except U.S. Government obligations) and (2)
no series may own more than 10% of the outstanding voting securities of any one
issuer. For purposes of calculating these 5% or 10% ownership limitations, the
series will consider the ultimate source of revenues supporting each obligation
to be a separate issuer. For example, even though a state hospital authority or
a state economic development authority might issue obligations on behalf of many
different entities, each of the underlying health facilities or economic
development projects will be considered as a separate issuer. These investments
are also subject to the limitations described in the remainder of this section.
See "How the Fund Invests--Investment Objective and Policies--Special
Considerations" in the Prospectuses of the Florida Series, the New York Income
Series and the money market series, other than the New York Money Market Series.
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Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a series may own so long as, with respect to 75% of the assets
of each series other than the Florida Series, the New York Income Series and the
money market series (except for the New York Money Market Series), it does not
invest more than 5% of its total assets in the securities of such issuer (except
obligations issued or guaranteed by the U.S. Government). As for the other 25%
of a series' assets not subject to the limitation described above, there is no
limitation on the amount of these assets that may be invested in a minimum
number of issuers. Because of the relatively smaller number of issuers of
investment-grade tax-exempt securities (or, in the case of the New York Money
Market Series, high quality tax-exempt securities) in any one of these states, a
series is more likely to use this ability to invest its assets in the securities
of a single issuer than is an investment company which invests in a broad range
of tax-exempt securities. Such concentration involves an increased risk of loss
to a series should the issuer be unable to make interest or principal payments
thereon or should the market value of such securities decline.
The Fund expects that a series will not invest more than 25% of its total
assets in municipal obligations the source of revenue of which is derived from
any one of the following categories: hospitals and health facilities; turnpikes
and toll roads; ports and airports; or colleges and universities. A series may
invest more than 25% of its total assets in municipal obligations of one or more
of the following types: obligations of public housing authorities; general
obligations of states and localities; lease rental obligations of states and
local authorities; obligations of state and local housing finance authorities;
obligations of municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. Each of the foregoing types of
investments might be subject to particular risks which, to the extent that a
series is concentrated in such investments, could affect the value or liquidity
of the series.
TAX-EXEMPT SECURITIES
Tax-exempt securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is exempt from federal income tax (except for possible
application of the alternative minimum tax) and, in certain instances,
applicable state or local income and personal property taxes. Such securities
are traded primarily in the over-the-counter market.
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guaranty may
be regarded as a separate security and treated as an issue of such guarantor.
TAX-EXEMPT BONDS. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, and gas and electric utilities.
Tax-exempt bonds also may be issued in connection with the refunding of
outstanding obligations, to obtain funds to lend to other public institutions,
or for general operating expenses.
The two principal classifications of tax-exempt bonds are "general
obligation" and "revenue". General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. The Internal Revenue Code restricts
the types of industrial
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development bonds (IDBs) which qualify to pay interest exempt from federal
income tax, and interest on certain IDBs issued after August 7, 1986 is subject
to the alternative minimum tax. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived from payments of
the industrial user. The payment of the principal and interest on IDBs is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
TAX-EXEMPT NOTES. Tax-exempt notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Tax-exempt notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to
provide interim financing until long-term financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of the
Notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by
a commitment by the Government National Mortgage Association (GNMA) to
purchase the loan, accompanied by a commitment by the Federal Housing
Administration to insure mortgage advances thereunder. In other instances,
permanent financing is provided by commitments of banks to purchase the
loan.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper
typically represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.
RISKS OF INVESTING IN DEFAULTED SECURITIES
The New York Income Series may invest up to 5% of its total assets in New
York 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.
ARIZONA
Arizona has traditionally been one of the fastest growing states in the
nation since World War II, due in part to its favorable climate and its
affordable housing. However, in the late 1980's, the State's rapid growth was
sharply curtailed by an overbuilding of office space which led to a slower rate
of new construction and financial difficulties in the banking and savings and
loan industries. This was compounded by the slowdown in defense spending which
has adversely affected many defense-related electronics firms. The economy has
also seen a noticeable shift away from manufacturing toward services, evidenced
in part by the attraction of several major credit card processing centers. This
shift toward lower paying jobs has been partially responsible for the decline in
per capita income from 92% of the national average in 1986 to 86% in 1991. The
State's
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economy has begun to grow again, albeit at a slower pace than experienced before
the real estate bust. The State has had some success in attracting the
relocation of firms from California, where the regulatory and tax environment
are seen as less favorable.
The State's fiscal situation has improved in recent years. After
experiencing several years of budget shortfalls requiring mid-year adjustments,
the State had a budget surplus of $86 million for fiscal year 1992-93, as
compared to a total State budget of $3.7 billion. For fiscal year 1993-94, the
Legislature is projecting a surplus of $107.1 million. For fiscal year 1994-95,
a surplus of between $4.9 million and $47 million is projected. However, the
1994 Legislature enacted a personal income tax reduction of approximately $107
million and various business tax cuts that raised concerns that the State may be
undercutting its tax base. In addition, voter approval in November 1992 of
Proposition 108, which requires a two-thirds majority in both houses of the
legislature to pass tax or fee increases, has substantially constrained the
State's ability to raise revenues.
CONNECTICUT
Connecticut is a wealthy state which experienced very strong economic growth
throughout the mid to late 1980's. The State's personal income growth exceeded
that of the U.S. and its per capita income is the highest in the nation. The
rate of unemployment was also well below the national average during this
period. However, beginning in 1988, these trends began to reverse themselves as
the Northeast went into recession in advance of the rest of the nation. This was
precipitated largely by major reductions in defense spending and by weaknesses
in housing and office construction, banking and the insurance industry. As a
result, personal income growth has slowed considerably and unemployment has
risen significantly, although it has remained somewhat below the national
average.
These economic difficulties resulted in severe fiscal stress, culminating
with a General Fund deficit of $965 million at the close of fiscal year 1991 and
the subsequent issuance of a like amount of Economic Recovery Notes which are
being repaid over a five year period. In fiscal year 1992, the State took a
number of actions to raise revenues, reduce expenditures and establish a broader
revenue base aimed at reducing the volatility of its budgetary operations. Chief
among these were the implementation of a 4.5% personal income tax and the
broadening of the sales tax base, which was coupled with a decrease in the sales
tax rate from 8% to 6%. The Corporation Business Tax has also been decreased
from 13.8% to 11.5% effective in 1993. These actions, along with conservative
revenue projections, allowed the State to achieve modest surpluses for fiscal
years 1992, 1993 and 1994, a portion of which will be used to retire some of the
outstanding Economic Recovery Notes.
In June of 1992 the Manufacturing Recovery Act of 1992, which is directed
primarily toward providing incentives to manufacturers, was enacted in
Connecticut. The legislation provides for credits for establishing new
manufacturing and increasing new employee training. In addition, property tax
exemptions and sales tax exemptions were expanded for certain purchases of
manufacturing machinery and production materials. In May 1993, the legislature
enacted a budget for the 1993-1995 biennium; it has since enacted further
legislation that affects revenue and spending estimates. The budget now provides
expenditures in fiscal 1994 of $7,690.1 million, up 3.4% from the prior year,
and $8,567.2 million in fiscal 1995, up 7.6%.
FLORIDA
In 1980, Florida ranked seventh among the fifty states with a population of
9.7 million people. The State has grown dramatically since then and, as of April
1, 1993, ranked fourth with an estimated population of 13.6 million, an increase
of approximately 44.7% since 1980. The service sector is Florida's largest
employment sector, presently accounting for 32.1% of total non-farm employment.
Manufacturing jobs in Florida are concentrated in the area of high-tech and
value-added sectors, such as electrical and electronic equipment, as well as
printing and publishing. Although the job creation rate for the State of Florida
since 1980 is over two times the rate for the nation, as a whole, since 1989 the
unemployment rate for the State has risen faster than the national average. The
average rate of unemployment for Florida since 1980 is 6.5%, while the national
average is 7.1%.
South Florida is particularly susceptible to international trade and
currency imbalances and to economic dislocations in Central and South America,
due to its geographical location and its involvement with foreign
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trade, tourism and investment capital. The Central and northern portions of the
State are impacted by problems in the agricultural sector, particularly with
regard to the citrus and sugar industries. Short-term adverse economic
conditions may be created in these areas, and in the State as a whole, due to
crop failures, severe weather conditions or other agriculture-related problems.
The State economy also has historically been somewhat dependent on the tourism
and construction industries and is sensitive to trends in those sectors.
Under the State Constitution and applicable statutes, the State budget as a
whole, and each separate fund within the State budget, must be kept in balance
from currently available revenues during each State fiscal year. Estimated
General Revenue and Working Capital fund revenues of $13,582.7 million for
1993-1994 (excluding Hurricane Andrew related revenues and expenses) represent
an increase of 8.4% over revenues for 1992-1993. This amount reflects a transfer
of $190 million, out of an estimated $220 million in non-recurring revenue due
to Hurricane Andrew, to a hurricane relief trust fund. Estimated Revenue for
1994-1995 of $14,573.8 million represent an increase of 7.3% over 1993-1994.
This amount reflects a transfer of $159 million in non-recurring revenue due to
Hurricane Andrew, to a hurricane relief trust fund.
A joint resolution to amend the State Constitution has been adopted by the
Florida Legislature. The amendment, if approved by the voters of the State at
the November 1994 general election, would limit the amount of taxes, fees,
licenses and charges imposed by the Legislature and collected during any fiscal
year to the amount of revenues allowed for the prior fiscal year, plus an
adjustment for growth. The limit would be effective starting with fiscal year
1995-96.
Many factors including national, economic, social and environmental policies
and conditions, most of which are not within the control of the State or its
local units of government, could affect or could have an adverse impact on the
financial condition of the State.
GEORGIA
Georgia's economy is based on manufacturing (textiles, food products, paper
products, electronic equipment and aircraft), trade and a growing service
sector. Atlanta, with an increasingly service-oriented economy, is a trade,
service and transportation center for the southeast region and the focus of
economic growth in the State. In most other cities in Georgia, manufacturing
predominates. The State's economy was only mildly affected by the early 1980's
recession and grew rapidly for most of the decade, with employment and personal
income growth in excess of comparable national rates and, despite continued
population growth, personal income per capita has steadily gained relative to
the nation, growing from 84.2% relative to the nation in 1980 to 91.4% in 1992.
Throughout the 1980's the State's expanding economy fostered strong income
and sales tax growth. This enabled the State to record fairly strong fiscal
operations from fiscal years 1984-1989. Audited results for fiscal year 1993
indicate a year-end surplus of $37.1 million and an additional $85.5 million on
hand in the revenue shortfall reserve. The fiscal year 1994 budget increases
appropriations by 8.6%, inclusive of the new State lottery, while overall
revenues are expected to grow by 9.4% over the previous fiscal year.
In March 1989, the U.S. Supreme Court (in DAVIS V. MICHIGAN DEPARTMENT OF
TREASURY) ruled unconstitutional the imposition of state income taxes on federal
retirement benefits when state and local benefits were not taxed. Several
related lawsuits have been filed against Georgia, and plaintiffs have requested
refunds for a period beginning in 1980, producing a maximum potential liability
estimated at $591 million. Under the State's three-year statute of limitations,
however, maximum liability is reported at $100 million.
It has been said that real estate development and expanded construction
employment clearly act as leading indicators in the State economy. Except for
the major building projects necessary for the 1996 Summer Olympics, it appears
unlikely that areas in and around metropolitan Atlanta will experience the
torrent of building that took place in the mid to late 1980's. It further
appears that many of Georgia's other cities are poised to participate in the
recovery that likely will take place.
MARYLAND
Maryland, one of the wealthiest states in the nation, experienced rapid
growth during the 1980's. Both total personal income and per capita income
outperformed the national averages until 1990. The economy is well
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diversified with services, trade and government accounting for a large
percentage of total employment. Due to Maryland's proximity to Washington D.C.,
government employment plays an important role in the economy, which has served
to insulate the regional economy from more volatile economic swings. For this
reason, the unemployment rate in Maryland has historically been below the
national average.
Maryland has generally been among the most heavily indebted of the states,
although its position was more moderate with the inclusion of local debt,
reflecting in part the State assumption several years ago of local school
construction costs. The State became concerned over its debt levels and,
following recommendations of a debt affordability committee, has practiced
restraint in borrowing. Resources have also expanded and debt ratios have
fallen. Capital borrowing plans are reasonable and designed not to increase debt
levels.
During the three fiscal years from 1991 through 1993, the State's finances
were severely affected by the national recession. Nevertheless, the State closed
fiscal year 1993 with a $10.5 million operating surplus on a budgetary basis. On
a GAAP basis, the State's General Fund moved from a deficit of $121.7 million as
of June 30, 1992 to a positive balance of $113.9 million on June 30, 1993. The
1995 budget continues the trend of increased budgetary reserves. By the end of
fiscal year 1995, Maryland anticipates a $221 million reserve representing
approximately 3% of General Fund revenues.
MASSACHUSETTS
Massachusetts is an urban, densely populated, wealthy state with a fully
developed industrial economy that has undergone a significant evolution in the
last decade, shifting from textiles, leather products and heavy manufacturing
into high technology and defense related sectors with concomitant growth in
services and trade. Little affected by the national recession of the early
1980s, Massachusetts enjoyed unemployment rates among the lowest in the nation
for most of the decade. But as the economy slowed, unemployment rates rose in
1988, 1989 and 1990, climbing above the national figure to 9.0% in 1991, placing
Massachusetts among those states with the highest unemployment rates in the
nation. Particularly hard hit by job losses were the construction and
manufacturing sectors. Personal income growth, both for the total and on a per
capita basis, also slowed to below the national rate in 1989 although per capita
personal income levels are still far above the U.S. figure. It appears that two
of the factors contributing to the earlier economic boom--large increases in
defense contract spending and low oil prices--are no longer present, and the
inflation in the relative costs of land and labor also poses an economic
disadvantage.
The recent economic downturn has had serious adverse effects on
Massachusetts' financial operations, which experienced increasing budgetary
deficits through fiscal year 1990. At the close of fiscal year 1990, the
Commonwealth faced a massive accumulated deficit of $1.45 billion. In order to
regain fiscal solvency, the Commonwealth sold a total of $1.4 billion in
dedicated tax bonds secured by a portion of the Commonwealth's income tax
proceeds as well as the full faith and credit general obligation pledge of the
Commonwealth. Since that time, the Commonwealth has adopted more conservative
revenue forecasting procedures and has moderated spending growth, resulting in
the achievement of balanced budgets in both fiscal year 1991-1992 and fiscal
year 1992-1993. On a statutory accounting basis, the Commonwealth reported that
the Budgeted Operating Funds ended fiscal year 1993 with balances of $562.5
million.
Despite concerted efforts to control Massachusetts' financial operations,
and some progress in that regard, substantial risks to the Commonwealth's
financial stability remain and economic growth is not likely to return soon to
the vigorous pace evident in the 1980's. Whether improved channels of
communication and efforts towards cooperation between the Commonwealth
legislature and executive will continue remains uncertain. Local economic
conditions remain weak, and the Commonwealth is likely to continue to face
considerable difficulty in balancing its annual operating budgets. Education
reform legislation enacted in June 1993 is estimated to require annual spending
increases for elementary and secondary education of $175 million in fiscal 1994,
$414 million in 1995, and $662 million in 1996. This program will absorb a large
part of the Commonwealth's future revenue growth.
Proposition 2 1/2 is a property tax limitation initiative passed by
Massachusetts voters in 1980. In general, Proposition 2 1/2 constrains the
ability of cities and towns to raise property tax revenues, virtually the only
local-source revenue available, and this may lead to adverse consequences on the
financial condition of some
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municipalities. Under Proposition 2 1/2, many cities and towns were required to
reduce their property tax levies to a stated percentage of the full and fair
cash value of their taxable real estate and personal property. It limited the
amount by which the total property taxes assessed by all cities and towns may
increase from year to year.
MICHIGAN
The State of Michigan is a highly industrialized state and its economy is
principally dependent upon three sectors: manufacturing (particularly durable
goods, automotive products and office equipment), tourism and agriculture. Since
the mid-1980's, Michigan's economy has continued to experience a restructuring,
with significant growth in trade and services more than compensating for the
loss of manufacturing jobs. However, the state's economy remains dominated by
the automotive products industry which has only recently recovered from a
prolonged downturn in production levels. Thus, the economy tends to be more
vulnerable to economic cycles than those of other states and the nation as a
whole.
The Michigan Senate Fiscal Agency Budget Status Report (issued in January
1994) projects continued improvement in Michigan's economy through 1995. The
principal reasons are expected to be increased motor vehicle sales and growth in
the service industry, wholesale and retail trade, and construction sectors of
the State's economy. Total wage and salary employment is projected to grow 2.2%
in 1994 and another 1.8% in 1995, an increase over recent years which reflects
the ongoing diversification of the Michigan economy as well
as the revived automotive products industry. The unemployment rate is projected
to decline from 6.7% in 1993 to 5.3% in 1994 and 5.5% in 1995, continuing the
recent trend of Michigan's unemployment rate to reach or fall below the national
average, as contrasted to a prior 15-year history of Michigan having higher
unemployment. Personal income growth, as a result of the shift from higher
paying manufacturing jobs to lower paying service jobs, has risen at a slower
pace than in the nation and per capita income continues to be slightly below the
U.S. average.
The principal revenue sources for the State's General Fund are sales,
personal income, single business and excise taxes. Under the State Constitution,
expenditures from the General Fund are not permitted to exceed available
revenues. The principal expenditures from the General Fund are for education,
public protection, mental and public health and social services. The State's
finances have improved in the past two fiscal years and have recovered from a
period of budget imbalances in fiscal years 1990 and 1991. For fiscal year 1992,
the State achieved a budget surplus by using budgetary reserves and deferring
local government payments. In fiscal 1993, the State expects to achieve a budget
surplus as the result of accounting adjustments and other payment deferrals. The
State government is continuing to reduce its scope through expenditure cuts and
the privatization of certain state-provided activities and services.
In July 1993, legislation was enacted to eliminate the use of property tax
revenues for local and intermediate school district operating purposes. This
legislation did not contain any method of replacing the revenues lost from such
taxes or provide for other means of financing public education, which the State
is constitutionally obligated to do. A proposal to replace such property tax
revenues through an increase in the State's sales tax from 4% to 6% together
with a variety of increases in other consumption-based or special taxes was
approved by Michigan voters in March, 1994 and became effective on May 1, 1994.
The ultimate impact of these new taxes may have a significant effect on the
economy of the State and may change the State's method of conducting and
financing public education.
Although revenue obligations of the State or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that further economic difficulties, with the resulting impact on
State and local government finances, will not adversely affect the market value
of municipal obligations held in the portfolios of the Michigan Series or the
ability of the respective obligors to make required payments on such
obligations.
MINNESOTA
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, fabricated metals,
instruments, food, paper and allied industries.
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The State relies heavily on a progressive individual income tax and a retail
sales tax for revenue, which results in a fiscal system that is sensitive to
economic conditions. During the period from 1980 to 1993, overall employment
growth in Minnesota lagged behind national employment growth, in large part due
to declining agricultural employment. Employment data through December 1993
indicate, however, that the recession which began in July 1990 was less severe
in Minnesota than in the national economy and that Minnesota's recovery has been
more rapid than the nation's. Between 1990 and 1993, Minnesota's non-farm
employment grew 5.1% compared to only 0.7% nationwide. Since 1980, Minnesota per
capita income has generally remained above the national average. During 1992 and
1993, the State's monthly unemployment rate was generally less than the national
unemployment rate, averaging 5.1% in 1993, as compared to the national average
of 7.4%. Since 1980, Minnesota per capita income has generally remained above
the national average. During 1992 and 1993, the State's monthly unemployment
rate was generally less than the national unemployment rate, averaging 5.1% in
1993, as compared to the national average of 7.4%.
Frequently in recent years, legislation has been required to eliminate
projected budget deficits by raising additional revenue, reducing expenditures,
including aids to political subdivisions and higher education, reducing the
State's budget reserve, imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments.
A budget analysis released by the Minnesota Department of Finance on May 27,
1994 projects a General Fund balance of $130 million at the end of the current
biennium, June 30, 1995, plus a budget reserve of $500 million. Total projected
expenditures and transfers for the biennium are $16.9 billion. Recently, the
Minnesota Supreme Court has determined that numerous banks are entitled to
refunds of Minnesota bank excise taxes paid for tax years 1979 through 1983. The
taxes and interest to be refunded are estimated to be in excess of $188 million.
The State will be permitted to pay the refunds over a four-year period. The
State also is party to a variety of other civil actions that could adversely
affect the State's General Fund.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect to
revenue obligations, no assurance can be given that economic difficulties and
the resultant impact on State and local government finances will not adversely
affect the market value of Minnesota Obligations held by the Minnesota Series
and the ability of the respective obligors to make timely payment of the
principal and interest on such obligations.
NEW JERSEY
New Jersey has a highly diversified economy which has evolved from a heavier
dependence on manufacturing to one more based on trade and services. The State
fully participated in the national economic recovery and did not experience the
brunt of the recession in the Northeast until much later than many other states.
The rate of unemployment was consistently below the national average through
1991, although the unemployment rate in 1992 rose well above that of the nation.
While personal income growth lagged behind the U.S. level in 1989 and 1991,
since 1989, the State's per capita income remains the second highest in the U.S.
The principal sources of revenue for the State are sales, corporate and
personal income taxes. The Constitution of the State prohibits the expenditure
of funds in excess of the State's revenues and reserves. Since the Constitution
was adopted in 1947, New Jersey has always had a positive undesignated fund
balance in its general fund at the end of each year. A favorable economy
translated into substantial growth in revenues and surpluses; from fiscal year
1984 to 1988 revenues grew almost 40%. Economic slowdown translated into revenue
shortfalls and operating deficits in fiscal years 1989 and 1990. Surplus
balances, which peaked at over $1.2 billion in fiscal year 1988, fell to $116
million (excluding the Transition School Aid Account) by fiscal year-end 1991.
At first, the State was able to use its significant fund balance reserves to
cushion against the large imbalance between revenues and expenditures. However,
in fiscal year 1991, a $1.4 billion tax program was required to balance the
budget.
In fiscal year 1993, the State resorted to a number of non-recurring
revenues to balance its budget. In addition, the challenge to balance its budget
was made greater by a tax revolt among voters in the 1991 elections that
resulted in a move in the new legislature to reduce the sales tax by 1%, from 7%
to 6%. The State's
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Governor is keeping a campaign promise to reduce the State income tax by 10% per
year for the next three years, beginning with the fiscal year 1995 budget. A
balanced budget was achieved by delaying a $1.1 billion contribution to the
State employees' pension fund. This move, on top of heavy borrowing by the
previous administration, has caused concern among some analysts that the State
bond rating may be adversely affected. The 1995 budget, which slightly reduces
total spending to $15.3 billion, is already under serious pressure by a recent
State Supreme Court decision requiring New Jersey to correct a school funding
disparity by 1996.
NEW YORK
New York State is the third most populous state in the nation (behind
California and Texas) and has a relatively high level of personal wealth. The
State's economy is diverse with a comparatively large share of the nation's
finance, insurance, transportation, communications and services employment, and
a comparatively small share of the nation's farming and mining activity. The
State has a declining proportion of its work force engaged in manufacturing and
an increasing proportion of its work force engaged in service industries. This
transition reflects a national trend. Historically, the State has been one of
the wealthiest states in the nation. For decades, however, the State has grown
more slowly than the nation as a whole, gradually eroding its relative economic
affluence.
A nation-wide recession commenced in mid-1990. The downturn continued
throughout the State's 1990-1991 fiscal year and was followed by a period of
weak economic growth during the 1991 and 1992 calendar years. For calendar year
1993, the economy grew faster than in 1992, but still at a very modest rate, as
compared to other recoveries. Moderate economic growth is expected to continue
in calendar year 1994 at a slightly faster rate than in 1993. Economic recovery
started considerably later in the State than in the nation as a whole due in
part to the significant retrenchment in the banking and financial services
industries, downsizing by several major corporations, cutbacks in defense
spending, and an over supply of office buildings.
The New York economy, as measured by employment, shifted from recession to
recovery near the start of calendar year 1993. During the course of calendar
year 1993, employment began to increase, albeit sporadically, and the
unemployment rate declined. The recovery is expected to continue in calendar
year 1994, with employment growing more rapidly, on average, than in the
previous calendar year.
On June 7, 1994, the State legislature enacted the fiscal year 1994-1995
budget, which Governor Cuomo signed into law on June 9, 1994. The 1994-1995
budget contains several business tax incentives but does not implement those
portions of the personal income tax reduction and reform program that was
enacted in 1987 and subsequently delayed and restructured during fiscal years
1990-91 through 1993-94.
The State's budgets for fiscal years 1992-1993 and 1993-1994 have produced
cash surpluses for the first time since fiscal year 1987-1988. The 1994-1995
budget is projected to be balanced. Notwithstanding this budget performance,
there can be no assurances that the State will not face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
NORTH CAROLINA
The following discussion regarding the financial condition of the North
Carolina State government may not be relevant to general obligation or revenue
bonds issued by political subdivisions of the State. Such information, and the
following discussion regarding the economy of the State, is included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of North Carolina obligations.
The economic profile of North Carolina consists of a combination of
industry, agriculture and tourism. The population of the State increased 13%
between 1980 and 1990, from 5,880,095 to 6,647,351 as reported by the 1990
federal census. Although North Carolina is the tenth largest state in
population, it is primarily a rural state, having only five municipalities with
populations in excess of 100,000. The State has moved from an
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agricultural to a service and goods producing economy. During the period 1980 to
1992, the State labor force grew about 22% (from 2,855,200 to 3,487,500), and
during the period 1980-1990 per capita income grew from $7,999 to $16,203, an
increase of 102.6%.
The North Carolina State Constitution requires that the total expenditures
of the State for the fiscal period covered by each budget not exceed the total
of receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period.
In 1990 and 1991 the State had difficulty meeting its budget projections.
The General Assembly responded by enacting a number of new taxes and fees, which
generated an estimated $665.5 million in fiscal year 1991-1992. Revenues for
1992-1993 were estimated to include an additional $95.6 million and helped
produce a budget surplus (approximately $342 million) for the 1992-1993 fiscal
year.
In addition, the 1993 Session of the General Assembly reduced allowable
departmental operating expenditures by $120.3 and $122.8 million for fiscal
years 1993-1994 and 1994-1995, respectively, and authorized continuation funding
of approximately $8.33 billion for fiscal year 1993-1994 and $8.60 billion for
fiscal year 1994-1995. The savings reductions were based on recommendations from
the Governor, the Government Performance Audit Committee, and selected savings
identified by the General Assembly.
In SWANSON, ET AL. V. STATE OF NORTH CAROLINA, ET AL., certain federal
retirees and federal military personnel plaintiffs brought an action in North
Carolina State court seeking refund of illegal taxes. On appeal by the
plaintiffs, the U.S. Supreme Court remanded the case to the North Carolina
Supreme Court in light of the U.S. Supreme Court's decision in HARPER V.
VIRGINIA DEPARTMENT OF TAXATION. The impact of HARPER on the estimated $140
million of refund claims in SWANSON has not been determined. On March 4, 1994,
in an unpublished opinion, the North Carolina Supreme Court decided in favor of
the State, dismissing the SWANSON case. The plaintiffs reportedly will appeal to
the United States Supreme Court. The HARPER decision also reactivated the damage
claims brought by the SWANSON plaintiffs in the United States District Court for
the Eastern District of North Carolina.
Both the nation and the State have experienced a modest economic recovery in
recent months. However, it is unclear what effect these developments, as well as
the reduction in government spending or increase in taxes, may have on the value
of the debt obligations in the North Carolina Series. No clear upward trend has
developed, and both the State and the national economies must be watched
carefully.
OHIO
The Ohio economy, while diversifying more into the service and other
non-manufacturing areas, continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic activity
in Ohio, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the State's economy, with over half the State's area
devoted to farming. An estimated 15% of total Ohio employment is in
agribusiness.
During the 1980's, the State's economy experienced steady growth and
diversification of employment and earnings; however, per capita personal income
in 1993 was only 94.6% of the U.S. average. Manufacturing, which employed 28.8%
of the labor force in 1980 declined to 21.7% in 1992. Manufacturing losses have
in large part been offset by gains in services, trade, finance, insurance and
real estate. Prior recessions have contributed to some weakness in the State's
revenues and increases in some expenditures.
In fiscal year 1992, revised economic forecasts indicated a revenue
shortfall of $314 million, which combined with expenditure increases produced a
$457 million projected General Revenue Fund deficit. Administrative actions by
the Governor yielding $196 million of savings and $143.4 million of transfers
and accelerations reduced the size of the gap. The General Fund budgetary
balance was reduced to $90.5 million and the $300 million Budget Stabilization
Reserve was exhausted. Fiscal year 1993 marked a third year of mid-course
corrective budget actions, including expansion and adjustment of the State sales
tax, imposition of new excise taxes, implementation of a new personal income tax
bracket, and an increase in the cigarette tax. The State ended fiscal 1993 with
a $111 million General Reserve Fund balance.
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The 1994-1995 biennial budget enacted in July 1993 anticipates an increase
in spending and includes all General Revenue Fund appropriations for biennial
State debt service and lease rental payments.
The General Revenue Fund appropriations act for the current 1994-1995
biennium was passed and signed by the Governor on July 1, 1993. It includes all
necessary General Revenue Fund appropriations for biennial State debt service
and lease rental payments.
The incurrence or assumption of debt by the State without a popular vote is,
with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000. The State is expressly precluded from assuming the debts of any
local government or corporation, except for debt incurred to repel invasion,
suppress insurrection, or defend the State in war.
Although revenue obligations of the State or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that economic difficulties and the resulting impact on State and
local governmental finances will not adversely affect the market value of
municipal obligations held in the portfolio of the Ohio Series or the ability of
the respective obligors to make required payments on such obligations.
PENNSYLVANIA
Pennsylvania is an established state with a diversified economy.
Pennsylvania has been historically identified as a heavy industry state,
although that reputation has recently changed as the composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. The major sources of revenue growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions. The five year period from fiscal 1988 through fiscal
1992 was a period of slowing revenue growth and accelerating expenditure
increases as the economy slowed and the national recession inhibited economic
growth. In addition, the City of Philadelphia, Pennsylvania's largest local
unit, has recently undergone severe financial strain.
During fiscal 1992, the General Fund recorded a $1.1 billion operating
surplus (determined on a generally accepted accounting principles basis).
Elimination of the budget deficit carried into fiscal year 1992 from fiscal year
1991 and provision of revenues for fiscal 1992 budgeted expenditures required
significant tax increases and tax base broadening measures which were enacted as
a part of the fiscal year 1992 budget. The tax revisions are estimated to have
increased receipts for fiscal 1992 by over $2.7 billion. The budget revenue
estimates for fiscal year 1992 were revised downward during the fiscal year to
reflect continued recessionary economic activity. A number of cost reductions
were implemented during the fiscal year which contributed to $296.8 million of
appropriation lapses. These appropriation lapses contributed to the estimated
$8.8 million surplus (on a budgetary basis) at June 30, 1992.
The 1993 fiscal year closed with revenues higher than anticipated and
expenditures about as projected, resulting in an ending unappropriated balance
surplus (on a budgetary basis) of $242.3 million. Cash revenues for 1993 were
$41.5 million above the budget estimate and totalled $14.633 billion
(representing less than a 1% increase over fiscal 1992 revenues). A reduction in
the personal income tax rate in July 1992 and revenues from retroactive
corporate tax increases received in fiscal 1992 were reportedly responsible for
the low rate of revenue growth. Appropriations (less lapses) totalled an
estimated $13.870 billion (representing a 1.1% increase over fiscal year 1992
appropriations). The low growth in spending was reportedly a consequence of a
low rate of revenue growth, significant one-time expenses during fiscal 1992,
increased tax refund reserves to cushion against adverse decisions on pending
litigations, and the receipt of federal funds for expenditures previously paid
out of Commonwealth funds.
The enacted 1994 fiscal budget provides for $14.999 billion of
appropriations. The budget estimates revenue growth of 3.7% over fiscal year
1993 actual revenues. The revenue estimate is based on an expectation of
continued economic recovery, but at a slow rate. In June 1994, with the passage
of the 1995 fiscal year budget, supplemental appropriations in the amount of
$69.6 million were enacted to provide additional
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appropriated funds for various education and public welfare programs. The
Commonwealth's most recent estimate in June 1994 is that the unappropriated
surplus will be approximately $303 million at the end of the 1994 fiscal year.
The fiscal 1995 budget was approved by the Governor on June 16, 1994 and
provides for $15,950.9 million of appropriations for fiscal 1994. The budget
includes tax reductions totaling an estimated $166.4 million including an
increase in the dependent exemption for low income working families, a reduction
in the corporate net income tax rate from 12.25% to 9.99% to be phased in over 3
years, and reinstatement of a corporate net income tax net operating loss
provision to be phased in over 3 years with a $500,000 annual cap. Several other
changes were also made to the sales tax, the inheritance tax, and the capital
stock/franchise tax.
There is various litigation pending against the Commonwealth, its officers
and employees. An adverse decision in one or more of these cases could
materially affect the Commonwealth's governmental operations.
ADDITIONAL ISSUERS
GUAM
Guam is governed under the Organic Act of Guam of 1950, which gave the
island statutory local power of self-government and made its inhabitants
citizens of the United States.
The economy of Guam revolves around the significant U.S. military presence
on the island. The federal government is the largest employer on the island; in
1991, there were a total of 10,757 active duty military personnel and
approximately 7,762 civilian personnel. Military spending makes a significant
contribution to Guam's economy, exceeding $587 million in 1991. The U.S.
military presence on Guam has increased recently, due to the closure of Subic
Bay Naval Base and Clark Air Force Base in the Philippines. The United States
Air Force headquarters has also relocated to Guam from Clark Air Force Base.
Tourism also plays a major role in Guam's economy. With visitors coming
mainly from Japan, tourist arrivals rose by more than 16% annually between 1985
and 1990. In 1991, there were 737,260 tourist arrivals, with tourist
expenditures exceeding $600 million. Nevertheless, recent earthquakes, typhoons
and the economic slowdown in Japan have had adverse effects on Guam's economy.
Guam's economy is also based on the export of fish and handicrafts. Guam is a
duty-free port and an important distribution point for goods destined for
Micronesia. Unemployment, which has been historically low, was 2.2% in 1991.
PUERTO RICO
Puerto Rico enjoys a Commonwealth status with the U.S. as a result of Public
Law 600, enacted by the U.S. Congress in 1950 and affirmed by a referendum in
1952. Residents of Puerto Rico are U.S. citizens.
Since World War II, Puerto Rico has undergone a social and economic
transformation. Once agrarian and densely populated, marked by rural poverty, it
is now an urbanized society with an economy producing the bulk of its earnings
from manufacturing and services. Despite its long term economic progress,
unemployment and poverty remain significant problems. The island's 1993
unemployment rate of 17% was more than double the corresponding U.S. figure, and
income data for the island compare unfavorably with even the poorest of the 50
states.
Financial operations of recent years have reflected general economic trends,
with fiscal improvement registered during good economic times and deterioration
during slowdown. In the mid-1980's, economic recovery and stable oil prices
helped the Commonwealth to reduce the General Fund's accumulated deficit. Later,
as economic slowdown placed financial operations under pressure, the
Commonwealth sought budgetary balance, but with regular reliance on
non-recurring measures. The General Fund closed in a negative cash position in
fiscal years 1992 and 1993. The Commonwealth had projected only a modest
improvement in the General Fund's negative ending position for fiscal year 1994,
even after the announcement in February 1994 of a $211 million increase in the
revenue estimate.
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In 1993, Congress passed legislation which restricts corporations' ability
to take advantage of Section 936 credits. The extent to which these changes will
slow business investment in Puerto Rico is not clear, although some slowing
effect is to be expected. Also in 1993, the Senate approved NAFTA, which will
pose a new challenge to the Puerto Rican economy by increasing competition in
certain areas with Mexico.
UNITED STATES VIRGIN ISLANDS
The Virgin Islands, comprised of St. Thomas, St. Croix and St. John, form an
unincorporated territory of the United States. The residents of the islands were
granted a measure of self-government by the Organic Act, as revised in 1954.
The Islands are heavily dependent on links with the U.S. mainland, with more
than 90% of its trade being conducted with Puerto Rico and the U.S. Tourism is
the predominant source of employment and income for the islands. The emphasis is
on the visiting cruise ship business and the advantages of duty-free purchases
for American visitors. Following declines in the numbers of tourists visiting
the Virgin Islands in 1992, in 1993 occupancy rates at hotels and on cruise
ships have increased with visitors from the U.S. up 18% and visitors from Europe
up 30% from a year before.
The Territorial Government also plays a vital role in the economy of the
Virgin Islands. Since governmental services must be provided on three separate
islands, the duplication of effort results in the unusually large public sector.
In 1993, 26.8% of total employment resulted from Territorial government
employment. The level of unemployment has been consistently low, but rose to
3.1% in May 1993.
FLOATING RATE AND VARIABLE RATE SECURITIES
Each series may invest more than 5% of its assets in floating rate and
variable rate securities, including participation interests therein and (for
series other than money market series) inverse floaters. Floating rate
securities normally have a rate of interest which is set as a specific
percentage of a designated base rate, such as the rate on Treasury Bonds or
Bills or the prime rate at a major commercial bank. The interest rate on
floating rate securities changes whenever there is a change in the designated
base interest rate. Variable rate securities provide for a specific periodic
adjustment in the interest rate based on prevailing market rates and generally
would allow the 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 interest inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
Each series may invest in participation interests in variable rate
tax-exempt securities (such as certain IDBs) owned by banks. A participation
interest gives the series an undivided interest in the tax-exempt security in
the proportion that the series' participation interest bears to the total
principal amount of the tax-exempt security and generally provides that the
holder may demand repurchase within one to seven days. Participation interests
frequently are backed by an irrevocable letter of credit or guarantee of a bank
that the investment adviser under the supervision of the Trustees has determined
meets the prescribed quality standards for the series. A series generally has
the right to sell the instrument back to the bank and draw on the letter of
credit on demand, on seven days' notice, for all or any part of the series'
participation interest in the par value of the tax-exempt security, plus accrued
interest. Each series intends to exercise the demand under the letter of credit
only (1) upon a default under the terms of the documents of the tax-exempt
security, (2) as needed to provide liquidity in order to meet redemptions or (3)
to maintain a high quality investment portfolio. Banks will retain a service and
letter of credit fee and a fee for issuing repurchase commitments in an amount
equal to the excess of the interest paid by the issuer on the tax-exempt
securities over the negotiated yield at which the instruments were purchased
from the bank by a series. The investment adviser will monitor the pricing,
quality and liquidity of the variable rate demand instruments held by each
series, including the IDBs supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other bank analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
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PUT OPTIONS
Each 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 securities to which
the put applies in the event of interest rate fluctuations and, in the case of
liquidity puts, to shorten the effective maturity of the underlying security.
The aggregate value of the premiums paid to acquire puts held in a series'
portfolio (other than liquidity puts) may not exceed 10% of the net asset value
of such 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 (two
highest grades for the money market series) 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 (or two for the money market series) highest quality grade of such rating
services; 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.
One form of transaction involving liquidity puts consists of an underlying
fixed rate municipal bond that is subject to a third party demand feature or
"tender option". The holder of the bond would pay a "tender fee" to the third
party tender option provider, the amount of which would be periodically adjusted
so that the bond/ tender option combination would reasonably be expected to have
a market value that approximates the par value of the bond. This bond/tender
option combination would therefore be functionally equivalent to ordinary
variable or floating rate obligations and the Fund may purchase such obligations
subject to certain conditions specified by the Securities and Exchange
Commission (SEC).
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
FUTURES CONTRACTS. Each series (except for the money market series) may
engage in transactions in financial futures contracts as a hedge against
interest rate related fluctuations in the value of securities which are held in
the investment portfolio or which the series intends to purchase. A clearing
corporation associated with the commodities exchange on which a futures contract
trades assumes responsibility for the completion of transactions and guarantees
that open futures contracts will be closed. Although interest rate futures
contracts call for actual delivery or acceptance of debt securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin". Subsequent payments to and from the broker, called
"variation margin", will be made on a daily basis as the price of the underlying
security or index fluctuates, making the long and short positions in the futures
contracts more or less valuable, a process known as "marking to the market."
When a series purchases a futures contract, it will maintain an amount of
cash, U.S. Government obligations or liquid, high-grade debt securities in a
segregated account with the Fund's Custodian, so that the amount so segregated
plus the amount of initial and variation margin held in the account of its
broker equals the market value of the futures contract, thereby ensuring that
the use of such futures contract is unleveraged. A series that has sold a
futures contract may "cover" that position by owning the instruments underlying
the futures contract or by holding a call option on such futures contract. A
series will not sell futures contracts if the value of such futures contracts
exceeds the total market value of the securities of the series. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
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OPTIONS ON FINANCIAL FUTURES. Each series (other than the money market
series) may purchase call options and write put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. Each series will use options on futures in
connection with hedging strategies.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently, options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.
When a series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option. In instances involving the purchase of a call
option on a futures contract, the series will deposit in a segregated account
with the Fund's Custodian an amount in cash, U.S. government obligations or
liquid, high-grade debt securities equal to the market value of the obligation
underlying the futures contract, less any amount held in the initial and
variation margin accounts.
LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of "commodity pool operator," subject to
compliance with certain conditions. The exemption is conditioned upon a series'
purchasing and selling financial futures contracts and options thereon for BONA
FIDE hedging transactions, except that a series may purchase and sell futures
contracts and options thereon for any other purpose to the extent that the
aggregate initial margin and option premiums do not exceed 5% of the liquidation
value of the series' total assets. Each series will use financial futures in a
manner consistent with these requirements. With respect to long positions
assumed by a series, the series will segregate with the Fund's Custodian an
amount of cash, U.S. Government securities or liquid, high-grade debt securities
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the futures
contracts and thereby insures that the use of futures contracts is unleveraged.
Each series will continue to invest at least 80% of its total assets in
municipal obligations except in certain circumstances, as described in its
Prospectus under "How the Fund Invests--Investment Objective and Policies." A
series may not enter into futures contracts if, immediately thereafter, the sum
of the amount of initial and net cumulative variation margin on outstanding
futures contracts together with premiums paid on options thereon, would exceed
20% of the total assets of the series.
RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests--Investment Objective and Policies-- Futures Contracts and
Options Thereon" in each series' Prospectus, there are a number of other risks
associated with the use of financial futures for hedging purposes.
Each series intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in the futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and, in the event of
adverse price movements, the series would continue to be required to make daily
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cash payments of variation margin. However, if futures contracts have been sold
to hedge portfolio securities, these securities will not be sold until the
offsetting futures contracts can be purchased. Similarly, if futures have been
bought to hedge anticipated securities purchases, the purchases will not be
executed until the offsetting futures contracts can be sold.
The hours of trading of interest rate futures may not conform to the hours
during which the series may trade municipal securities. To the extent that the
futures markets close before the municipal securities market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange, (v) the facilities of an exchange
may not at all times be adequate to handle current trading volume or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis, in which case delivery and payment normally take place within
one month after the date of the commitment to purchase. The payment obligation
and the interest rate that will be received on the tax-exempt securities are
each fixed at the time the buyer enters into the commitment. The purchase price
for the security includes interest accrued during the period between purchase
and settlement and, therefore, no interest accrues to the economic benefit of
the series until delivery and payment take place. Although a series will only
purchase a tax-exempt security on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the
B-17
<PAGE>
extent that a series remains substantially fully invested at the same time that
it has purchased securities on a when-issued or delayed delivery basis, the
market value of the series' assets will vary to a greater extent than otherwise.
Purchasing a tax-exempt security on a when-issued or delayed delivery basis can
involve a risk that the yields available in the market when the delivery takes
place may be higher than those obtained on the security so purchased.
A segregated account of each series consisting of cash or liquid high-grade
debt securities equal to the amount of the when-issued and delayed delivery
commitments will be established with the Fund's Custodian and marked to market
daily, with additional cash or liquid high-grade debt securities added when
necessary. When the time comes to pay for when-issued or delayed delivery
securities, the series will meet their respective obligations from then
available cash flow, sale of securities held in a separate account, sale of
other securities or, although they would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a value greater or
less than the series' payment obligations). The sale of securities to meet such
obligations carries with it a greater potential for the realization of capital
gain, which is not exempt from state or federal income taxes. See "Distributions
and Tax Information."
Each series (other than the money market 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
Fund has obtained a ruling from Florida authorities that such municipal forward
contracts qualify as assets exempt from the Florida intangibles tax.
PORTFOLIO TURNOVER
Portfolio transactions will be undertaken principally to accomplish a
series' objective in relation to anticipated movements in the general level of
interest rates but a series may also engage in short-term trading consistent
with its objective. Securities may be sold in anticipation of a market decline
(a rise in interest rates) or purchased in anticipation of a market rise (a
decline in interest rates) and later sold. In addition, a security may be sold
and another purchased at approximately the same time to take advantage of what
the investment adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, due to such factors as changes in the
overall demand for or supply of various types of tax-exempt securities or
changes in the investment objectives of investors.
The Fund's investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by a series is known as "portfolio turnover" and may involve the
payment by the series of dealer mark-ups or underwriting commissions, and other
transaction costs on the sale of securities, as well as on the reinvestment of
the proceeds in other securities. Portfolio turnover rate for a fiscal year is
the ratio of the lesser of purchases or sales of portfolio securities to the
monthly average of the value of portfolio securities--excluding securities whose
maturities at acquisition were one year or less. A series' portfolio turnover
rate will not be a limiting factor when the Fund deems it desirable to sell or
purchase securities. For the fiscal year ended August 31, 1993, the portfolio
turnover rate of each series, other than the money market series, was as
follows:
<TABLE>
<CAPTION>
PORTFOLIO
SERIES TURNOVER RATE
- ----------------------------------------------------------------------------- --------------
<S> <C>
Arizona...................................................................... 14%
Florida...................................................................... 68%
Georgia...................................................................... 41%
Maryland..................................................................... 41%
Massachusetts................................................................ 56%
Michigan..................................................................... 14%
Minnesota.................................................................... 27%
New Jersey................................................................... 32%
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO
SERIES TURNOVER RATE
- ----------------------------------------------------------------------------- --------------
<S> <C>
New York..................................................................... 44%
North Carolina............................................................... 38%
Ohio......................................................................... 28%
Pennsylvania................................................................. 13%
</TABLE>
ILLIQUID SECURITIES
A series may invest up to 15% (10% in the case of the money market series)
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. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period. Mutual funds do not typically hold a
significant amount of illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the series' limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security,
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the security, and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease, (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease, (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled, (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold, (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics), (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of non-appropriation) and (v)
the legal recourse in the event of failure to appropriate and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser.
REPURCHASE AGREEMENTS
The series' repurchase agreements will be collateralized by U.S. Government
obligations. The series will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees. The
Fund's investment adviser will monitor the creditworthiness of such parties
under the general supervision of the Trustees. In the event of a default or
bankruptcy by a seller, the series will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the series will suffer a loss.
The series participate in a joint repurchase agreement account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF)
pursuant to an order of the SEC. On a daily basis, any uninvested cash balances
of the series may be aggregated with those of such investment companies and
invested in one or more repurchase agreements. Each fund or series participates
in the income earned or accrued in the joint account based on the percentage of
its investment.
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities (as
defined above).
B-19
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. 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 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.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
B-20
<PAGE>
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, to the knowledge of
the Fund, 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 issuer.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach.................... Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; prior thereto, Vice Chairman of Broyhill
Management, Inc. Furniture Industries, Inc.; Certified Public Accountant;
One Seaport Plaza Secretary and Treasurer of Broyhill Family Foundation, Inc.;
New York, NY President, Treasurer and Director of The High Yield Plus
Fund, Inc. and First Financial Fund, Inc.; Director of The
Global Government Plus Fund, Inc. and The Global Yield Fund,
Inc.
Eugene C. Dorsey................... Trustee Retired President, Chief Executive Officer and Trustee of the
c/o Prudential Mutual Fund Gannett Foundation (now Freedom Forum); former Publisher of
Management, Inc. four Gannett newspapers and Vice President of Gannett
One Seaport Plaza Company; past Chairman of Independent Sector (national
New York, NY coalition of philanthropic organizations); former Chairman
of the American Council for the Arts; Director of the
Advisory Board of Chase Manhattan Bank of Rochester and The
High Yield Income Fund, Inc.
Delayne Dedrick Gold............... Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
*Harry A. Jacobs, Jr................ Trustee Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim
New York, NY Chairman and Chief Executive Officer of Prudential Mutual
Fund Management, Inc. ("PMF") (June-September 1993);
formerly Chairman of the Board of Prudential Securities
(1982-1985) and Chairman of the Board and Chief Executive
Officer of Bache Group Inc. (1977-1982); Director of the
Center for National Policy, The First Australia Fund, Inc.,
The First Australia Prime Income Fund, Inc., The Global
Government Plus Fund, Inc. and The Global Yield Fund, Inc.;
Trustee of the Trudeau Institute.
*Lawrence C. McQuade................ President and Vice Chairman of PMF (since 1988); Managing Director,
One Seaport Plaza Trustee Investment Banking, Prudential Securities (1988-1991);
New York, NY Director of Quixote Corporation (since February 1992) and
BUNZL, PLC (since June 1991); formerly Director of Crazy
Eddie Inc. (1987-1990) and Kaiser Tech., Ltd. and Kaiser
Aluminum and Chemical Corp. (March 1987-November 1988);
formerly Executive Vice President and Director of W.R. Grace
& Company; President and Director of The High Yield Income
Fund, Inc, The Global Government Plus Fund, Inc. and The
Global Yield Fund, Inc.
Thomas T. Mooney................... Trustee President of the Greater Rochester Metro Chamber of Commerce;
c/o Prudential Mutual Fund former Rochester City Manager; Trustee of Center for
Management, Inc. Governmental Research, Inc.; Director of Monroe County Water
One Seaport Plaza Authority, Rochester Jobs, Inc., Blue Cross of Rochester,
New York, NY Executive Service Corps of Rochester, Monroe County
Industrial Development Corporation, Northeast Midwest
Institute, First Financial Fund, Inc., The Global Government
Plus Fund, Inc., The Global Yield Fund, Inc. and The High
Yield Plus Fund, Inc.
Thomas H. O'Brien.................. Trustee President of O'Brien Associates (Financial and Management
c/o Prudential Mutual Fund Consultants) (since April 1984); formerly President of
Management, Inc. Jamaica Water Securities Corp. (holding company) (February
One Seaport Plaza 1989-August 1990); Director (September 1987-April 1991) and
New York, NY Chairman of the Board and Chief Executive Officer (September
1987-February 1989) of Jamaica Water Supply Company;
formerly Director of TransCanada Pipelines U.S.A. Ltd.
(1984-June 1989) and Winthrop University Hospital (November
1976-June 1988); Director of Ridgewood Savings Bank and
Yankee Energy System, Inc.; Secretary and Trustee of Hofstra
University.
<FN>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker.......... Trustee President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Executive Vice
New York, NY President, Director and Member of Operating
Committee (since October 1993), Prudential
Securities; Director (since October 1993),
Prudential Securities Group, Inc.; formerly
Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September
1978-September 1993); Director of The Global
Government Plus Fund, Inc., The Global Yield
Fund Inc. and The High Yield Income Fund, Inc.
Nancy H. Teeters............ Trustee Economist; formerly Vice President and Chief
c/o Prudential Mutual Fund Economist (March 1986-June 1990) of
Management, Inc. International Business Machines Corporation;
One Seaport Plaza Member of the Board of Governors of the Horace
New York, NY H. Rackham School of Graduate Studies of the
University of Michigan; Director of Inland Steel
Industries (since July 1991), First Financial
Fund, Inc. and The Global Yield Fund, Inc.
Robert F. Gunia............. Vice Chief Administrative Officer (since July 1990),
One Seaport Plaza President Director (since January 1989), Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities;
Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989).
S. Jane Rose................ Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice
New York, NY President (June 1987-December 1990) of PMF;
Senior Vice President and Senior Counsel (since
June 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of
Prudential Securities.
Susan C. Cote............... Treasurer and Senior Vice President (since January 1989) and
One Seaport Plaza Principal First Vice President (June 1987-December 1988) of
New York, NY Financial and PMF; Senior Vice President (since January 1992)
Accounting and Vice President (January 1986-December 1991)
Officer of Prudential Securities.
<FN>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Ronald Amblard..................... Secretary First Vice President (since January 1994) and Associate
One Seaport Plaza General Counsel (since January 1992) of PMF; Vice President
New York, NY and Associate General Counsel of Prudential Securities
(since January 1992); formerly, Assistant General Counsel
(August 1988-December 1991), Associate Vice President
(January 1989-December 1990) and Vice President (January
1991-December 1993) of PMF.
Deborah A. Docs.................... Assistant Vice President and Associate General Counsel (since January
One Seaport Plaza Secretary 1993) of PMF; Vice President and Associate General Counsel
New York, NY (since January 1993) of Prudential Securities; previously
Associate Vice President (January 1990-December 1992),
Assistant Vice President (January 1989-December 1989) and
Assistant General Counsel (November 1991-
December 1992) of PMF.
</TABLE>
Trustees and officers of the Fund are also Trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $9,000, in
addition to certain out-of-pocket expenses. Messrs. Beach and O'Brien receive
their Trustees' fee pursuant to a deferred fee agreement with the Fund. Under
the terms of the agreement, the Fund accrues daily the amount of such Trustees'
fees which accrue interest at a rate equivalent to the prevailing rate
applicable to 90-day U.S. Treasury Bills at the beginning of each calendar
quarter or at the daily rate of return of the Fund (the Fund rate). Payment of
the interest so accrued is also deferred and accruals become payable at the
option of the Trustee. The Fund's obligation to make payments of deferred
Trustees' fees, together with interest thereon, is a general obligation of the
Fund.
As of June 17, 1994, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each series of the Fund.
B-24
<PAGE>
As of June 17, 1994, Prudential Securities was the record holder for other
beneficial owners of the following shares of the series, representing the
percentage shown of the outstanding shares of each such series:
<TABLE>
<CAPTION>
SERIES CLASS A CLASS B*
- ---------------------------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
Arizona....................................... 580,310 (91.9%) 2,948,661 (65.3% )
Florida....................................... 12,305,472 (88.1%) 995,992 (93.8% )
Georgia....................................... 84,373 (80.3%) 978,977 (54.9% )
Maryland...................................... 179,111 (70.4%) 3,209,761 (65.4% )
Massachusetts................................. 159,799 (69.7%) 2,605,326 (52.0% )
Michigan...................................... 293,571 (73.3%) 3,209,761 (52.7% )
Minnesota..................................... 31,433 (27.4%) 590,316 (27.0% )
New Jersey.................................... 981,815 (71.3%) 25,257,361 (83.4% )
New York...................................... 887,565 (75.4%) 18,158,355 (63.5% )
North Carolina................................ 144,386 (72.7%) 4,767,419 (74.6% )
Ohio.......................................... 260,280 (65.6%) 5,384,011 (53.7% )
Pennsylvania.................................. 470,955 (47.2%) 11,692,304 (46.8% )
<FN>
- --------------
*Class D shares for the Florida Series.
</TABLE>
As of June 17, 1994, Prudential Securities was the record holder for other
beneficial owners of 57,974,371 shares (or 99.4% of those outstanding) of the
Connecticut Money Market Series, 41,405,572 shares (or 94.5% of those
outstanding) of the Massachusetts Money Market Series, 150,210,619 shares (or
97.9% of those outstanding) of the New Jersey Money Market Series and
270,115,410 shares (or 98.0% of those outstanding) of the New York Money Market
Series). In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy materials to the beneficial
owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is
Managed--Manager" in the Prospectus of each series. As of June 30, 1994, PMF
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $47 billion. According to the Investment
Company Institute, as of April 30, 1994, the Prudential Mutual Funds were the
12th largest family of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian), the Fund's custodian, and
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF
B-25
<PAGE>
will be paid by PMF to the Fund. No such reductions were required during the
fiscal year ended August 31, 1993. Currently, the Fund believes that the most
restrictive expense limitation of state securities commissions is 2 1/2% of a
series' average daily net assets up to $30 million, 2% of the next $70 million
of such assets and 1 1/2% of such assets in excess of $100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communication expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement also provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Trustees of the Fund, including a majority of
the Trustees who are not parties to such contract or interested persons of any
such party as defined in the Investment Company Act, on May 4, 1994 and by
shareholders of each series of the Fund then in existence on December 28, 1988,
by shareholders of the Florida Series and the New Jersey Money Market Series on
December 30, 1991, and by the shareholders of the Connecticut Money Market
Series and the Massachusetts Money Market Series on November 10, 1992.
B-26
<PAGE>
The amount of the management fee paid by each series of the Fund to PMF for
the fiscal years ended August 31, 1991, 1992 and 1993 was as follows:
<TABLE>
<CAPTION>
1991* 1992 1993
----------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona................................................................ $ 299,550 $ 276,179 $ 286,344
Connecticut Money Market............................................... -- (a) -- (a) -- (a)
Florida................................................................ -- (b) 72,385(b) 247,845(b)
Georgia................................................................ 95,533 87,957 94,559
Maryland............................................................... 244,699 260,251 279,241
Massachusetts.......................................................... 247,135 256,886 286,520
Massachusetts Money Market............................................. -- (c) -- (c) -- (c)
Michigan............................................................... 257,519 266,860 319,163
Minnesota.............................................................. 120,996 121,648 130,014
New Jersey............................................................. 51,385(d) 646,032(d) 1,236,812(d)
New Jersey Money Market................................................ -- (e) 81,075(e) 523,804(e)
New York............................................................... 1,485,325 1,535,202 1,697,889
New York Money Market.................................................. 1,227,472 1,242,784 1,378,198
North Carolina......................................................... 296,585 306,815 346,561
Ohio................................................................... 455,260 487,606 564,784
Pennsylvania........................................................... 790,378(f) 952,761 1,186,546
<FN>
- ------------------------
* The following series were not in existence for the full fiscal year ended
August 31, 1991: Connecticut Money Market Series (commenced investment
operations on August 5, 1991), Florida Series (commenced investment
operations on December 28, 1990), Massachusetts Money Market Series
(commenced investment operations on August 5, 1991) and New Jersey Money
Market Series (commenced investment operations on December 3, 1990).
(a) PMF voluntarily waived its management fee of $2,489, $169,818 and
$265,760, respectively.
(b) PMF voluntarily waived all or a portion of its management fee of $138,236,
$342,080 and $371,767, respectively.
(c) PMF voluntarily waived all of its management fee of $1,183, $77,383 and
$161,228, respectively.
(d) PMF voluntarily waived all or a portion of its management fee of
$1,021,266, $749,352 and $412,271, respectively.
(e) PMF voluntarily waived all or a portion of its management fee of $335,080,
$698,502 and $323,145, respectively.
(f) PMF voluntarily waived a portion of its management fee of $15,703.
</TABLE>
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 4,
1994, by shareholders of each series of the Fund then in existence on December
28, 1988, by shareholders of the Florida Series and the New Jersey Money Market
Series on December 30, 1991 and by shareholders of the Connecticut Money Market
Series and the Massachusetts Money Market Series on November 10, 1992.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written
B-27
<PAGE>
notice. The Subadvisory Agreement provides that it will continue in effect for a
period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of The Prudential Insurance
Company of America (Prudential) which, as of December 31, 1993, is one of the
largest financial institutions in the world and the largest insurance company in
North America. Prudential has been engaged in the insurance business since 1875.
In July 1993, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of each
series of the Fund having Class A shares, of the shares of the money market
series and of the shares of the New York Income Series (which are not divided in
classes). Prudential Securities, One Seaport Plaza, New York, New York 10292,
acts as the distributor of the Class B and Class C shares of the Fund.
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 Fund's Class A, Class B and
Class C shares. See "How the Fund is Managed--Distributor" in each series'
Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 19, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Class A or
Class B Plan or in any agreement related to any one of the Plans (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on the Class A and
Class B Plans, adopted a new plan of distribution for the Class A shares of the
Fund (the Class A Plan) and approved an amended and restated plan of
distribution with respect to the Class B shares of the Fund (the Class B Plan).
On May 6, 1993, the Trustees, including a majority of the Rule 12b-1 Trustees,
at a meeting called for the purpose of voting on each Plan, approved the
continuance of the Plans and Distribution Agreements and approved modifications
of the Fund's Class A and Class B Plans and Distribution Agreements to conform
them with recent amendments to the National Association of Securities Dealers,
Inc. (NASD) maximum sales charge rule described below. As so modified, the Class
A Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder acounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to .50 of 1%
(including the service fee) of the average daily net assets of the Class B
shares (asset-based sales charge) may be used as reimbursement for
distribution-related expenses with respect to the Class B shares. Total
distribution fees (including the service fee of .25 of 1%) may not exceed .50 of
1%. On May 6, 1993, the Trustees, including a majority of the Rule 12b-1
Trustees, at a meeting called for the purpose of voting on the Plans, adopted a
plan of distribution for the Class C shares and approved further amendments to
the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. Also on May 6,
1993, the Trustees, including a majority of the Rule 12b-1 Trustees, approved a
plan of distribution (the Florida Series' Class C Plan) for the Florida Series'
Class D shares (now called Class C shares). The Plans were last approved by the
Trustees, including a majority of the Rule 12b-1 Trustees, on May 4, 1994. The
Class A Plan, as amended, was approved by Class A and Class B shareholders, the
Class B Plan was approved by Class B shareholders, the Florida Series' Class C
Plan was approved by Florida Series shareholders and the Class C Plan was
approved by the Class C shareholders on July 19, 1994. The Class C Plan was
approved by the sole shareholder of Class C shares of the other series on August
1, 1994.
B-28
<PAGE>
CLASS A PLAN. For the fiscal year ended August 31, 1993, PMFD received the
following payments under the Class A Plan:
<TABLE>
<CAPTION>
SERIES
- ----------------------------------------------------------------------------------
<S> <C>
Arizona........................................................................... $ 3,613
Florida........................................................................... 0
Georgia........................................................................... 475
Maryland.......................................................................... 2,068
Massachusetts..................................................................... 1,336
Michigan.......................................................................... 2,285
Minnesota......................................................................... 616
New Jersey........................................................................ 13,444
New York.......................................................................... 8,755
North Carolina.................................................................... 1,316
Ohio.............................................................................. 2,904
Pennsylvania...................................................................... 7,354
</TABLE>
This amount was primarily expended for payment of account servicing fees to
financial advisers and other persons who sell Class A shares. For the fiscal
year ended August 31, 1993, PMFD also received approximate initial sales charges
with respect to the sale of Class A shares of the series as follows:
<TABLE>
<CAPTION>
SERIES
- ------------------------------------------------------------------------------
<S> <C>
Arizona....................................................................... $ 74,900
Florida....................................................................... 1,472,000
Georgia....................................................................... 25,400
Maryland...................................................................... 58,200
Massachusetts................................................................. 43,400
Michigan...................................................................... 80,600
Minnesota..................................................................... 18,000
New Jersey.................................................................... 150,000
New York...................................................................... 239,500
North Carolina................................................................ 29,600
Ohio.......................................................................... 84,100
Pennsylvania.................................................................. 141,300
</TABLE>
CLASS B PLAN. For the fiscal year ended August 31, 1993, Prudential
Securities received the distribution fees paid by the following series of the
Fund and the proceeds of contingent deferred sales charges paid by investors on
the redemption of shares of each series as set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
CONTINGENT
DEFERRED
SERIES AMOUNT OF FEE SALES CHARGES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Arizona........................................................ $ 268,279 $ 42,500
Georgia........................................................ 92,185 4,000
Maryland....................................................... 268,900 26,000
Massachusetts.................................................. 279,824 32,100
Michigan....................................................... 307,738 43,500
Minnesota...................................................... 126,935 25,300
New Jersey..................................................... 1,581,862 451,000
New York....................................................... 1,654,116 285,000
North Carolina................................................. 339,983 66,000
Ohio........................................................... 550,265 40,300
Pennsylvania................................................... 1,149,777 228,200
</TABLE>
B-29
<PAGE>
For the fiscal year ended August 31, 1993, it is estimated that Prudential
Securities spent approximately the following amounts on behalf of the series of
the Fund:
<TABLE>
<CAPTION>
COMPENSATION APPROXIMATE
PRINTING AND COMMISSION TO PRUSEC* FOR TOTAL
MAILING PAYMENTS TO COMMISSION AMOUNT
PROSPECTUSES SALES INTEREST FINANCIAL PAYMENTS TO SPENT BY
TO OTHER MATERIAL AND ADVISERS OF OVERHEAD COSTS REPRESENTATIVES DISTRIBUTOR
THAN CURRENT AND CARRYING PRUDENTIAL OF PRUDENTIAL AND OTHER ON BEHALF OF
SERIES SHAREHOLDERS ADVERTISING CHARGES SECURITIES SECURITIES** EXPENSES** SERIES
- -------------------- ------------ ----------- -------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona............. $ 3,800 $ 0 $ 53,300 $ 184,300 $ 113,500 $ 52,000 $ 406,900
Georgia............. 4,600 0 27,200 96,500 26,500 24,300 179,100
Maryland............ 8,300 0 43,500 171,000 105,200 70,100 398,100
Massachusetts....... 1,500 0 49,600 158,200 92,400 188,400 490,100
Michigan............ 4,500 0 65,900 223,400 188,000 237,900 719,700
Minnesota........... 300 500 32,600 62,400 46,900 84,800 227,500
New Jersey.......... 4,000 10,400 322,700 1,267,100 1,025,700 506,100 3,136,000
New York............ 4,000 1,100 287,800 1,097,800 741,700 521,300 2,653,700
North Carolina...... 300 1,400 64,900 298,400 251,200 83,500 699,700
Ohio................ 100 1,900 98,200 304,000 190,500 392,900 987,600
Pennsylvania........ 0 0 216,900 680,600 514,200 1,429,500 2,841,200
<FN>
- ------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
</TABLE>
During the fiscal year ended August 31, 1993, the Florida Series did not
offer Class B shares.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus of each applicable series of the Fund. The amount of
distribution expenses reimbursable by the Fund is reduced by the amount of such
contingent deferred sales charges.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares-- Contingent Deferred
Sales Charges" in each series' (except the money market series) Prospectus. For
the fiscal year ended August 31, 1993, Prudential Securities received
distribution fees of $767 paid by the Florida Series of the Fund and there were
no contingent deferred sales charges paid by investors on the redemption of
Class C shares (then called Class D shares) of the Florida Series. Prior to the
date of this Statement of Additional Information, with the exception of the
preceding sentence, no distribution expenses were incurred under either Class C
Plan.
Pursuant to Rule 12b-1, the Plans and the money market series' Plan of
Distribution (collectively, the Plans) were last approved by the Trustees of the
Fund, including the Rule 12b-1 Trustees, at a meeting called for the purpose of
voting on the Plans on May 4, 1994.
The Plans provide that they shall continue in effect from year to year with
respect to each series, provided such continuance is approved annually by a vote
of the Trustees of the Fund in the manner described above. The Plans may not be
amended to increase materially the amount to be spent for the services described
therein without approval of the shareholders of the applicable class (by both
Class A and Class B shareholders, voting separately, in the case of material
amendments to the Class A Plan), and all material amendments are required to be
approved by the Trustees in the manner described above. Each Plan may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Rule 12b-1 Trustees, or by a vote of a majority of the outstanding voting
securities of the applicable class on not more than 60 days' nor less than 30
days' written notice to any other party to the Plans. Each Plan will
automatically terminate in the event of its assignment. The Fund will not be
contractually obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an
B-30
<PAGE>
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of the Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities and PMFD to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. The
Distribution Agreements were last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on May 4, 1994.
The Connecticut Money Market, Massachusetts Money Market, New Jersey Money
Market, and the New York Money Market Series' Plan of Distribution (the Money
Market Plan) was last approved by the Trustees of the Fund, including a majority
of the Rule 12b-1 Trustees, at a meeting called for the purpose of voting on the
Money Market Plan, on May 4, 1994. The Money Market Plan was approved by
shareholders of the New York Money Market Series on December 28, 1988, by
shareholders of the New Jersey Money Market Series on December 30, 1991 and by
shareholders of the Connecticut Money Market Series and Massachusetts Money
Market Series on November 10, 1992. For the fiscal year ended August 31, 1993,
PMFD incurred distribution expenses with respect to the money market series, all
of which were recovered by PMFD through the distribution fee paid by the series,
as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
SERIES EXPENSES
- ----------------------------------------------------------------------------------------- ------------
<S> <C>
Connecticut Money Market................................................................. $ 66,440
Massachusetts Money Market............................................................... 40,307
New Jersey Money Market.................................................................. 212,629
New York Money Market.................................................................... 344,549
</TABLE>
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of a series of the Fund rather than on a per shareholder
basis. If aggregate sales charges were to exceed 6.25% of total gross sales of
any class of any series, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures and options thereon for each series of the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions. The term "Manager" as used in this
section includes the Subadviser. Purchases and sales of securities on a
securities exchange, which are not expected to be a significant portion of the
portfolio securities of any series, are effected through brokers who charge a
commission for their services. Broker-dealers may also receive commissions in
connection with options and futures transactions, including the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Thus it will not deal in over-the-counter securities with Prudential Securities
acting as a market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities' acting as
principal with respect to any part of the Fund's order.
B-31
<PAGE>
In placing orders for portfolio securities for each series of the Fund, the
Manager is required to give primary consideration to obtaining the most
favorable price and efficient execution. The Manager seeks to effect each
transaction at a price and commission, if any, that provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. Within the
framework of this policy, the Manager will consider the research and investment
services provided by brokers, dealers or futures commission merchants who effect
or are parties to portfolio transactions of the Fund, the Manager or the
Manager's other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Manager in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other investment
accounts. Conversely, brokers, dealers or futures commission merchants
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than the Fund, and
the services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker based
on the quality and quantity of execution services provided by the broker, dealer
or futures commission merchant in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers, other than Prudential
Securities, for particular transactions than might be charged if a different
broker had been selected, on occasions when, in the Manager's opinion, this
policy furthers the objective of obtaining best price and execution. The Manager
is authorized to pay higher commissions on brokerage transactions for the Fund
to brokers other than Prudential Securities in order to secure the research and
investment services described above, subject to review by the Fund's Trustees
from time to time as to the extent and continuation of this practice. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Fund's Trustees. Portfolio securities may not be purchased
from any underwriting or selling syndicate of which Prudential Securities (or
any affiliate), during the existence of the syndicate, is a principal
underwriter (as defined in the Investment Company Act), except in accordance
with rules of the SEC. This limitation, in the opinion of the Fund, will not
significantly affect the series' ability to pursue their present investment
objectives. However, in the future in other circumstances, the series may be at
a disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers or futures commission merchants in
connection with comparable transactions involving similar securities or futures
contracts being purchased or sold on an exchange or board of trade during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be expected
to be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the non-interested Trustees, have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage and
futures transactions with Prudential Securities (or any affiliate) are also
subject to such fiduciary standards as may be imposed upon Prudential Securities
(or such affiliate) by applicable law.
B-32
<PAGE>
During the fiscal years ended August 31, 1993, 1992 and 1991, the series
paid brokerage commissions on certain futures transactions as set forth below.
During these periods, the series paid no brokerage commissions to Prudential
Securities.
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
-------------------------------
SERIES 1993 1992 1991*
- ------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Arizona....................................................................... $ 1,820 $ 2,678 $ 1,170
Connecticut Money Market...................................................... 0 0 0
Florida....................................................................... 2,013 2,835 1,858
Georgia....................................................................... 175 140 466
Maryland...................................................................... 437 88 864
Massachusetts................................................................. 613 53 1,440
Massachusetts Money Market.................................................... 0 0 0
Michigan...................................................................... 3,623 1,908 3,511
Minnesota..................................................................... 525 1,190 693
New Jersey.................................................................... 0 0 0
New Jersey Money Market....................................................... 0 0 0
New York...................................................................... 2,415 2,258 18,777
New York Money Market......................................................... 0 0 0
North Carolina................................................................ 875 350 925
Ohio.......................................................................... 1,418 3,728 1,577
Pennsylvania.................................................................. 2,468 1,523 19,193
<FN>
- --------------
*The following series were not in existence for the full fiscal year ended
August 31, 1991: Connecticut Money Market Series (commenced investment
operations on August 5, 1991), Florida Series (commenced investment operations
on December 28, 1990), Massachusetts Money Market Series (commenced investment
operations on August 5, 1991) and New Jersey Money Market Series (commenced
investment operations on December 3, 1990).
</TABLE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each series of the Fund, other than the money market series, may
be purchased at a price equal to the next determined net asset value per share
plus a sales charge which, at the election of the investor, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). See "Shareholder Guide--How to Buy Shares of the
Fund" in each series' Prospectus. The series (other than the money market series
and the New York Income Series) issue three classes of shares, designated Class
A, Class B and Class C shares. Class C shares of the Florida series were
formerly called Class D shares.
Each class of shares represents an interest in the same portfolio of
investments of the series and has 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
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
For a description of the methods of purchasing shares of the Connecticut
Money Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series or the New York Money Market Series, see "Shareholder Guide--How
to Buy Shares of the Fund" in the money market series' Prospectuses.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at net asset value plus a maximum sales
charge of 3% and Class B* and Class C* shares are sold at net asset
B-33
<PAGE>
value.* Using the net asset value at August 31, 1993 of each series then in
existence (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), the maximum offering price of the series' shares is as follows:
<TABLE>
<CAPTION>
CLASS A AZ GA FL MD MA MI MN NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value and redemption price per
Class A share.......................... $12.44 $12.12 $10.87 $11.64 $12.17 $12.51 $12.33 $11.74 $12.54 $12.04 $12.38 $11.21
Maximum sales charge (3% of offering
price)................................. .38 .37 .34 .36 .38 .39 .38 .36 .39 .37 .38 .35
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Offering price to public................ $12.82 $12.49 $11.21 $12.00 $12.55 $12.90 $12.71 $12.10 $12.93 $12.41 $12.76 $11.56
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS B AZ GA FL MD MA MI MN NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class B
share*................................. $12.44 $12.12 $10.87 $11.65 $12.17 $12.51 $12.33 $11.74 $12.54 $12.05 $12.38 $11.21
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS C AZ GA FL MD MA MI MN NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class C
share*................................. $12.44 $12.12 $10.87 $11.65 $12.17 $12.51 $12.33 $11.74 $12.54 $12.05 $12.38 $11.21
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<FN>
- --------------
*Class B and Class C shares are subject to a contingent deferred sales charge on
certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus of each applicable
series. Class C shares did not exist on August 31, 1993.
</TABLE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the applicable Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings.
B-34
<PAGE>
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectuses. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings.
LETTERS OF INTENT. Reduced sales charges are also available to investors or
an eligible group of related investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential Mutual Funds. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and the sales charge actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the purchaser the amount of excess sales charge, if any, paid
during the thirteen-month period. Investors electing to purchase Class A shares
of the Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
B-35
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the applicable Prospectuses. See Shareholder Guide--How to Sell Your
Shares--Waiver of the Contingent Deferred Sales Charges-- Class B Shares" in the
Prospectuses. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in any award letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
Account custodial firm indicating (i) the date of birth
of the shareholder and (ii) that the shareholder
is over age 59 1/2 and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason for
the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the excess
and whether or not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE -----------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------------- ----------------------- ---------------
<S> <C> <C>
First.................... 3.0% 2.0%
Second................... 2.0% 1.0%
Third.................... 1.0% 0%
Fourth and thereafter.... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-36
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a series. An investor
may direct the Transfer Agent in writing by the first business day of the month
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at net asset value (without a sales charge) by returning the check
or the proceeds to the Transfer Agent within 30 days after the payment date. The
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholder will
receive credit for any contingent deferred sales charge paid in connection with
the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each series makes available to its shareholders the privilege of exchanging
their shares of a series for shares of other series of the Fund and certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential Mutual Funds may also be exchanged for
shares of the Fund. All exchanges are made on the basis of relative net asset
value next determined after receipt of an order in proper form. An exchange will
be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of other series of the Fund or certain other Prudential Mutual
Funds, shares of Prudential Government Securities Trust (Intermediate Term
Series) and shares of the money market funds specified below. No fee or sales
load will be imposed upon the exchange. Shareholders of money market funds who
acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of each series may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of other series
of the Fund or certain other Prudential Mutual Funds and shares of Prudential
Special Money Market Fund, a money market fund. No CDSC will be payable upon
such exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a
B-37
<PAGE>
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather than
the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the time
of exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month.Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of a series, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C Exchange Privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING (NOT APPLICABLE TO THE MONEY MARKET SERIES)
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
B-38
<PAGE>
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.......................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................... 176 264 352 440
15 Years.......................................... 296 444 592 740
10 Years.......................................... 555 833 1,110 1,338
5 Years.......................................... 1,371 2,057 2,742 3,428
<FN>
See "Automatic Savings Accumulation Plan."
- ------------------------
(1)Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992, The National Center for Educational Statistics and
the U.S. Department of Education. Average costs for private institutions include
tuition, fees, room and board.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a series monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the series. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A withdrawal plan is available to shareholders through Prudential Securities
or the Transfer Agent. Such withdrawal plan provides for monthly or quarterly
checks in any amount, except as provided below, up to the value of the shares in
the shareholder's account. Withdrawals of Class B or Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus of each applicable series.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
B-39
<PAGE>
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan.
HOW TO REDEEM SHARES OF THE MONEY MARKET SERIES
Redemption orders submitted to and received by Prudential Mutual Fund
Services, Inc. (PMFS) will be effected at the net asset value next determined
after receipt of the order. Shareholders of the Connecticut Money Market Series,
the Massachusetts Money Market Series, the New Jersey Money Market Series and
the New York Money Market Series (other than Prudential Securities clients for
whom Prudential Securities has purchased shares of such Series) may use Check
Redemption, Expedited Redemption or Regular Redemption.
CHECK REDEMPTION. Shareholders are subject to the Custodian's rules and
regulations governing checking accounts, including the right of the Custodian
not to honor checks in amounts exceeding the value of the shareholder's account
at the time the check is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 10 days after receipt of the purchase check by PMFS unless
the Fund or PMFS has been advised that the purchase check has been honored. Such
delay may be avoided by purchasing shares by certified or official bank checks
or by wire. If insufficient shares are in the account, or if the purchase was
made by check within 10 days, the check is returned marked "insufficient funds."
Since the dollar value of an account is constantly changing, it is not possible
for a shareholder to determine in advance the total value of his or her account
so as to write a check for the redemption of the entire account. Checks in an
amount less than $500 will not be honored.
There is a service charge of $5.00 payable to PMFS to establish a checking
account and to order checks. The Custodian and the Fund have reserved the right
to modify this checking account privilege or to impose a charge for each check
presented for payment for any individual account or for all accounts in the
future.
The Fund or PMFS may terminate Check Redemption at any time upon 30 days'
notice to participating shareholders. To receive further information, contact
Prudential Mutual Fund Services, Inc., Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
EXPEDITED REDEMPTION
To request Expedited Redemption by telephone, a shareholder should call PMFS
at (800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time. Requests by letter should be addressed to Prudential Mutual Fund Services,
Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015.
In order to change the name of the commercial bank or account designated to
receive redemption proceeds, it is necessary to execute a new Expedited
Redemption Authorization Form and submit it to PMFS at the address set forth
above. Requests to change a bank or account must be signed by each shareholder
and each signature must be guaranteed by: (a) a commercial bank which is a
member of the Federal Deposit Insurance Corporation; (b) a trust company; or (c)
a member firm of a domestic securities exchange. Guarantees must be signed by an
authorized signatory of the bank, trust company or member firm, and "Signature
Guaranteed" should appear with the signature. Signature guarantees by savings
banks, savings and loan associations and notaries will not be accepted. PMFS may
request further documentation from corporations, executors, administrators,
trustees or guardians.
To receive further information, investors should contact PMFS at (800)
225-1852.
B-40
<PAGE>
REGULAR REDEMPTION
Shareholders may redeem their shares by sending to PMFS, at the address set
forth above, a written request, accompanied by duly endorsed share certificates,
if issued. 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. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential District or Ordinary offices. The Fund may change the
signature guarantee requirements from time to time on notice to shareholders,
which may be given by means of a new Prospectus. All correspondence 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. Regular redemption is made by check sent to
the shareholder's address.
NET ASSET VALUE
The net asset value per share of a series is the net worth of such series
(assets including securities at value minus liabilities) divided by the number
of shares of such series outstanding. Net asset value is calculated separately
for each class. The Fund will compute the net asset value of each such series
(except the money market series) once daily at 4:15 P.M., New York time, on days
the New York Stock Exchange is open for trading, except on days on which no
orders to purchase, sell or redeem shares of the series have been received or on
days on which changes in the value of the series' portfolio securities do not
affect net asset value. The Fund will compute the net asset value of the money
market series at 4:30 P.M., New York time, on days the New York Stock Exchange
is open for trading, except on days on which no orders to purchase, sell or
redeem shares of the money market series have been received or on days on which
changes in the value of the money market series' portfolio securities do not
affect net asset value. 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.
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Securities for which market quotations are not
readily available are valued at fair value in accordance with procedures adopted
by the Trustees. Under these procedures the Fund values municipal securities on
the basis of valuations provided by a pricing service which uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The Trustees believe that reliable market
quotations are generally not readily available for purposes of valuing
tax-exempt securities. As a result, depending on the particular tax-exempt
securities owned by the Fund, it is likely that most of the valuations for such
securities will be based upon fair value determined under the foregoing
procedures. Short-term investments which mature in less than 60 days are valued
at amortized cost, if their original term to maturity was less than 60 days, or
are valued at amortized cost on the 60th day prior to maturity, if their
original term to maturity when acquired by the Fund was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
The money market series use the amortized cost method to determine the value
of their portfolio securities in accordance with regulations of the SEC. The
amortized cost method involves valuing a security at its cost and amortizing any
discount or premium over the period until maturity. The method does not take
into account unrealized capital gains and losses which may result from the
effect of fluctuating interest rates on the market value of the security.
With respect to the money market series, the Trustees have determined to
maintain a dollar-weighted average portfolio maturity of 90 days or less, to
purchase instruments having remaining maturities of thirteen months or less and
to invest only in securities determined by the investment adviser under the
supervision of the Trustees to present minimal credit risks and to be of
"eligible quality" in accordance with regulations of the SEC. The Trustees have
adopted procedures designed to stabilize, to the extent reasonably possible, the
money market series' price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures
B-41
<PAGE>
will include review of the money market series' portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the money market series' net asset value calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. The extent of
any deviation will be examined by the Trustees. If such deviation exceeds 1/2 of
1%, the Trustees will promptly consider what action, if any, will be initiated.
In the event the Trustees determine that a deviation exists which may result in
material dilution or other unfair results to prospective investors or existing
shareholders, the Trustees will take such corrective action as they consider
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, the withholding of dividends, redemptions of shares in kind, or the
use of available market quotations to establish a net asset value per share.
PERFORMANCE INFORMATION
ALL SERIES (EXCEPT THE MONEY MARKET SERIES)
YIELD. Each series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B and
Class C shares. The yield will be computed by dividing the series' net
investment income per share earned during this 30-day period by the net asset
value per share on the last day of this period. The average number of shares
used in determining the net investment income per share will be the average
daily number of shares outstanding during the 30-day period that were eligible
to receive dividends. In accordance with SEC regulations, income will be
computed by totaling the interest earned on all debt obligations during the
30-day period and subtracting from that amount the total of all recurring
expenses incurred during the period, which includes management and distribution
fees. The 30-day yield is then annualized on a bond-equivalent basis assuming
semi-annual reinvestment and compounding of net investment income, as described
in the Prospectus of each series. The yield for the 30 days ended February 28,
1994 and the yield without the management subsidies and waivers were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------ ------------------------------
YIELD SUBSIDY/ YIELD SUBSIDY/
SERIES YIELD WAIVER ADJUSTED YIELD WAIVER ADJUSTED
- ------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Arizona.......................................... 3.5% -- 3.2% --
Georgia.......................................... 3.9% -- 3.7% --
Maryland......................................... 4.2% -- 4.0% --
Massachusetts.................................... 4.0% -- 3.8% --
Michigan......................................... 3.9% -- 3.7% --
Minnesota........................................ 3.5% -- 3.3% --
New Jersey....................................... 4.3% 4.2% 4.1% 4.0%
New York......................................... 4.2% -- 4.0% --
North Carolina................................... 4.0% -- 3.8% --
Ohio............................................. 3.9% -- 3.6% --
Pennsylvania..................................... 4.2% -- 4.0% --
</TABLE>
The Florida Series' yield for the 30 days ended February 28, 1994 was 4.9%
(4.5% adjusted for management subsidies and waivers) for Class A shares and 4.4%
(3.9% adjusted for management subsidies and waivers) for Class C (then called
Class D) shares.
The series' yield is computed according to the following formula:
<TABLE>
<S> <C> <C>
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
</TABLE>
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
Each series may also calculate the tax equivalent yield over a 30-day
period. The tax equivalent yield will be determined by first computing the yield
as discussed above. The series will then determine what portion of that yield is
attributable to securities, the income on which is exempt for federal income tax
purposes. This
B-42
<PAGE>
portion of the yield will then be divided by one minus the state tax rate times
one minus the federal tax rate and then added to the portion of the yield that
is attributable to other securities. For the 30 days ended February 28, 1994,
the tax equivalent yield (assuming a federal tax rate of 36%) and the tax
equivalent yield without the management subsidies and waivers were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------- --------------------------------
TAX EQUIVALENT TAX EQUIVALENT
TAX EQUIVALENT YIELD SUBSIDY/ TAX EQUIVALENT YIELD SUBSIDY/
SERIES YIELD WAIVER ADJUSTED YIELD WAIVER ADJUSTED
- ---------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Arizona..................... 5.8% -- 5.4% --
Georgia..................... 6.5% -- 6.2% --
Maryland.................... 7.0% -- 6.7% --
Massachusetts............... 7.1% -- 6.7% --
Michigan.................... 6.4% -- 6.0% --
Minnesota................... 6.1% -- 5.6% --
New Jersey.................. 7.1% 7.0% 6.8% 6.7%
New York.................... 7.1% -- 6.7% --
North Carolina.............. 6.8% -- 6.4% --
Ohio........................ 6.5% -- 6.1% --
Pennsylvania................ 6.8% -- 6.5% --
</TABLE>
The Florida Series' tax equivalent yield for the 30 days ended February 28,
1994, was 7.7% (7.0% adjusted for management subsidies and waivers) for Class A
shares and 6.8% (6.1% adjusted for management subsidies and waivers) for Class C
(then called Class D) shares. During this period, no Class C shares of any other
series were outstanding.
AVERAGE ANNUAL TOTAL RETURN. Each series of the Fund may from time to time
advertise its average annual total return. Average annual total return is
determined separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus of each applicable series.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
B-43
<PAGE>
The average annual total return and subsidy/waiver adjusted average annual
total return for the series (other than the money market series) for the periods
ended March 31, 1994 were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- -----------------------------------------------------
SUBSIDY/WAIVER SUBSIDY/WAIVER
ADJUSTED ADJUSTED
------------------ -------------------------
ONE FROM ONE FROM ONE FIVE FROM ONE FIVE FROM
SERIES YEAR INCEPTION YEAR INCEPTION YEAR YEARS INCEPTION YEAR YEARS INCEPTION
- ------------------------- ------ --------- ------ --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona.................. -1.9% 6.7% -1.9% 6.7% -2.7% 7.6% 8.7% -2.7% 7.6% 8.7%
Georgia.................. -2.9% 6.2% -2.9% 6.2% -3.7% 7.2% 8.7% -3.7% 7.2% 8.5%
Maryland................. -2.8% 6.0% -2.8% 6.0% -3.7% 6.9% 7.4% -3.7% 6.9% 7.3%
Massachusetts............ -2.4% 6.7% -2.4% 6.7% -3.3% 7.5% 8.2% -3.3% 7.5% 8.2%
Michigan................. -2.1% 6.6% -2.1% 6.6% -2.9% 7.6% 9.0% -2.9% 7.6% 8.9%
Minnesota................ -2.2% 5.6% -2.2% 5.6% -2.9% 6.7% 8.1% -2.9% 6.7% 7.9%
New Jersey............... -1.9% 7.2% -1.9% 7.2% -2.7% 8.2% 8.4% -2.8% 8.2% 8.2%
New York................. -2.0% 7.2% -2.0% 7.2% -2.9% 7.9% 8.9% -2.9% 7.9% 8.9%
North Carolina........... -2.6% 6.3% -2.6% 6.3% -3.5% 7.1% 7.8% -3.5% 7.1% 7.8%
Ohio..................... -1.9% 6.9% -1.9% 6.9% -2.6% 7.6% 8.5% -2.6% 7.6% 8.5%
Pennsylvania............. -1.9% 6.8% -1.9% 6.8% -2.7% 7.8% 7.0% -2.7% 7.8% 7.0%
</TABLE>
The Florida Series' average annual total return and subsidy/waiver adjusted
average annual total return for the one year period ended March 31, 1994 and for
the period December 28, 1990 through March 31, 1994 was -2.8% and 7.0%, and
- -2.8% and 6.6%, respectively, for the Class A shares and for the period July 26,
1993 through March 31, 1994 was -4.0% for the Class C (then called Class D)
shares. During these periods, no Class C shares of any other series were
outstanding.
AGGREGATE TOTAL RETURN. Each series of the Fund may also advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B and Class C shares. See "How the Fund Calculates Performance"
in the Prospectus of each applicable series.
Aggregate total return represents the cumulative change in the value of an
investment in a series of the Fund and is computed according to the following
formula:
ERV-P
------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods of a hypothetical $1,000 payment made at the beginning
of the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-44
<PAGE>
The aggregate total return for each series for the one year, five year and
since inception periods ended February 28, 1994 for the Class A and Class B
shares of each series were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------- ------------------------------------------
AGGREGATE TOTAL AGGREGATE TOTAL
RETURN RETURN
----------------- -------------------------
SINCE SINCE
SERIES 1 YR. INCEPTION INCEPTION DATE 1 YR. 5 YR. INCEPTION INCEPTION DATE
- -------------------- ----- --------- -------------- ----- ----- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona............. 5.4% 43.0% 1/22/90 5.0% 51.1% 130.4% 9/24/84
Florida............. 5.2% 35.6% 12/27/90 N/A N/A N/A 8/1/94
Georgia............. 4.7% 41.5% 1/22/90 4.3% 48.4% 128.0% 9/25/84
Maryland............ 5.1% 39.7% 1/22/90 4.8% 47.1% 101.3% 1/22/85
Massachusetts....... 5.0% 43.0% 1/22/90 4.6% 50.0% 117.7% 9/19/84
Michigan............ 5.0% 42.5% 1/22/90 4.6% 50.9% 135.6% 9/19/84
Minnesota........... 5.0% 36.9% 1/22/90 4.6% 44.3% 118.4% 9/19/84
New Jersey.......... 5.1% 46.2% 1/22/90 4.7% 55.7% 69.8% 3/1/88
New York............ 5.8% 46.0% 1/22/90 5.3% 53.0% 134.2% 9/27/84
North Carolina...... 4.9% 41.2% 1/22/90 4.6% 48.6% 108.1% 2/13/85
Ohio................ 5.2% 43.5% 1/22/90 4.7% 51.1% 126.0% 9/19/84
Pennsylvania........ 5.3% 43.4% 1/22/90 4.9% 53.2% 69.3% 3/6/87
</TABLE>
THE CONNECTICUT MONEY MARKET SERIES, THE MASSACHUSETTS MONEY MARKET SERIES,
THE NEW JERSEY MONEY MARKET SERIES AND THE NEW YORK MONEY MARKET SERIES
The money market series will prepare a current quotation of yield from time
to time. The yield quoted will be the simple annualized yield for an identified
seven calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the shares but excluding any capital
changes. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the money market series' portfolio and its
operating expenses. The money market series may also prepare an effective annual
yield computed by compounding the unannualized seven-day period return as
follows: by adding 1 to the unannualized seven-day period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
The money market series may also calculate the tax equivalent yield over a
7-day period. The tax equivalent yield will be determined by first computing the
current yield as discussed above. The Series will then determine what portion of
that yield is attributable to securities, the income on which is exempt for
federal income tax purposes. This portion of the yield will then be divided by
one minus the state tax rate times one minus the federal tax rate and then added
to the portion of the yield that is attributable to other securities. The
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series and New York Money Market Series' 7-day tax equivalent yield
(assuming a federal tax rate of 36%) as of February 28, 1994 was 3.45%, 3.13%,
2.96% and 3.07%, respectively.
Comparative performance information may be used from time to time in
advertising or marketing the money market series' shares, including data from
Lipper Analytical Services, Inc., Donoghue's Money Fund Report or other industry
publications.
The money market series' yield fluctuates, and an annualized yield quotation
is not a representation by the money market series as to what an investment in
the money market series will actually yield for any given period. Actual yields
will depend upon not only changes in interest rates generally during the period
in which the investment in the money market series is held, but also on any
realized or unrealized gains and losses and changes in the money market series'
expenses.
B-45
<PAGE>
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[GRAPHIC]
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
B-46
<PAGE>
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
All of the Fund's net investment income is declared as a dividend each
business day. Shares will begin earning dividends on the day following the date
on which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn dividends until they are redeemed.
Unless the shareholder elects (by notice to the Dividend Disbursing Agent by the
first business day of the month) to receive monthly cash payments of dividends,
such dividends will be automatically received in additional series shares
monthly at net asset value on the payable date. In the event an investor redeems
all the shares in his or her account at any time during the month, all dividends
declared to the date of redemption will be paid to him or her at the time of the
redemption. The Fund's net investment income on weekends, holidays and other
days on which the Fund is closed for business will be declared as a dividend on
shares outstanding on the close of the last business day on which the Fund was
open for business. Accordingly, a shareholder who redeems his or her shares
effective as of 4:15 P.M. (4:30 P.M. for the money market series), New York
time, on a Friday earns a dividend which reflects the income earned by the Fund
on the following Saturday and Sunday. On the other hand, an investor whose
purchase order is effective as of 4:15 P.M. (4:30 P.M. for the money market
series), New York time, on a Friday does not begin earning dividends until the
following business day. Net investment income consists of interest income
accrued on portfolio securities less all expenses, calculated daily.
Net realized capital gains, if any, will be distributed annually and, unless
the shareholder elects to receive them in cash, will be automatically received
in additional shares of a series.
The per share dividends on Class B shares and Class C shares of a series
will be lower than the per share dividends on Class A shares of the series as a
result of the higher distribution-related fee applicable to the Class B and
Class C shares. The per share distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B and Class C shares. See "Net
Asset Value."
Annually, the Fund will mail to shareholders information regarding the tax
status of dividends and distributions made by the Fund in the calendar year. The
Fund intends to report the proportion of all distributions that were tax-exempt
for that calendar year. The percentage of income designated as tax-exempt for
the calendar year may be substantially different from the percentage of the
Fund's income that was tax-exempt for a particular period.
FEDERAL TAXATION
Under the Internal Revenue Code, each series of the Fund is required to be
treated as a separate entity for federal income tax purposes.
Each series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under the requirements
of Subchapter M of the Internal Revenue Code for each taxable year. If so
qualified, each series will not be subject to federal income taxes on any net
investment income and capital gains, if any, realized during the taxable year
which are distributed to shareholders, provided that it distributes at least 90%
of its net investment income and short-term capital gains and 90% of any excess
of its tax-exempt interest over certain disallowed deductions during the taxable
year. In addition, each series intends to make distributions in accordance with
the provisions of the Internal Revenue Code so as to avoid the 4% excise tax on
certain amounts remaining undistributed at the end of each calendar year. In
order to qualify as a regulated investment company, each series of the Fund
must, among other things, (a) derive at least 90% of its gross income (without
offset for losses) from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities; (b)
derive less than 30% of its gross income (without offset for losses) from the
sale or other disposition of stock, securities or futures contracts or options
thereon held for less than three months; and (c) diversify its holdings so that,
at the end of each quarter of the taxable year (i) at least 50% or more of the
market value of the assets of the series is represented by cash, U.S. Government
securities and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the market value of the assets of the series and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of the assets of the series is invested in the securities of
any one issuer (other than U.S. Government securities).
B-47
<PAGE>
Gain or loss realized by a 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 a series at
its original issue.
The purchase of a put option may be subject to the short sale rules or
straddle rules (including the modified short sale rule) for federal income tax
purposes. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such put option (or any other Section
1256 contract under the Internal Revenue Code) will be treated as 60% long-term
and 40% short-term capital gain or loss. On the last trading day of the fiscal
year of a series, all outstanding put options as well as certain futures
contracts will be treated as if such positions were closed out at their closing
price on such day, with any resulting gain or loss recognized as 60% long-term
and 40% short-term capital gain or loss. In addition, positions held by a series
which consist of at least one debt security and at least one put option which
substantially reduces the risk of loss of the series with respect to that debt
security constitute a "mixed straddle" which is governed by certain provisions
of the Internal Revenue Code that may cause deferral of losses, adjustments in
the holding periods of debt securities and conversion of short-term capital
losses into long-term capital losses. Each series may consider making certain
tax elections applicable to mixed straddles.
Each series' hedging activities may be affected by the requirement under the
Internal Revenue Code that less than 30% of a series' income be derived from the
sale or other disposition of securities, futures contracts, options and other
instruments held for less than three months. From time to time, this requirement
may cause a series to limit its acquisitions of futures contracts to those that
will not expire for at least three months. At the present time, there is only a
limited market for futures contracts on the municipal bond index that will not
expire within three months. Therefore, to meet the 30%/3 month requirement, a
series may choose to use futures contracts based on fixed-income securities that
will not expire within three months.
Since each series is treated as a separate entity for federal income tax
purposes, the determination of the amount of net capital gains, the
identification of those gains as long-term or short-term and the determination
of the amount of income dividends of a particular series will be based on the
purchases and sales of securities and the income received and expenses incurred
in that series. Net capital gains of a series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the series.
For the year ended August 31, 1993, the following series had capital loss
carryforwards for federal tax purposes as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS
SERIES CARRYFORWARD EXPIRES
- ----------------------------------------------------------------- ------------- -----------
<S> <C> <C>
New York......................................................... $ 528,400 1999
------------- -----
Ohio............................................................. 1,051,400 1996
------------- -----
</TABLE>
If any net long-term capital gains in excess of net short-term capital
losses are retained by a series for investment, requiring federal income taxes
to be paid thereon by the series, the series will elect to treat such capital
gains as having been distributed to shareholders. As a result, shareholders will
be taxed on such amounts as long-term capital gains, will be able to claim their
proportionate share of the federal income taxes paid by the series on such gains
as a credit against their own federal income tax liabilities, and will be
entitled to increase the adjusted tax basis of their shares in such series by
the differences between their PRO RATA share of such gains and their tax credit.
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned
B-48
<PAGE>
by any series of the Fund for the taxable year are not subject to federal income
tax (except for possible application of the alternative minimum tax). Interest
from certain private activity and other bonds is treated as an item of tax
preference for purposes of the 28% alternative minimum tax on individuals and
the 20% alternative minimum tax on corporations. To the extent interest on such
bonds is distributed to shareholders of any series of the Fund, shareholders
will be subject to the alternative minimum tax on such distributions.
Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of the series have been held
by such shareholders. Such distributions are not eligible for the dividends
received deduction. Distributions of long-term capital gains of the series are
includable in income and may also be subject to the alternative minimum tax.
Any short-term capital loss realized upon redemption of shares within six
months (or such shorter period as may be established by Treasury regulations)
from the date of purchase of such shares and following receipt of an
exempt-interest dividend will be disallowed to the extent of such tax-exempt
dividend. Any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution will be treated as long-term capital loss to the extent of
such long-term capital gains distribution and to the extent not disallowed under
the preceding sentence.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes. In
addition, under rules used by the Internal Revenue Service for determining when
borrowed funds are considered to be used for the purpose of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares.
Persons holding certain municipal obligations who also are "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by bonds in the
portfolios of the Fund's series has been made by the Fund. Potential investors
should consult their tax advisers with respect to this matter before purchasing
shares of the Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. Such proposals, if enacted,
may further limit the availability of state or municipal obligations for
investment by the Fund and the value of portfolio securities held by the series
may be adversely affected. In such case, each series of the Fund would
reevaluate its investment objective and policies.
All distributions of taxable net investment income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the applicable series of the Fund on the reinvestment date.
Distributions of tax-exempt interest must also be reported. Under federal income
tax law, each series of the Fund will be required to report to the Internal
Revenue Service all distributions of taxable
B-49
<PAGE>
income and capital gains as well as gross proceeds from the redemption or
exchange of shares of such series, except in the case of certain exempt
shareholders. Under the backup withholding provisions of the Internal Revenue
Code, all proceeds from the redemption or exchange of shares are subject to
withholding of federal income tax at the rate of 31% in the case of nonexempt
shareholders who fail to furnish the appropriate series of the Fund with their
taxpayer identification numbers on IRS Form W-9 and with required certifications
regarding their status under the federal income tax law. Such withholding is
also required on taxable dividends and capital gains distributions unless it is
reasonably expected that at least 95% of the distributions of the series are
comprised of tax-exempt interest. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisers about the applicability of the backup
withholding provisions.
STATE TAXATION
The following discussion assumes that each series of the Fund qualified for
each taxable year as a regulated investment company for federal tax purposes.
ARIZONA. In the opinion of Arizona tax counsel, individual shareholders
resident in Arizona and corporate shareholders of the Arizona Series will not be
subject to Arizona income tax on distributions received from the Series to the
extent that such distributions are attributable to interest on tax-exempt
obligations of the State of Arizona and its political subdivisions or on
obligations issued by the Governments of Puerto Rico, the Virgin Islands and
Guam, provided that the Arizona Series complies with the requirement of the
Internal Revenue Code that at least 50% of the value of its assets at the close
of each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt from federal income tax under
Section 103(a) of the Internal Revenue Code.
Other distributions from the Arizona Series, including those related to
long-term and short-term capital gains, will generally not be exempt from
Arizona income tax.
Shares of the Arizona Series will not be subject to the Arizona personal
property tax.
Shareholders of the Arizona Series should consult their tax advisers about
other state and local tax consequences of their investments in the Arizona
Series.
CONNECTICUT. Distributions from the Connecticut Series to individual
shareholders of the Connecticut Series resident in Connecticut and Connecticut
resident trusts and estates are not subject to taxation pursuant to the
Connecticut Personal 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 Connecticut Series as interest from
obligations of the State of Connecticut or its political subdivisions
(Connecticut Municipal Obligations) or on obligations the interest on which is
exempt from state taxation under the laws of the United States (including
obligations issued by Puerto Rico, the Virgin Islands and Guam). It is likely
that capital gain dividends derived from the sale of Connecticut Municipal
Obligations also are not subject to the Connecticut Personal Income Tax. Other
distributions to individual shareholders resident in Connecticut and to resident
trusts and estates from the Connecticut Series, including capital gains
dividends derived from sales of obligations other than Connecticut Municipal
Obligations, exempt-interest dividends derived from sources other than
Connecticut Obligations, and distributions that are taxable as dividends for
federal income tax purposes are not exempt from the Connecticut Personal Income
Tax. Individual shareholders and estates and trusts subject to alternative
minimum tax for federal tax purposes may also be subject to alternative minimum
tax for Connecticut Tax purposes. Exempt interest-dividends other than those
derived from Connecticut Obligations and any loss from the sale or exchange of
Connecticut Obligations will be added to the alternative minimum tax base, while
exempt dividends paid by a regulated investment company, exempt
interest-dividends derived from interest payments on Connecticut Obligations and
capital gain dividends derived from the sale of Connecticut obligations are
subtracted from the alternative minimum tax base for Connecticut Tax purposes.
Distributions that constitute exempt-interest dividends under section
852(b)(5) of the Internal Revenue Code from the Connecticut Series to corporate
shareholders (other than shareholders that are S Corporations)
B-50
<PAGE>
that are apportioned to Connecticut are subject to taxation pursuant to the
Connecticut Corporation Business Tax, whether or not derived from Connecticut
Municipal Obligations. Distributions to corporate shareholders (other than
shareholders that are S Corporations) from the Connecticut Series that
constitute capital gains for federal income tax purposes are also subject to
taxation pursuant to the Connecticut Corporation Business Tax. Thirty percent of
distributions to corporate shareholders (other than shareholders that are S
Corporations) that are taxable as dividends for federal income tax purposes
generally is subject to taxation pursuant to the Corporation Business Tax and
the remaining seventy percent is not.
Distributions to shareholders of the Connecticut Series that are S
Corporations that constitute either exempt-interest dividends, whether or not
derived from Connecticut Municipal Obligations, capital gain dividends or
taxable dividends for federal income tax purposes which are required to be
separately taken into account by shareholders of S Corporations for federal
income tax purposes are not subject to taxation pursuant to the Connecticut
Corporation Business Tax. For purposes of the Connecticut Personal Income Tax,
Connecticut resident individual, trust and estate shareholders of S Corporations
are taxed on their PRO RATA share of such separately stated items in the same
manner and to the same extent as if received by them directly from the
Connecticut Series.
Shares of the Connecticut Series will not be subject to the personal
property tax in the State of Connecticut.
Shareholders of the Connecticut Series should consult their tax advisers
about other state and local tax consequences of their investment in the
Connecticut Series including the tax consequences of ceasing to be a resident of
Connecticut.
FLORIDA. Florida does not impose an income tax on individuals. Thus,
individual shareholders of the Florida Series will not be subject to any Florida
state or local income taxes on distributions received from the Florida Series.
Florida does impose a State income tax on the income of corporations,
limited liability companies and certain trusts (excluding probate and
testamentary trusts) that is allocated or apportioned to Florida. For those
shareholders, in determining income subject to Florida corporate income tax,
Florida generally "piggy-backs" federal taxable income concepts, subject to
adjustments that are applicable to all corporations and some adjustments that
are applicable to certain classes of corporations. In regard to the Florida
Series, the most significant adjustment is for interest income from state and
local bonds that is exempt from tax under Section 103 of the Internal Revenue
Code. Provided that the Florida Series qualifies as a regulated investment
company and complies with the requirements of the Internal Revenue Code
necessary to pay exempt-interest dividends, including the requirement that at
least 50% of the value of its assets at the close of each quarter of its taxable
year be invested in state, municipal or other obligations the interest on which
is exempt from tax under Section 103, the corporate shareholders of the Series
may incur Section 103 interest income from Florida Series distributions. While
Section 103 interest income is generally excluded from taxable income for
federal income tax purposes, it is added back to taxable income for Florida
corporate income tax purposes (only 40% of such income is added back for
corporate taxpayers subject to Florida alternative minimum tax). Consequently,
the portion of the Section 103 interest income (or 40% of that amount for
corporate taxpayers subject to the Florida alternative minimum tax) allocated or
apportioned to Florida of a corporate Florida Series shareholder arising from
Florida Series distributions is subject to Florida corporate income taxes. Other
distributions from the Florida Series to corporate shareholders, to the extent
allocated or apportioned to Florida, may also be subject to Florida income tax.
Provided that on and throughout January 1 of a given year the portfolio of
assets of the Florida Series will be comprised exclusively of notes, bonds, and
other obligations issued by the State of Florida or its municipalities, counties
and other taxing districts, the United States Government and its agencies,
Puerto Rico, Guam and the Virgin Islands, and other investments exempt from
Florida intangible personal property tax, in the opinion of Florida counsel
shares of the Florida Series will not be subject to Florida intangible personal
property taxes for that year. The Florida Series has obtained a technical
assistance advisement from the Florida Department of
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Revenue which confirms this consequence. If the Florida Series holds any other
type of asset on that date, then the entire value of the Florida Series shares
(except for that portion of the value attributable to U.S. government
obligations) will be subject to the intangible personal property tax.
Provided that the Florida Series will not possess any tangible personal
property physically located within Florida, in the opinion of Florida counsel
the shareholders of the Florida Series will not be subject to Florida state or
local tangible personal property taxes on their shares.
Shareholders of the Florida Series should consult their tax advisers about
other state and local tax consequences of their investments in the Florida
Series.
GEORGIA. In the opinion of Georgia tax counsel, shareholders of the Georgia
Series will not be subject to Georgia income taxes on distributions from the
Georgia Series to the extent that such distributions represent "exempt-interest
dividends" for federal income tax purposes that are attributable to
interest-bearing obligations issued by or on behalf of the State of Georgia or
its political subdivisions, or by the governments of Puerto Rico, the Virgin
Islands, or Guam. Distributions, if any, derived from capital gains or other
sources generally will be taxable to shareholders of the Georgia Series for
Georgia income tax purposes. For purposes of the Georgia intangibles tax, shares
of the Georgia Series likely are taxable (at the rate of 10 cents per $1,000 in
value) to shareholders who are otherwise subject to such tax.
Shareholders of the Georgia Series should consult their tax advisers about
other state and local tax consequences of their investments in the Georgia
Series.
MARYLAND. In the opinion of Maryland tax counsel, individual shareholders
of the Maryland Series resident in Maryland, corporate shareholders of the
Maryland Series and shareholders of the Maryland Series that are trusts or
estates will not be subject to Maryland State or local income taxes on
distributions received from the Maryland Series to the extent that such
distributions are attributable to interest on tax-exempt obligations of the
State of Maryland or its political subdivisions and authorities, or obligations
issued by the Governments of Puerto Rico, the Virgin Islands and Guam, provided
that the Maryland Series qualifies as a regulated investment company and
complies with the requirements of the Internal Revenue Code necessary to pay
exempt-interest dividends including the requirement that at least 50% of the
value of its assets at the close of each quarter of its taxable year be invested
in state, municipal or other obligations, the interest on which is exempt from
federal income tax under Section 103(a) of the Internal Revenue Code.
In addition, distributions received from the Maryland Series which are
attributable to gains realized on the sale or exchange of bonds issued by the
State of Maryland or its political subdivisions will not be subject to Maryland
State and local income taxes. Other distributions from the Maryland Series will
generally not be exempt from Maryland State and local income taxes.
Shares of the Maryland Series will not be subject to the Maryland personal
property tax.
Shareholders of the Maryland Series should consult their tax advisers about
other state and local tax consequences of their investments in the Maryland
Series.
MASSACHUSETTS. In the opinion of Massachusetts tax counsel, if the
Massachusetts Series and the Massachusetts Money Market Series each qualify as
regulated investment companies, (1) individual and other noncorporate
shareholders of each Series resident in Massachusetts will not be subject to
Massachusetts personal income tax on distributions received from such Series to
the extent such distributions are attributable to interest on tax-exempt
obligations of the Commonwealth of Massachusetts and its political subdivisions
and instrumentalities provided that such Series complies with the requirement
that at least 50% of the value of its assets at the close of each quarter of its
taxable year be invested in state, municipal or other obligations, the interest
on which is excluded from gross income for federal income tax purposes under
Section 103(a) of the Internal Revenue Code; (2) such shareholders will not be
subject to Massachusetts personal income tax on distributions received from
either of such Series to the extent such distributions are attributable to
interest on obligations issued by the Governments of Puerto Rico, the Virgin
Islands or Guam; and (3) such shareholders will not be subject to Massachusetts
personal income tax on capital gain dividends received from either of such
Series to the extent such capital gain dividends are attributable to long-term
capital gains realized on the sale or
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exchange of Massachusetts obligations issued pursuant to legislation which
specifically exempts capital gains from the disposition of such obligations from
Massachusetts personal income tax; in each case subject to the requirement that
such Series notify its shareholders in writing within sixty days following the
close of its taxable year of the portion of any distribution qualifying for any
such exemption.
Other distributions from the Massachusetts Series and the Massachusetts
Money Market Series will generally not be exempt from Massachusetts personal
income tax.
Massachusetts Series and the Massachusetts Money Market Series distributions
will not be excluded from net income of corporations and shares of the
Massachusetts Series and the Massachusetts Money Market Series will not be
excluded from the net worth of intangible property corporations in determining
the Massachusetts excise tax on corporations.
Shares of the Massachusetts Series and the Massachusetts Money Market Series
will not be subject to Massachusetts local property taxes.
Shareholders of the Massachusetts Series and the Massachusetts Money Market
Series should consult their tax advisers about other state and local tax
consequences of their investments in the Massachusetts Series and the
Massachusetts Money Market Series.
MICHIGAN. Individual shareholders of the Michigan Series residing in
Michigan will not be subject to Michigan personal income tax or personal income
taxes imposed by cities in Michigan, and corporate shareholders will not be
subject to the Michigan single business tax, on distributions received from the
Michigan Series to the extent such distributions are attributable to interest on
tax-exempt obligations of the State of Michigan or any municipality, political
subdivision or governmental agency or instrumentality thereof or on obligations
issued by the Governments of Puerto Rico, the Virgin Islands and Guam, provided
that the Michigan Series complies with the requirement of the Internal Revenue
Code that at least 50% of the value of its assets at the close of each quarter
of its taxable year is invested in state, municipal or other obligations the
interest on which is exempt from federal income tax under Section 103(a) of the
Internal Revenue Code.
Other distributions from the Michigan Series, including those related to
long-term and short-term capital gains, will generally not be exempt from the
Michigan personal income tax or single business tax.
Income from the Michigan Series, to the extent attributable to interest on
obligations issued by Michigan or its political subdivisions, will be excluded
for purposes of determining yield under the Michigan intangibles tax.
The Fund has obtained rulings from the Michigan Department of Treasury which
confirm these state tax consequences for Michigan resident individuals and
corporations. Shareholders of the Michigan Series should consult their tax
advisers about other state and local tax consequences of their investments in
the Michigan Series.
MINNESOTA. In the opinion of Minnesota tax counsel, the portion of
exempt-interest dividends paid by the Minnesota Series that is excluded from
federal adjusted gross income and that is derived from interest income on
obligations of the State of Minnesota or its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities, or
Indian tribal governments of tribes located in Minnesota, is excluded from the
Minnesota taxable net income of individuals, estates and trusts, provided that
the portion of the exempt-interest dividends from such Minnesota sources paid to
all shareholders represents 95 percent or more of the exempt-interest dividends
paid by the Minnesota Series. The remaining portion of such dividends, and
dividends that are not exempt-interest dividends or capital gain dividends, are
included in the Minnesota taxable net income of individuals, estates and trusts,
except for dividends that are directly attributable to interest on obligations
of the United States Government, the Government of Puerto Rico, the Territory of
Guam or certain other territories and possessions of the United States.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions. Dividends qualifying for federal income
tax purposes as capital gain dividends are to be treated by shareholders of the
Minnesota Series as long-term capital gains under Minnesota law. However,
Minnesota has repealed the favorable treatment of long-term capital gains, while
retaining restrictions on the deductibility of capital losses.
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Exempt-interest dividends attributable to interest on certain private
activity bonds issued after August 7, 1986 will be included in Minnesota
"alternative minimum taxable income" of individuals, estates and trusts for
purposes of computing Minnesota's alternative minimum tax. In certain limited
circumstances, the portion of Social Security benefits subject to Minnesota
income tax may be affected by the amount of exempt-interest dividends received
by shareholders of the Minnesota Series. Exempt-interest dividends may be
subject to taxation under Minnesota law for an S Corporation that has Subchapter
C earnings and profits at the close of a taxable year if more than 25 percent of
its gross receipts is passive investment income. Dividends generally will not
qualify for the dividends-received deduction for corporations and financial
institutions. Losses (including those of corporations) that are disallowed under
federal law by reason of a shareholder's receipt of exempt-interest dividends
will be treated similarly under Minnesota law, notwithstanding that all or a
portion of such dividends is not excluded from Minnesota taxable net income.
Minnesota law restricts for individuals, estates and trusts the deductibility of
interest expense on indebtedness incurred or continued to purchase or carry
shares of the Minnesota Series, as well as certain other expenses allocable to
such shares, notwithstanding that all or a portion of the exempt-interest
dividends is not excluded from Minnesota taxable net income.
Shareholders of the Minnesota Series should consult their tax advisers about
other state and local tax consequences of their investments in the Minnesota
Series.
NEW JERSEY. In the opinion of New Jersey tax counsel, individual
shareholders of the New Jersey Series and the New Jersey Money Market Series
resident in New Jersey and shareholders of the New Jersey Series and the New
Jersey Money Market Series that are trusts or estates will not be subject to New
Jersey income tax on distributions received from either series to the extent
that such distributions are attributable to interest on tax-exempt obligations
of the State of New Jersey or its political subdivisions and authorities, or
obligations issued by the Governments of Puerto Rico, the Virgin Islands and
Guam, provided that the relevant Series complies with the requirement of the New
Jersey Gross Income Tax Act that (1) 80% of the aggregate principal amount of
all its investments (excluding cash, cash items and receivables, and financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto that are related to such series' business of
investing in securities (Related Financial Instruments)) are invested in
obligations issued by the State of New Jersey or any of its agencies or
political subdivisions, or other obligations exempt from state or local taxation
under the laws of New Jersey and the United States and (2) it has no investments
other than interest bearing obligations, obligations issued at a discount, and
cash and cash items, including receivables, and Related Financial Instruments.
Distributions received by shareholders who are resident individuals, trusts
or estates from the New Jersey Series and the New Jersey Money Market Series
which are attributable to gains realized on the sale or exchange of bonds issued
by the State of New Jersey or its political subdivisions are exempt from New
Jersey income tax. Other distributions from the New Jersey Series and the New
Jersey Money Market Series, including those related to long-term and short-term
capital gains from other bonds, will generally not be exempt from New Jersey
income tax.
Shareholders of the New Jersey Series and the New Jersey Money Market Series
should consult their tax advisers about other state and local tax consequences
of their investments in these Series.
NEW YORK. The New York State franchise tax law and the New York City
general corporation tax law have special provisions governing the taxation of
regulated investment companies which elect to be treated and qualify as such
under Subchapter M of the Internal Revenue Code. Assuming that (1) the New York
Series and the New York Money Market Series (the Series) each are treated as a
separate entity for federal income and New York purposes, (2) each such Series
qualifies as a regulated investment company and distributes all of its
investment income and short-term and long-term capital gains so as to have no
federal income tax liability, and (3) all of the assets of each Series consist
of New York Obligations (as described below), other governmental obligations,
cash or certain cash equivalents, in the opinion of New York tax counsel, each
Series will be exempt from the New York State franchise tax and the New York
City general corporation tax, except for
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nominal taxes of $325 (increased by the applicable New York State surcharge) and
$300, respectively. However, capital gains retained by a Series could be subject
to New York State or City tax, and shareholders of such Series who are State or
City residents will receive no State or City income tax credit for taxes paid by
such Series.
Individual shareholders of the New York Series, the New York Money Market
Series and the New York Income Series resident in New York State will not be
subject to State income tax on distributions received from either Series to the
extent such distributions are attributable to interest on tax-exempt obligations
of the State of New York and its political subdivisions, and obligations of the
Governments of Puerto Rico, the Virgin Islands and Guam (New York Obligations),
provided that the relevant Series qualifies as a regulated investment company
and satisfies the requirements of the Internal Revenue Code necessary to pay
exempt-interest dividends, including the requirement that at least 50% of the
value of its assets at the close of each quarter of its taxable year be invested
in state, municipal or other obligations the interest on which is excluded from
gross income for federal income tax purposes under Section 103(a) of the
Internal Revenue Code. Individual shareholders who reside in New York City will
be able to exclude such distributions for City income tax purposes.
Other distributions from the New York Series, the New York Money Market
Series and the New York Income Series, including those related to long-term and
short-term capital gains, will generally not be exempt from State or City income
tax.
Distributions from these Series will not be excluded from net income and
shares of these Series will not be excluded from investment capital in
determining State or City franchise and corporation taxes for corporate
shareholders.
Shares of these Series will not be subject to any State or City property
tax.
The Fund has obtained the opinion of its New York tax counsel to confirm
these State and City tax consequences for the New York Series and the New York
Money Market Series and for New York resident individuals and corporations who
are shareholders of the New York Series and the New York Money Market Series.
The Fund anticipates receiving an opinion of its New York tax counsel to confirm
these State and City tax consequences for the New York Income Series and for New
York residents who are shareholders of that series when such series is offered.
Shareholders of the New York Series, the New York Money Market Series and the
New York Income Series should consult their advisers about other state and local
tax consequences of their investments in these Series.
NORTH CAROLINA. In the opinion of North Carolina tax counsel, individual
shareholders resident in North Carolina and shareholders that are trusts or
estates will not be subject to North Carolina income tax on distributions
received from the North Carolina Series to the extent such distributions are
either (i) exempt from federal income tax and attributable to interest on
obligations of North Carolina or its political subdivisions; nonprofit
educational institutions organized or chartered under the laws of North
Carolina; or Guam, Puerto Rico or the Virgin Islands including the governments
thereof and their agencies, instrumentalities and authorities or (ii)
attributable to interest on direct obligations of the United States. These North
Carolina income tax exemptions will be available only if the North Carolina
Series complies with the requirement of the Internal Revenue Code that at least
50% of the value of its assets at the close of each quarter of its taxable year
is invested in state, municipal or other obligations the interest on which is
exempt from federal income tax under Section 103(a) of the Internal Revenue
Code.
Other distributions from the North Carolina Series (except distributions of
capital gains attributable to the sale by the North Carolina Series of an
obligation the profit from which is exempt by a North Carolina statute) will
generally not be exempt from North Carolina income tax.
Shares of the North Carolina Series will not be subject to the North
Carolina intangibles tax provided that the Series satisfies certain substantive
and reporting requirements pertaining to the composition of its portfolio. The
Series intends to comply with all such requirements.
The Series has obtained rulings signed by the Directors of the Individual
Income Tax Division and the Intangibles Tax Division of the North Carolina
Department of Revenue and an Information Release issued by
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such Individual Income Tax Division which form the basis of the opinion of North
Carolina tax counsel regarding the North Carolina income tax and intangibles tax
consequences of investments in the North Carolina Series for individuals, trusts
and estates. The general practice in North Carolina is for taxpayers to rely on
rulings signed by a Division Director and Information Releases issued by a
Division.
Shareholders of the North Carolina Series should consult their tax advisers
about other state and local tax consequences of their investments in the North
Carolina Series.
OHIO. In the opinion of Ohio tax counsel, individual shareholders who are
otherwise subject to the Ohio personal income tax, Ohio school district income
taxes or Ohio municipal income taxes will not be subject to such taxes on
distributions received from the Ohio Series to the extent such distributions
consist of interest on or gains from the sale of obligations issued by or on
behalf of the State of Ohio, political subdivisions thereof and agencies and
instrumentalities of the State or its political subdivisions (Ohio State
Obligations), provided that the Ohio Series continues to qualify as a regulated
investment company for federal income tax purposes and that at all times at
least 50% of the value of the total assets of the Ohio Series consists of Ohio
State Obligations, or similar obligations of other states or their subdivisions.
It is assumed for purposes of this discussion that the 50% requirement is
satisfied.
Corporate shareholders that are subject to the Ohio corporation franchise
tax will not be required to include distributions received from the Ohio Series
in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions are either
excluded from gross income for federal income tax purposes or consist of
interest on or gains from the sale of Ohio State Obligations. However, shares of
the Ohio Series will be includable in the computation of net worth for purposes
of such tax. Corporate shareholders that are subject to Ohio municipal income
taxes will not be subject to such taxes on distributions received from the Ohio
Series to the extent such distributions consist of interest on or gains from the
sale of Ohio State Obligations.
Distributions from the Ohio Series that consist of interest on obligations
of the United States or its territories or possessions or of any authority,
commission or instrumentality of the United States that is exempt from state
income taxes under the laws of the United States (including the obligations of
the Governments of Puerto Rico, the Virgin Islands and Guam) are exempt from the
Ohio personal income tax, Ohio school district income taxes and Ohio municipal
income taxes and are excluded from the net income base of the Ohio corporation
franchise tax.
Other distributions from the Ohio Series will generally not be exempt from
Ohio income tax.
Shareholders of the Ohio Series should consult their tax advisers about
other state and local tax consequences of their investments in the Ohio Series.
PENNSYLVANIA. Under Pennsylvania law, individual shareholders of the
Pennsylvania Series who are residents of Pennsylvania will not be subject to
Pennsylvania personal income tax on distributions received from the Pennsylvania
Series to the extent such distributions are attributable to interest on
tax-exempt obligations of the Commonwealth and its political subdivisions and
authorities or of the Governments of Puerto Rico, the Virgin Islands and Guam.
Other distributions from the Pennsylvania Series will generally not be exempt
from Pennsylvania personal income tax. Distributions paid by the Pennsylvania
Series will also be exempt from the Philadelphia School District investment net
income tax for individuals who are residents of the City of Philadelphia to the
extent such distributions are derived from interest on tax-exempt obligations of
the Commonwealth and its political subdivisions and authorities or of the
governments of Puerto Rico, the Virgin Islands and Guam, or to the extent such
distributions are designated as capital gain dividends for federal income tax
purposes.
Corporations which are subject to the Pennsylvania corporate net income tax
will not be subject to tax on distributions received from the Pennsylvania
Series to the extent such distributions are attributable to interest from
tax-exempt obligations of the Commonwealth and its political subdivisions and
authorities, and further provided that such distributions are not included in
federal taxable income determined before net operating loss deductions and
special deductions.
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The Pennsylvania Series will not be treated as a taxable entity and
therefore will not be subject to the Pennsylvania personal income tax or
corporate net income tax.
In addition, shares of the Pennsylvania Series will not be subject to
personal property taxation in Pennsylvania to the extent that the personal
property owned by the Pennsylvania Series would not be subject to such taxation
if owned by a resident of Pennsylvania. Because the Pennsylvania Series will
invest predominantly in obligations of the Commonwealth and its political
subdivisions and authorities, which obligations are not subject to personal
property taxation in Pennsylvania, only a small fraction, if any, of the value
of the shares of the Pennsylvania Series would be subject to such tax.
Shareholders of the Pennsylvania Series should consult their tax advisers
about other state and local tax consequences of their investments in the
Pennsylvania Series.
ORGANIZATION AND CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 18, 1984, as amended. The Declaration of Trust and the
By-Laws of the Fund are designed to make the Fund similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability: under Massachusetts law, shareholders of
a business trust may, in 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.
Counsel for the Fund have advised the Fund that no personal liability will
attach to the shareholders under any undertaking containing such provision when
adequate notice of such provision is given, except possibly in a few
jurisdictions. With respect to all types of claims in the latter jurisdictions
and with respect to tort claims, contract claims where the provision referred to
is omitted from the undertaking, claims for taxes and certain statutory
liabilities in other jurisdictions, a shareholder may be held personally liable
to the extent that claims are not satisfied by the Fund. However, upon payment
of any such liability the shareholder will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his, her
or its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his, her or its duties. It also provides that all third parties
shall look solely to the Fund property or the property of the appropriate series
of the Fund for satisfaction of claims arising in connection with the affairs of
the Fund or of the particular series of the Fund, respectively. With the
exceptions stated, the Declaration of Trust permits the Trustees to provide for
the indemnification of Trustees, officers, employees or agents of the Fund
against all liability in connection with the affairs of the Fund.
Other distinctions between a corporation and a Massachusetts business trust
include the absence of a requirement that business trusts issue share
certificates.
The Fund and all series thereof shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders or by the Trustees by written notice to the
shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in separate series. Each series
of the Fund, for federal income tax and Massachusetts state law purposes, will
constitute a separate trust which will be governed by the provisions of the
Declaration of Trust. All shares of any series of the Fund issued and
outstanding will be fully paid and non-assessable by the Fund. Each share of
each series represents an equal proportionate interest in that series with each
other share of that series. The assets of the Fund received for the issue or
sale of the shares of each series and all income, earnings,
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profits and proceeds thereof, subject only to the rights of creditors of such
series, are specially allocated to such series and constitute the underlying
assets of such series. The underlying assets of each series are segregated on
the books of account and are to be charged with the liabilities in respect to
such series and with a share of the general liabilities of the Fund. Under no
circumstances would the assets of a series be used to meet liabilities which are
not otherwise properly chargeable to it. Expenses with respect to any two or
more series are to be allocated in proportion to the asset value of the
respective series except where allocations of direct expenses can otherwise be
fairly made. The officers of the Fund, subject to the general supervision of the
Trustees, have the power to determine which liabilities are allocable to a given
series or which are general or allocable to two or more series. Upon redemption
of shares of a series of the Fund, the shareholder will receive proceeds solely
of the assets of such series. In the event of the dissolution or liquidation of
the Fund, the holders of the shares of any series are entitled to receive as a
class the underlying assets of such series available for distribution to
shareholders.
Shares of the Fund entitle their holders to one vote per share. However, on
any matter submitted to a vote of the shareholders, all shares then entitled to
vote will be voted by individual series, unless otherwise required by the
Investment Company Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a series would be
voted upon only by shareholders of the series involved. Additionally, approval
of the investment advisory agreement is a matter to be determined separately by
each series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve the proposal as to those series.
The Fund does not intend to hold annual meetings of shareholders.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any series (which would be
used to distinguish among the rights of different categories of shareholders, as
might be required by future regulations or other unforeseen circumstances) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Fund for shares of any
additional series or class, and all assets in which such consideration is
invested, would belong to that series or class (subject only to the rights of
creditors of such series or class) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to removal upon the action of
two-thirds of the outstanding shares of beneficial interest) and appoint their
own successors, provided that always at least a majority of the Trustees have
been elected by the shareholders of the Fund. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains cash and certain financial and accounting
books and records pursuant to an agreement with the Fund. See "How the Fund is
Managed-- Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus of each series.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent of the Fund. Its
mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005. PMFS is
a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and
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related functions. For these services, PMFS receives an annual fee per
shareholder account, in addition to a new set up fee for each manually
established account and a monthly inactive zero balance account fee per
shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication and other costs. For the fiscal year ended August 31, 1993, the
Fund incurred fees for the services of PMFS in the following amounts with
respect to each series:
<TABLE>
<CAPTION>
TRANSFER AGENCY
SERIES FEES
- ---------------------------------------------------- ----------------
<S> <C>
Arizona............................................. $ 22,800
Connecticut Money Market............................ 24,300
Florida............................................. 38,000
Georgia............................................. 12,700
Maryland............................................ 26,300
Massachusetts....................................... 25,300
Massachusetts Money Market.......................... 17,900
Michigan............................................ 36,300
Minnesota........................................... 21,000
New Jersey.......................................... 106,500
New Jersey Money Market............................. 72,500
New York............................................ 131,700
New York Money Market............................... 126,000
North Carolina...................................... 26,800
Ohio................................................ 49,000
Pennsylvania........................................ 110,000
</TABLE>
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants and in that capacity audits the Fund's annual
financial statements.
DESCRIPTION OF TAX-EXEMPT 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 edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements may
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.
Bonds rated within the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1 and Baa1.
B-59
<PAGE>
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. 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. Loans bearing the designation MIG 2 are of
high quality with margins of protection ample although not so large as in the
preceding group. Loans bearing the designation MIG 3 are of favorable quality,
with all security elements accounted for but lacking the strength of the
preceding grades. 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.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations having an original maturity not
exceeding one year.
Prime-1: Issuers rated at Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
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 for debt in higher-rated categories.
MUNICIPAL NOTES
A Standard & Poor's municipal note rating reflects the liquidity concerns
and market access risks unique to municipal notes. Municipal notes due in 3
years or less will likely receive a municipal note rating, while notes maturing
beyond 3 years will most likely receive a long-term debt rating.
SP-1: Very strong capacity to pay principal and interest. Those issues
determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard & Poor's commercial paper ratings are current assessments 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 characterisitics are denoted with a plus sign (+) designation.
B-60
<PAGE>
<TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
ARIZONA SERIES February 28, 1994 (Unaudited)
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.2%
Arizona St. Edl. Loan
Mkt. Corp.,
A $ 1,375 7.00%, 3/1/05, Ser. B.... $ 1,505,749
Arizona St. Hsg. Fin.
Review Brd.,
Sngl. Fam. Mtge. Rev.,
AA-* 15 10.625%, 12/1/02, Ser.
82..................... 15,465
Arizona St. Mun. Fin.
Prog.,
Cert. of Part.,
Aaa 700 8.75%, 8/1/06, Ser. 15,
B.I.G.................. 795,788
Aaa 2,250 7.875%, 8/1/14, Ser. 25,
A.M.B.A.C.............. 2,894,085
Arizona St. Trans. Brd.
Hwy. Rev.,
Aaa 2,000(dag)@7.00%, 7/1/09............
2,276,240
Aa 1,500(dag) 6.00%, 7/1/10............ 1,625,505
Arizona St. Univ. Sys.
Rev.,
Aaa 1,000(dag) 7.00%, 7/1/10, Ser. A.... 1,158,650
Central Arizona Wtr.
Consv. Dist.,
Contract Rev.,
A1 1,500(dag) 7.50%, 11/1/05........... 1,765,170
Chandler, Cap. Apprec.
Ref.,
Aaa 2,000 Zero Coupon, 7/1/02,
F.G.I.C................ 1,326,860
Aaa 500 4.375%, 7/1/13,
F.G.I.C................ 432,425
Goodyear, Gen. Oblig.,
Baa1 100 10.00%, 7/1/95........... 107,860
La Paz Cnty., Unified
Sch. Dist.,
No. 27, Parker Impvt.
Proj.,
Baa 450 9.40%, 7/1/96............ 497,065
Maricopa Cnty. Hosp.
Dist. No. 1,
Facs. Rev., East Valley
Behavioral Hlth. Fac.
Proj.,
Aaa 725(dag) 7.80%, 6/1/13,
F.G.I.C................ 819,148
Maricopa Cnty. Ind. Dev.
Auth. Hosp. Fac. Rev.,
John C. Lincoln Hosp.,
Aaa 2,000 7.00%, 12/1/00, F.S.A.... 2,295,920
Mercy Hlth.,
Aaa 1,000 9.00%, 7/1/99, Ser. D,
M.B.I.A................ 1,088,950
A1 525(dag) 9.25%, 7/1/11, Ser. D.... 573,914
A1 475 9.25%, 7/1/11, Ser. D.... 515,038
Samaritan Hlth. Svcs.,
Aaa 290(dag) 12.00%, 1/1/08........... 357,997
A 1,000 9.25%, 12/1/15, Ser.
85A.................... 1,103,390
Maricopa Cnty. Sch.
Dist.,
No. 41 Gilbert Proj.,
Aaa $ 2,000(dag)@6.50%, 7/1/08, Ser. E,
F.G.I.C................ $ 2,237,120
No. 11 Peoria Unified
Sch. Dist.,
Aaa 1,500 Zero Coupon, 7/1/04,
M.B.I.A................ 877,680
No. 92 Pendergast Elem.
Sch.,
Aaa 1,140 Zero Coupon, 7/1/04,
F.G.I.C................ 667,037
Mohave Cnty. Hosp. Dist.
No. 1,
Kingman Regl. Med. Ctr.
Proj.,
Aaa 2,110 6.50%, 6/1/15,
F.G.I.C................ 2,257,405
Navajo Cnty. Unified Sch.
Dist.,
No. 006 Herber
Overgaard,
Aaa 250 7.25%, 7/1/00,
A.M.B.A.C.............. 282,492
Aaa 300 7.35%, 7/1/03,
A.M.B.A.C.............. 339,330
Nogales Mun. Dev. Auth.
Rev.,
Aaa 500(dag)@8.00%, 6/1/08,
M.B.I.A................ 574,985
Peoria Bell Road Impvt.
Dist.,
BBB* 465 7.20%, 1/1/11............ 500,916
Phoenix Civic Impvt.
Corp.,
Wastewater Sys.,
A1 1,500(dag) 6.125%, 7/1/23........... 1,653,000
Phoenix Ind. Dev. Auth.
Hosp.,
John C. Lincoln Hosp.,
BBB+* 500 6.00%, 12/1/10........... 492,675
BBB+* 500 6.00%, 12/1/14........... 487,210
Phoenix St. & Hwy. Rev.,
A1 1,480 6.25%, 7/1/06, Ser. 92... 1,589,476
Aaa 3,000 Zero Coupon, 7/1/12,
F.G.I.C................ 1,032,600
Pima Cnty. Ind. Dev.
Auth.
Hlth. Care,
Carondelet Hlth. Care
Corp.,
Aaa 500 5.25%, 7/1/12,
M.B.I.A................ 488,450
Carondelet
St. Josephs & Marys,
Aaa 1,000 7.90%, 7/1/05, B.I.G..... 1,146,560
Aaa 1,000(dag) 8.00%, 7/1/13, B.I.G..... 1,156,900
Pima Cnty. Ind. Dev.
Auth. Rev.,
Tucson Elec. Pwr. Co.,
Aaa 2,700 7.25%, 7/15/10, F.S.A.... 3,055,158
Pima Cnty. Unified Sch.
Dist. No. 16,
Catalina Foothills,
Aaa 3,000 Zero Coupon, 7/1/08,
F.G.I.C................ 1,347,360
Aaa 3,455 Zero Coupon, 7/1/09,
F.G.I.C................ 1,443,568
</TABLE>
See Notes to Financial Statements.
B-61
<PAGE>
<TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa $ 1,000 8.915%, 7/1/08,
Ser. A, M.B.I.A........ $ 1,091,250
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 995 7.50%, 4/1/22............ 1,051,038
Sngl. Fam.,
Baa 1,500 5.125%, 12/1/05.......... 1,442,835
Puerto Rico Hwy. Auth.
Rev.,
Baa1 490(dag) 7.70%, 7/1/03, Ser. Q.... 581,650
Salt River Proj. Agric.
Impvt. &
Pwr. Dist., Elec. Sys.
Rev.,
Aa 1,500 4.75%, 1/1/17, Ser. C.... 1,320,855
Aa 500 5.75%, 1/1/20, Ser. C.... 500,120
Scottsdale Ind. Dev.
Auth. Rev.,
Mem. Hosp.,
Aaa 2,100 8.50%, 9/1/07,
Ser. A, A.M.B.A.C...... 2,412,375
Scottsdale, Gen. Oblig.,
Aa1 500 5.50%, 7/1/09............ 502,020
Aa1 1,000(dag) 6.00%, 7/1/10............ 1,091,160
Aa1 1,000 4.00%, 7/1/13, Ser. D.... 823,740
Tempe Impvt. Dist. Auth. Rev.,
Papago Park Ctr., Dist. No. 166,
A1 500 7.10%, 1/1/06............ 530,660
Tolleson Mun. Fin. Corp.
Rev.,
Citizen Util. Co.,
AAA* 400 9.20%, 9/1/05............ 436,260
Tucson Arpt. Auth. Inc.
Rev.,
Aaa 1,000 5.50%, 6/1/07,
M.B.I.A................ 1,030,390
Tucson Wtr. Rev.,
Aaa 1,000 8.60%, 7/1/00............ 1,216,530
A1 1,000 5.50%, 7/1/09............ 995,820
Aaa 500 7.00%, 7/1/10, Ser. C,
M.B.I.A................ 549,800
Univ. Arizona Revs. Sys.,
A1 1,750 6.25%, 6/1/11, Ser. B.... 1,850,257
Virgin Islands Pub. Fin. Auth. Rev.,
Ref. Matching Loan Notes,
NR 600 7.25%, 10/1/18, Ser. A... 674,652
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Prog.,
NR $ 460 7.75%, 10/1/06, Ser.
91..................... $ 529,897
Virgin Islands Wtr. &
Pwr. Auth.,
NR 200 7.60%, 1/1/12, Ser. B.... 223,458
Elec. Sys. Rev.,
NR 500 8.50%, 1/1/10, Ser. A.... 563,740
Elec. Sys.,
NR 500 7.40%, 7/1/11, Ser. A.... 569,605
-----------
Total long-term
investments
(cost $56,889,125)..... 62,773,253
-----------
SHORT-TERM INVESTMENTS--2.0%
Pinal Cnty. Ind. Dev.
Auth. Hlth.
Care, Ctrl. Rev.,
F.R.D.D.,
P1 1,300 2.30%, 3/1/94
(cost $1,300,000)...... 1,300,000
-----------
Total Investments--99.2%
(cost $58,189,125; Note
4)..................... 64,073,253
Other assets in excess of
liabilities--0.8%...... 534,903
-----------
Net Assets--100%......... $64,608,156
-----------
-----------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
@ Pledged as initial margin on financial futures contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-62
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February
28,
Assets 1994
-----------
<S> <C>
Investments, at value (cost $58,189,125)................................................... $64,073,253
Interest receivable........................................................................ 806,735
Receivable for Fund shares sold............................................................ 147,170
Other assets............................................................................... 1,309
-----------
Total assets............................................................................. 65,028,467
-----------
Liabilities
Bank Overdraft............................................................................. 18,120
Payable for Fund shares reacquired......................................................... 274,026
Accrued expenses........................................................................... 64,998
Management fee payable..................................................................... 25,237
Distribution fee payable................................................................... 22,987
Due to broker-variation margin............................................................. 7,130
Dividends payable.......................................................................... 7,099
Deferred trustees' fees.................................................................... 714
-----------
Total liabilities........................................................................ 420,311
-----------
Net Assets................................................................................. $64,608,156
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 53,412
Paid-in capital in excess of par......................................................... 58,670,283
-----------
58,723,695
Distributions in excess of net realized gain............................................. (45,886)
Net unrealized appreciation on investments............................................... 5,930,347
-----------
Net assets, February 28, 1994............................................................ $64,608,156
-----------
-----------
Class A:
Net asset value and redemption price per share ($7,395,588 (div) 611,350 shares of
beneficial interest issued and outstanding)............................................ $12.10
Maximum sales charge (4.5% of offering price)............................................ .57
-----------
Maximum offering price to public......................................................... $12.67
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share ($57,212,568 (div)
4,729,801 shares of beneficial interest issued and outstanding)........................ $12.10
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-63
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................. $ 1,988,500
------------
Expenses
Management fee....................... 161,249
Distribution fee--Class A............ 3,461
Distribution fee--Class B............ 143,945
Custodian's fees and expenses........ 28,000
Transfer agent's fees and expenses... 18,000
Reports to shareholders.............. 13,000
Registration fees.................... 11,000
Audit fee............................ 5,300
Legal fees........................... 5,000
Trustees' fees....................... 1,700
Miscellaneous........................ 1,612
------------
Total expenses..................... 392,267
------------
Net investment income.................. 1,596,233
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.............. 827,144
Financial futures contract
transactions......................... (90,000)
------------
737,144
------------
Net change in unrealized
appreciation/depreciation on:
Investments.......................... (1,912,248)
Financial futures contracts.......... 47,156
------------
(1,865,092)
------------
Net loss on investments................ (1,127,948)
------------
Net Increase in Net Assets
Resulting from Operations.............. $ 468,285
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 1,596,233 $ 2,979,801
Net realized gain on
investment
transactions........... 737,144 175,821
Net change in unrealized
appreciation of
investments............ (1,865,092) 3,112,559
------------ -----------
Net increase in net
assets resulting from
operations............. 468,285 6,268,181
------------ -----------
Dividends and distributions
(Note 1):
Dividends to shareholders
from net investment
income
Class A................ (183,871) (201,649)
Class B................ (1,412,362) (2,778,152)
------------ -----------
(1,596,233) (2,979,801)
------------ -----------
Distributions to
shareholders from net
realized gains on
investment transactions
Class A................ (74,329) (21,305)
Class B................ (618,468) (500,545)
------------ -----------
(692,797) (521,850)
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............. 5,314,800 12,302,375
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 1,263,647 1,717,602
Cost of shares
reacquired............... (4,056,742) (6,722,273)
------------ -----------
Net increase in net
assets from
Fund share
transactions........... 2,521,705 7,297,704
------------ -----------
Total increase............. 700,960 10,064,234
Net Assets
Beginning of period........ 63,907,196 53,842,962
------------ -----------
End of period.............. $ 64,608,156 $63,907,196
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-64
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Arizona Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-65
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Series under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $35,100 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the six months
ended February 28, 1994, it received approximately $11,700 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $1,506,000.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $11,700 for the services of PMFS. As of February 28, 1994,
approximately $2,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Purchases and sales of port
Note 4. Portfolio folio securities of the Series,
Securities excluding short-term investments, for the six
months ended February 28, 1994 were $14,304,795 and $13,916,212, respectively.
B-66
<PAGE>
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of February 28, 1994, net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes is $5,884,128 (gross
unrealized appreciation--$6,263,799, gross unrealized depreciation--$379,671).
At February 28, 1994, the Series sold 17 financial futures contracts on the
Municipal Bond Index expiring March 1994. The value at disposition of such
contracts is $1,738,250. The value of such contracts on February 28, 1994 was
$1,692,031, thereby resulting in an unrealized gain of $46,219. The Series has
pledged $2,000,000 principal amount of Arizona State Transportation Board
Highway Revenue Bonds, $2,000,000 principal amount of Maricopa County School
District Bonds, and $500,000 principal amount of Nogales Municipal Development
Authority Revenue Bonds as initial margin on such contracts.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1994 and the fiscal year ended
August 31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28, 1994:
Shares sold................... 90,494 $ 1,118,653
Shares issued in reinvestment
of dividends and
distributions............... 16,076 197,469
Shares reacquired............. (27,563) (340,510)
---------- ------------
Net increase in shares
outstanding................. 79,007 $ 975,612
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 379,867 $ 4,588,716
Shares issued in reinvestment
of dividends and
distributions............... 10,501 127,266
Shares reacquired............. (38,736) (459,132)
---------- ------------
Net increase in shares
outstanding................. 351,632 $ 4,256,850
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
Six months ended February 28, 1994:
Shares sold................... 337,676 $ 4,196,147
Shares issued in reinvestment
of dividends and
distributions............... 86,773 1,066,178
Shares reacquired............. (300,448) (3,716,232)
---------- ------------
Net increase in shares
outstanding................. 124,001 $ 1,546,093
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 639,982 $ 7,713,659
Shares issued in reinvestment
of dividends and
distributions............... 132,586 1,590,336
Shares reacquired............. (520,539) (6,263,141)
---------- ------------
Net increase in shares
outstanding................. 252,029 $ 3,040,854
---------- ------------
---------- ------------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results
for the interim period presented.
B-67
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- ----------------------------------------------------------
Six
January 22, Months
Six Months 1990+ Ended
Ended Year Ended August 31, through February Year Ended August 31,
February 28, ------------------------ August 31, 28, -----------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
<CAPTION>
PER SHARE
OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning
of
period..... $12.44 $11.88 $11.32 $10.80 $ 10.99@ $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $ 10.73
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
Income from
investment
operations
Net
investment
income..... .32 .67 .68 .69 .42 .30 .62 .63 .64 .65 .67
Net realized
and
unrealized
gain (loss)
on
investment
transactions... (.21) .68 .56 .52 (.19)@ (.21) .69 .55 .52 (.17) .24
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
Total from
investment
operations... .11 1.35 1.24 1.21 .23@ .09 1.31 1.18 1.16 .48 .91
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
Less
distributions
Dividends
from net
investment
income..... (.32) (.67) (.68) (.69) (.42) (.30) (.62) (.63) (.64) (.65) (.67)
Distributions
from net
realized
gains...... (.13) (.12) -- -- -- (.13) (.12) -- -- -- --
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
Total
distributions.. (.45) (.79) (.68) (.69) (.42) (.43) (.74) (.63) (.64) (.65) (.67)
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
Net asset
value, end
of
period..... $12.10 $12.44 $11.88 $11.32 $ 10.80 $ 12.10 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -------
TOTAL
RETURN#:... 1.03% 11.79% 11.23% 11.45% 2.01%@ 0.82 % 11.42% 10.68% 11.02% 4.49% 8.88%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)...... $7,396 $6,622 $2,146 $1,508 $ 436 $57,213 $57,286 $51,697 $57,209 $59,216 $59,266
Average net
assets
(000)...... $6,979 $3,613 $1,758 $ 937 $ 260 $58,055 $53,656 $53,477 $58,973 $60,359 $55,479
Ratios to
average net
assets:
Expenses,
including
distribution
fees..... .86%* .92% 1.02% 1.02% .96%* 1.26 %* 1.32% 1.42% 1.41% 1.30% 1.30%
Expenses,
excluding
distribution
fees..... .76%* .82% .92% .92% .86%* .76 %* .82% .92% .91% .82% .83%
Net
investment
income..... 5.31%* 5.58% 5.81% 6.13% 6.36%* 4.91 %* 5.18% 5.42% 5.77% 5.99% 6.26%
Portfolio
turnover... 22% 14% 42% 25% 49% 22 % 14% 42% 25% 49% 62%
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full year are not annualized.
@ Restated.
</TABLE>
See Notes to Financial Statements.
B-68
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
CONNECTICUT MONEY MARKET SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--94.7%
Brooklyn, Gen Oblig.,
NR $ 475 2.65%, 4/14/94, B.A.N.... $ 475,087
Connecticut St. Arpt.
Rev.,
Bradley Int'l Arpt.,
Aaa 2,375 7.05%, 10/1/94, Ser. 92,
F.G.I.C................ 2,439,775
Connecticut St. Dev.
Auth. Rev.,
Lt. & Pwr. Co. Proj.,
VMIG1 7,200 2.40%, 3/2/94, Ser. 93B,
F.R.W.D................ 7,200,000
Connecticut St. Dev.
Auth., Jewish
Cmnty. Ctr. of New
Haven,
A1* 800 2.10%, 3/2/94, Ser. 92,
F.R.M.D................ 800,000
Rand Whitney Container
Bd.,
P1 1,000 2.35%, 3/2/94, Ser. 93,
F.R.W.D................ 1,000,000
RK Bradley Assoc. Proj.,
NR 1,500 2.40%, 3/2/94, Ser. 85,
F.R.W.D................ 1,500,000
SHW Inc. Proj.,
NR 3,100 2.60%, 3/2/94, Ser. 90,
F.R.W.D................ 3,100,000
Connecticut St. Hsg. Fin.
Auth.,
VMIG1 2,860 2.50%, 4/26/94, Ser. 89D,
T.E.C.P................ 2,860,000
VMIG1 3,000 2.65%, 5/16/94, Ser.
92G-1, S.E.M.M.T....... 3,001,449
VMIG1 1,500 2.75%, 5/16/94, Ser.
92G-2, S.E.M.M.T....... 1,500,000
VMIG1 2,000 2.90%, 11/15/94, Ser.
93H-2,
A.N.N.M.T.............. 2,000,000
Connecticut St. Spec.
Assmt.,
Unemployment Comp.,
VMIG1 3,000 2.40%, 3/2/94, Ser. 93B,
F.R.W.D................ 3,000,000
VMIG1 2,500 3.00%, 7/1/94, Ser. 93C,
A.N.N.M.T.............. 2,501,617
MIG1 1,750 3.10%, 11/15/94, Ser.
93A.................... 1,757,534
Connecticut St. Spec. Tax
Oblig.,
Trans. Infrastructure
Rev.,
VMIG1 $ 700 2.45%, 3/2/94, Ser. 90I,
F.R.W.D................ $ 700,000
Connecticut St., Gen.
Oblig.,
Aa 1,400 7.00%, 3/15/94, Ser.
93B.................... 1,402,241
Econ. Recovery Notes,
VMIG1 6,600 2.40%, 3/2/94, Ser. 91B,
F.R.W.D................ 6,600,000
Aa 1,000 5.25%, 12/15/94, Ser.
91A.................... 1,023,011
Connecticut St., Hlth. &
Edl. Facs. Auth. Rev.,
Charlotte-Hungerford,
VMIG1 1,000 2.40%, 3/3/94, Ser. B,
F.R.W.D................ 1,000,000
Yale Univ., T.E.C.P.,
VMIG1 1,400 2.50%, 4/27/94, Ser. L... 1,400,000
VMIG1 1,500 2.50%, 4/27/94, Ser. N... 1,500,000
N. Branford, Gen. Oblig.,
NR 1,150 2.43%, 4/15/94, Ser. 93,
B.A.N.................. 1,150,210
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
VMIG1 2,700 2.25%, 3/2/94, Ser. 85,
F.R.W.D................ 2,700,000
Puerto Rico Hsg. Fin.
Corp. Rev. Med.,
Aa 3,000 2.50%, 3/15/94, Ser. 90I,
M.T.H.O.T.............. 3,000,000
Puerto Rico Ind. Med. &
Environ. Facs.,
Ana G. Mendez Ed.
Fndtn.,
A1+* 200 2.25%, 3/2/94, Ser. 85,
F.R.W.D................ 200,000
Reynolds Metal Co. Proj.,
P1 1,900 2.90%, 9/1/94, Ser. 83A,
A.N.N.O.T.............. 1,900,000
Schering-Plough Corp.,
NR 700 2.80%, 12/1/94, Ser. 83A,
A.N.N.O.T.............. 700,000
Puerto Rico Maritime
Shipping Auth.,
P1 2,600 2.15%, 4/27/94,
T.E.C.P................ 2,600,000
</TABLE>
B-69
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Sprague, Gen. Oblig.,
NR $ 625 2.85%, 7/1/94, B.A.N..... $ 625,918
Stamford, Gen. Oblig.,
NR 3,000 2.11%, 7/19/94, B.A.N.... 2,991,108
Winchester, Gen. Oblig.,
NR 500 2.75%, 5/11/94, Ser. 93,
B.A.N.................. 500,435
-----------
Total Investments--94.7%
(amortized
cost--$63,128,385**)... 63,128,385
Other assets in excess of
liabilities--5.3%...... 3,558,321
-----------
Net Assets--100%......... $66,686,706
-----------
-----------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
M.T.H.O.T.--Monthly Optional Tender.
S.E.M.M.T.--Semi-Annual Mandatory Tender.
T.E.C.P.--Tax Exempt Commercial Paper.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-70
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February 28,
Assets 1994
------------
<S> <C>
Investments, at amortized cost which approximates market value............................. $63,128,385
Cash....................................................................................... 2,800,423
Receivable for Fund shares sold............................................................ 675,212
Interest receivable........................................................................ 457,378
Receivable for investments sold............................................................ 50,128
Deferred organization expenses and other assets............................................ 36,453
------------
Total assets........................................................................... 67,147,979
------------
Liabilities
Payable for Fund shares reacquired......................................................... 380,677
Accrued expenses........................................................................... 29,925
Payable for investments purchased.......................................................... 27,933
Due to Distributor......................................................................... 10,915
Due to Manager............................................................................. 6,505
Dividend payable........................................................................... 4,604
Deferred Trustees' fees.................................................................... 714
------------
Total liabilities...................................................................... 461,273
------------
Net Assets................................................................................. $66,686,706
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value......................................... $ 666,867
Paid-in capital in excess of par......................................................... 66,019,839
------------
Net assets, February 28, 1994............................................................ $66,686,706
------------
------------
Net asset value, offering price and redemption price per share ($66,686,706 / 66,686,706
shares of beneficial interest issued and outstanding; unlimited number of shares
authorized)............................................................................ $1.00
-----
-----
</TABLE>
See Notes to Financial Statements.
B-71
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest........................... $ 763,049
----------
Expenses
Management fee, net of waiver of
$127,531......................... 26,108
Distribution fee................... 38,410
Custodian's fees and expenses...... 32,000
Transfer agent's fees and
expenses......................... 14,500
Registration fee................... 12,000
Reports to shareholders............ 11,000
Audit fee.......................... 5,000
Legal fees......................... 5,000
Amortization of organization
expenses......................... 4,617
Trustees' fees..................... 1,700
Miscellaneous...................... 391
----------
Total expenses................... 150,726
----------
Net investment income................ 612,323
----------
Realized Loss on Investments
Net realized loss on investment
transactions....................... (4,743)
----------
Net Increase in Net Assets
Resulting from Operations............ $ 607,580
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Increase (Decrease) Six Months
in Net Assets Ended Year Ended
February 28, August 31,
1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income............... $ 612,323 $ 1,150,867
Net realized gain
(loss) on investment
transactions......... (4,743) 371
------------- -------------
Net increase in net
assets resulting from
operations........... 607,580 1,151,238
------------- -------------
Dividends and
distributions to
shareholders (Note
1)..................... (607,580) (1,151,238)
------------- -------------
Fund share transactions
(at $1 per share)
Net proceeds from
shares
subscribed........... 119,833,004 197,325,014
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 594,838 1,096,823
Cost of shares
reacquired........... (111,534,668) (181,107,990)
------------- -------------
Net increase in net
assets from Fund
share transactions... 8,893,174 17,313,847
------------- -------------
Total increase........... 8,893,174 17,313,847
Net Assets
Beginning of period...... 57,793,532 40,479,685
------------- -------------
End of period............ $ 66,686,706 $ 57,793,532
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-72
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Connecticut Money Market Series (the
``Series'') commenced investment operations on August 5, 1991. The Series is
non-diversified and seeks to provide the highest level of income that is exempt
from Connecticut State, local and federal income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities having a maturity of
thirteen months or less and whose ratings are within the two highest ratings
categories by a nationally recognized statistical rating organization, or if not
rated, are of comparable quality. The ability of the issuers of the securities
held by the Series to meet their obligations may be affected by economic
developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting pol-
icies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $52,600 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Note 2. Agreements The Fund has a manage-
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. Prior to
November 1, 1993, PMF voluntarily waived 100% of its management fees for the
Series. On November 1, 1993, PMF reduced the management fee waiver to 75%. The
amount of fees waived for the six months ended February 28, 1994 amounted to
$127,531 ($.002 per share; .42% of average net assets, annualized).
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
B-73
<PAGE>
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, th e Series incurred fees of
approximately $12,200 for the services of PMFS. As of February 28, 1994,
approximately $2,400 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations also include certain out-of-pocket
expenses paid to non-affiliates.
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results
for the interim period presented.
B-74
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
August 5,
Six Months Year ended August 1991*
Ended 31, through
February 28, ------------------- August 31,
1994 1993 1992 1991
------------ ------- ------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains(D)........................ .010 .022 .034 .003
Dividends and distributions to shareholders........................ (.010) (.022) (.034) (.003)
------------ ------- ------- ----------
Net asset value, end of period..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------- ------- ----------
------------ ------- ------- ----------
TOTAL RETURN#:..................................................... 1.01% 2.20% 3.42% .30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 66,687 $57,794 $40,480 $ 10,904
Average net assets (000)........................................... $ 61,965 $53,152 $33,964 $ 6,730
Ratios to average net assets(D):
Expenses, including distribution fee............................. .491%** .387% .125% .125%**
Expenses, excluding distribution fee............................. .366%** .262% .00% .00%**
Net investment income............................................ 1.98%** 2.17% 3.20% 4.42%**
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of management fee waiver and expense subsidy.
# Total return for periods less than a full year are not annualized.
See Notes to Financial Statements.
B-75
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
FLORIDA SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--92.9%
Alachua Cnty. Hlth.
Facs. Auth. Rev.,
Santa Fe Healthcare
Facs. Proj.,
Baa $ 1,750 7.60%, 11/15/13......... $ 1,914,972
Alachua Cnty. Ind. Dev.
Rev.,
HB Fuller Co. Proj.,
NR 3,000 7.75%, 11/1/16.......... 3,284,370
Brevard Cnty. Edl. Facs.
Auth. Rev., Florida
Inst. of Techn.,
BBB+* 1,500 6.875%, 11/1/22......... 1,576,815
Wuesthoff Mem. Hosp.,
Aaa 1,000 6.625%, 4/1/13, Ser. A,
M.B.I.A............... 1,092,380
Broward Cnty. Edl. Facs.
Auth.
Rev., Nova Univ. Dorm.
Proj.,
BBB* 1,500 7.50%, 4/1/17, Ser. A... 1,656,255
Broward Cnty. Res. Rec.
Rev.,
Ltd. Partnership So.
Proj.,
A 2,730 7.95%, 12/1/08.......... 3,104,201
Broward Cnty., Wtr. &
Swr. Rev.,
Aaa 1,750 5.125%, 10/1/15,
A.M.B.A.C............. 1,644,405
Cape Coral Hlth. Facs.
Auth.,
Hosp. Rev., Cape Coral
Med. Ctr. Inc. Proj.,
Baa 2,000 7.50%, 11/15/21......... 2,214,060
City of Atlantis,
Wtr. & Swr. Rev.,
BBB* 1,750 6.50%, 9/1/22........... 1,795,500
City of Cocoa,
Wtr. & Swr. Rev.,
Aaa 3,475 5.00%, 10/1/23, Ser. B,
A.M.B.A.C............. 3,151,860
City of Deerfield Beach,
Wtr. & Swr. Rev.,
Aaa 550 6.125%, 10/1/06,
F.G.I.C............... 602,943
City of Miami Beach
Hlth. Facs. Auth.
Hosp.,
Mt. Sinai Med. Ctr.,
Aaa* 750 6.125%, 11/15/14,
C.G.I.C............... 786,247
Clay Cnty. Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.,
Aaa $ 375 7.45%, 9/1/23, Ser. A,
G.N.M.A............... $ 397,178
Clay Cnty. Utils. Sys.
Rev.,
Aaa 3,500 5.00%, 11/1/23,
F.G.I.C............... 3,174,080
Coral Springs Impvt.
Dist.,
Wtr. & Swr. Rev.,
Aaa 1,000 6.00%, 6/1/10,
M.B.I.A............... 1,071,020
Dade Cnty. Hlth. Facs.
Auth. Rev., Baptist
Hosp. of Miami Proj.,
Aaa 500 6.75%, 5/1/08, Ser. A,
M.B.I.A............... 573,225
No. Shore Med. Ctr.
Proj.,
Aaa 750 6.50%, 8/15/15,
A.M.B.A.C............. 812,152
Dade Cnty. Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.
G.N.M.A.,
Aaa 1,025 7.75%, 9/1/22, Ser. C... 1,111,377
Aaa 360(dag)(dag) 7.25%, 9/1/23,
Ser. B... ........... 383,249
Dade Cnty. Pub. Facs.
Rev.,
Jackson Mem. Hosp.,
Aaa 2,000 4.875%, 6/1/15, Ser. A,
M.B.I.A............... 1,809,400
Dade Cnty. Sch. Dist.,
Aaa 1,500 5.00%, 8/1/13,
M.B.I.A............... 1,399,215
Dade Cnty. Wtr. & Swr.
Sys. Rev.,
Aaa 2,000 5.00%, 10/1/13,
F.G.I.C............... 1,869,500
Dunedin Hosp. Rev.,
Mease Healthcare,
Aaa 2,500 5.375%, 11/15/13,
M.B.I.A............... 2,421,500
Duval Cnty. Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.,
AAA* 830 8.375%, 12/1/14,
G.N.M.A............... 834,299
Escambia Cnty. Hlth.
Facs. Auth.
Rev., Baptist Hosp.
Inc.,
BBB+* 1,830 8.70%, 10/1/14, Ser.
A..................... 2,132,938
</TABLE>
B-76
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Escambia Cnty. Hsg. Fin.
Auth.
Rev., Sngl. Fam.
Mtge.,
Aaa $ 845(dag)(dag) 7.40%, 10/1/23,
Ser. A,
G.N.M.A............... $ 911,899
Florida St. Brd. of Ed.
Cap. Outlay,
Pub. Ed., Ser. A,
Aa 255(dag) 7.25%, 6/1/23........... 294,744
Aa 245 7.25%, 6/1/23........... 279,303
Florida St. Broward
Cnty.,
Expwy. Auth.,
Aa 2,100@ 9.875%, 7/1/09.......... 3,049,074
Florida St. Dept. of
Trans., Ser. A,
Aaa 1,000 7.20%, 7/1/11,
A.M.B.A.C............. 1,167,160
Tpke. Auth. Rev.,
Aaa 5,200 5.00%, 7/1/19,
F.G.I.C............... 4,747,132
Florida St. Div. Bond
Fin. Dept.,
Gen. Svcs. Rev.,
Aaa 1,500 6.75%, 7/1/13,
A.M.B.A.C............. 1,701,450
Gen. Svcs. Rev., Dept.
of Natural Res.
Preservation,
Aaa 1,650 6.25%, 7/1/09, Ser. A,
M.B.I.A............... 1,777,809
Aaa 2,490 5.50%, 7/1/11, F.S.A.... 2,497,570
Florida St. Gen. Oblig.,
Ref. Dade Cnty. Rd.,
Aa 1,500 5.125%, 7/1/13.......... 1,431,705
Jacksonville Trans.,
Aa 1,750 6.375%, 7/1/12.......... 1,868,440
Florida St. Hillsborough
Cnty. Expwy.,
Aa 500 5.50%, 10/1/08.......... 510,425
Florida St. Mun. Pwr.
Agcy. Rev.,
Aaa 4,365 4.50%, 10/1/27,
A.M.B.A.C............. 3,618,629
St. Lucie Proj.,
Aaa 2,000 5.25%, 10/1/21,
F.G.I.C............... 1,875,480
Florida St. Right of Way
Acquis. & Bridge,
Aa 1,500 5.50%, 7/1/23........... 1,459,440
Hillsborough Cnty. Hosp.
Auth.
Rev., Tampa Gen. Hosp.
Proj.,
Aaa 1,500 6.375%, 10/1/13,
F.S.A................. 1,612,935
Hillsborough Cnty. Util.
Ref. Rev.,
Aaa $ 2,000 5.25%, 8/1/06,
M.B.I.A............... $ 2,003,080
Jacksonville Elec. Auth.
Rev.,
Bulk Pwr. Supply
Scherer,
Aaa 1,000(dag) 6.75%, 10/1/21.......... 1,133,950
Elec. Sys. Ser. 3-B,
Aa1 1,000 5.20%, 10/1/13.......... 955,010
St. Johns Rvr. Pwr.
Park,
Aa1 3,000 Zero Coupon, 10/1/10.... 1,159,920
St. Johns Rvr.,
Aa1 1,000 5.40%, 10/1/10, Ser.
8..................... 990,220
Jacksonville Gtd.
Entitlement Rev.,
Aaa 1,000 5.50%, 10/1/12,
A.M.B.A.C............. 982,810
Jacksonville Hlth. Facs.
Auth. Hosp. Rev.,
Baptist Med. Ctr.
Proj.,
Aaa 450 7.30%, 6/1/19, Ser. A,
M.B.I.A............... 505,341
Daughters Of Charity,
Aa 1,000 5.00%, 11/15/15, Ser.
A..................... 921,510
Nat'l. Ben. Assoc.,
Baa1 1,825 7.00%, 12/1/22.......... 1,927,857
St. Lukes Hosp. Assoc.
Proj.,
AA+* 1,000 7.125%, 11/15/20........ 1,112,740
Jacksonville Wtr. & Swr.
Dev.
Rev., Suburban Utils.,
A2 1,000 6.75%, 6/1/22........... 1,087,070
Kissimmee Util. Auth.
Elec.
Sys. Rev., F.G.I.C.,
Aaa 2,500 5.375%, 10/1/12......... 2,458,050
Aaa 2,000 5.30%, 10/1/17, Ser.
A..................... 1,906,740
Lake Cnty. Res. Rec.
Ind. Dev. Rev.,
Baa 1,035 5.95%, 10/1/13, Ser.
A..................... 1,008,080
Leon Cnty. Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.,
Aaa 490 7.30%, 4/1/21, Ser. A,
G.N.M.A............... 522,453
</TABLE>
B-77
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Marion Cnty. Hosp. Dist.
Rev.,
Munroe Regl. Med.
Ctr.,
Aaa $ 500 6.25%, 10/1/12,
F.G.I.C............... $ 533,905
Martin Cnty.,
Aaa 1,575 4.50%, 2/1/09,
A.M.B.A.C............. 1,444,558
Miami Hlth. Facs. Auth.
Hosp.
Rev., Mercy Hosp.,
A 1,000 8.125%, 8/1/11.......... 1,136,130
Okaloosa Cnty. Cap.
Impvt. Rev.,
Aaa 450 Zero Coupon, 12/1/06,
M.B.I.A............... 230,868
Orange Cnty. Hlth Facs.,
Orlando,
Aaa 2,000 6.00%, 11/1/14,
M.B.I.A............... 2,084,660
Orange Cnty. Hsg. Fin.
Auth.,
Mtge. Rev.,
AAA* 420 7.375%, 9/1/24, Ser. A,
G.N.M.A............... 442,315
Orange Cnty. Sales Tax
Rev.,
Aaa 2,000 5.375%, 1/1/24, Ser. B,
F.G.I.C............... 1,907,080
Orlando & Orange Cnty.
Expwy.,
Auth. Rev.,
Aaa 1,000 7.125%, 7/1/06.......... 1,090,880
Aaa 1,000(dag) 7.25%, 7/1/14........... 1,094,360
Orlando Utils Comm.,
Wtr. & Elec. Rev.,
Aa1 1,500 5.125%, 10/1/19......... 1,373,190
Palm Beach Cnty. Arpt.
Sys. Rev.,
Aaa 1,000 7.75%, 10/1/10,
M.B.I.A............... 1,172,420
Palm Beach Cnty. Hlth.
Facs Auth. Rev.,
JFK Med. Ctr. Inc.
Proj.,
Aaa 4,255 5.75%, 12/1/14,
F.S.A................. 4,283,466
Polk Cnty. Sch. Brd.
Ctfs. Part.,
Aaa 1,000 4.875%, 1/1/18,
F.S.A................. 900,290
Puerto Rico Elec. Pwr.
Auth. Rev.,
Baa1 1,000 6.20%, 7/1/04........... 1,088,730
Puerto Rico Gen. Oblig.,
Aaa 3,000 8.932%, 7/1/20,
F.S.A................. 3,153,750
Pub. Impvt.,
Baa1 2,000 5.10%, 7/1/02........... 2,021,520
Baa1 2,000 5.40%, 7/1/07........... 2,016,860
Puerto Rico Hsg. Fin.
Corp. Rev.,
Sngl. Fam. Mtge. Rev.,
Baa $ 2,000 5.125%, 12/1/05......... $ 1,923,780
Baa 1,000 5.25%, 12/1/06.......... 960,370
Aaa 750 4.60%, 8/1/25........... 752,002
Puerto Rico Hwy. Auth.
Rev.,
Baa1 500(dag) 7.75%, 7/1/16, Ser. Q... 594,885
Puerto Rico Pub. Bldgs. Auth.,
Pub. Ed. & Hlth. Facs.,
Aaa 1,000(dag) 7.875%, 7/1/16, Ser.
H..................... 1,137,800
Puerto Rico Tel. Auth.
Rev.,
Aaa 2,250(dag)(dag) 8.03%, 1/16/15,
Ser. I,
M.B.I.A............... 2,247,187
Reedy Creek Impvt. Dist.
Utils. Rev., M.B.I.A.
Aaa 2,500 5.00%, 10/1/19, Ser.
1..................... 2,281,325
Sanford Wtr. & Swr.
Rev.,
Aaa 3,955 4.50%, 10/1/21,
A.M.B.A.C............. 3,342,252
Seminole Cnty. Solid
Waste Disp. Sys. Rev.,
Aaa 1,500 5.25%, 10/1/20,
F.G.I.C............... 1,415,865
St. Petersburg Hlth.
Facs. Auth.
Rev., Allegheny Hlth.
Prog.,
Aaa 1,000 7.00%, 12/1/15,
M.B.I.A............... 1,126,340
St. Petersburg Pub.
Impvt. Rev.,
Aaa 750 6.375%, 2/1/12,
M.B.I.A............... 809,160
Tallahassee Mun. Elec.
Rev.,
Aa 1,500 6.20%, 10/1/12.......... 1,588,290
Tampa Allegheny Hlth.
Sys. Rev., M.B.I.A.,
St. Marys Hosp.,
Aaa 2,000 5.125%, 12/1/23......... 1,827,940
St. Joseph Hosp.,
Aaa 2,535 6.70%, 12/1/07.......... 2,833,141
Tampa Gtd. Entitlement
Rev.,
Aaa 2,000 7.05%, 10/1/07,
A.M.B.A.C............. 2,275,520
Vero Beach Wtr. & Swr.
Rev.,
Aaa 3,000 5.00%, 12/1/21, Ser. B,
F.G.I.C............... 2,728,080
</TABLE>
See Notes to Financial Statements.
B-78
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Village Ctr. Cmnty. Dev.
Dist.,
Elec. & Pub. Pwr.,
Aaa $ 1,500 5.375%, 11/1/23......... $ 1,430,475
Virgin Islands Pub. Fin.
Auth. Rev.,
Hwy. Trans. Trust
Fund,
BBB* 260 7.65%, 10/1/99.......... 279,339
Ref. Matching Loan
Notes,
NR 900 7.25%, 10/1/18, Ser.
A..................... 1,011,978
Virgin Islands
Territory,
Hugo Ins. Claims Fund
Proj.,
NR 1,405 7.75%, 10/1/06, Ser.
91.................... 1,618,490
Virgin Islands Wtr. &
Pwr. Auth.,
Wtr. Sys. Rev.,
NR 680 7.60%, 1/1/12, Ser. B... 759,757
Volusia Cnty. Edl. Fac.
Auth. Rev.,
AAA* 1,000 6.625%, 10/15/22........ 1,083,690
Volusia Cnty. Hlth.
Facs.
Auth. Rev.,
BBB+* 2,000 8.25%, 6/1/20........... 2,259,240
------------
Total long-term
investments
(cost $145,851,410)..... 150,553,055
------------
SHORT-TERM INVESTMENTS--3.9%
Hillsborough Cnty.
Poll., Ctrl. Rev.
Bds.,
Tampa Elec. Co.,
VMIG1 700 2.45%, 3/1/94,
F.R.D.D............... 700,000
Jacksonville Hlth. Facs.
Auth. Rev.,
VMIG1 800 2.25%, 3/1/94,
F.R.D.D............... 800,000
Pinellas Cnty. Hlth.
Facs. Auth. Rev.,
Pooled Hosp. Loan
Prog.,
VMIG1 4,800 2.30%, 3/1/94,
F.R.D.D............... 4,800,000
------------
Total short-term
investments
(cost $6,300,000)....... 6,300,000
------------
Total Investments--96.8%
(cost $152,151,410; Note
5).................... $156,853,055
Other assets in excess
of
liabilities--3.2%..... 5,101,647
------------
Net Assets--100%........ $161,954,702
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corp.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C--Capital Guaranteed Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note.#
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(dag) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(dag)(dag) Indicates a when-issued security.
@ Pledged as initial margin on financial futures contracts.
* Standard & Poor's rating.
N.R.--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-79
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $152,151,410)............................................. $ 156,853,055
Interest receivable................................................................... 2,667,723
Receivable for investments sold....................................................... 2,626,676
Receivable for Fund shares sold....................................................... 628,383
Due from Manager...................................................................... 20,707
Deferred expenses and other assets.................................................... 15,434
-----------------
Total assets...................................................................... 162,811,978
-----------------
Liabilities
Bank overdraft........................................................................ 21,420
Payable for Fund shares reacquired.................................................... 695,785
Accrued expenses...................................................................... 69,041
Due to broker-variation margin payable................................................ 32,813
Dividends payable..................................................................... 26,403
Distribution fee payable.............................................................. 6,498
Management fee payable................................................................ 4,602
Deferred trustees' fees............................................................... 714
-----------------
Total liabilities................................................................. 857,276
-----------------
Net Assets............................................................................ $ 161,954,702
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................... $ 155,345
Paid-in capital in excess of par.................................................... 155,823,873
-----------------
155,979,218
Accumulated net realized gain on investments........................................ 1,015,776
Net unrealized appreciation on investments.......................................... 4,959,708
-----------------
Net assets, February 28, 1994....................................................... $ 161,954,702
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($150,443,797 (div) 14,430,584 shares of beneficial interest issued and
outstanding)...................................................................... $10.43
Maximum sales charge (4.5% of offering price) 0.49
-----------------
Maximum offering price to public.................................................... $10.92
-----------------
-----------------
Class D:
Net asset value, offering price and redemption price per share
($11,510,905 (div) 1,103,917 shares of beneficial interest issued and
outstanding)...................................................................... $10.43
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-80
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
Net Investment Income 28, 1994
----------
<S> <C>
Income
Interest............................. $4,584,049
----------
Expenses
Management fee, net waiver of
$239,020........................... 159,347
Distribution fee--Class A, net waiver
of $75,759......................... --
Distribution fee--Class D............ 29,355
Custodian's fees and expenses........ 42,000
Reports to shareholders.............. 27,000
Transfer agent's fees and expenses... 24,000
Registration fees.................... 15,000
Audit fee............................ 5,300
Legal fees........................... 5,000
Amortization of deferred organization
expense............................ 4,000
Trustees' fees....................... 1,700
Miscellaneous........................ 9,808
----------
Total expenses..................... 322,510
Less: expense subsidy (Note 3)....... (133,808)
----------
Net expenses....................... 188,702
----------
Net investment income.................. 4,395,347
----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions.............. 1,753,845
Financial futures contract
transactions....................... (83,425)
----------
1,670,420
----------
Net change in unrealized
appreciation/depreciation on:
Investments.......................... (5,930,022)
Financial futures contracts.......... 327,375
----------
(5,602,647)
----------
Net loss on investments................ (3,932,227)
----------
Net Increase in Net Assets
Resulting from Operations.............. $ 463,120
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 4,395,347 $ 7,354,295
Net realized gain on
investment
transactions.......... 1,670,420 2,571,909
Net change in unrealized
appreciation/depreciation
of investments........ (5,602,647) 6,419,976
------------ ------------
Net increase in net
assets resulting from
operations............ 463,120 16,346,180
------------ ------------
Dividends and
Distributions (Note 1):
Dividends to
shareholders
Class A................. (4,204,664) (7,348,931)
Class D................. (190,683) (5,364)
------------ ------------
(4,395,347) (7,354,295)
------------ ------------
Distributions to
shareholders from net
realized gains
Class A................. (2,821,852) (1,396,748)
Class D................. (142,331) --
------------ ------------
(2,964,183) (1,396,748)
------------ ------------
Fund share transactions
(Note 5)
Proceeds from shares
subscribed............ 26,766,482 52,329,243
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 3,481,922 3,739,870
Cost of shares
reacquired............ (13,428,646) (15,967,441)
------------ ------------
Net increase in net
assets
from Fund share
transactions.......... 16,819,758 40,101,672
------------ ------------
Total increase............ 9,923,348 47,696,809
Net Assets
Beginning of period....... 152,031,354 104,334,545
------------ ------------
End of period............. $161,954,702 $152,031,354
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
B-81
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Florida Series (the ``Series'') commenced
investment operations on December 28, 1990. The Series is non-diversified and
seeks to achieve its investment objective of providing the maximum amount of
income that is exempt from federal income taxes with the minimum of risk, and
investing in securities which will enable its shares to be exempt from the
Florida intangibles tax by investing in ``investment grade'' tax-exempt
securities whose ratings are within the four highest ratings categories by a
nationally recognized statistical rating organization or, if not rated, are of
comparable quality. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic developments in a
specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund,
and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason and because substantially all of the Series' gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-82
<PAGE>
Deferred Organization Expenses: The Series incurred approximately $32,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending December, 1995.
Note 2. Agreements The Fund has a management
agreement with Prudential
Mutual Fund Management, Inc. (``PMF''). Pursuant to this
agreement, PMF has responsibility for all investment advi-
sory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the six months ended February 28, 1994, PMF waived 60% of its management fee,
which amounted to $239,020 ($.02 per share; .30% of average net assets,
annualized). The Series is not required to reimburse PMF for such waiver.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as distributor of the Class A shares
of the Fund, and with Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class D shares of the Fund, (collectively, the
``Distributors'').
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. PMFD has voluntarily agreed to waive its
distribution fee, currently limited to .10 of 1% of average net assets, until
further notice. The amount of distribution fees waived by PMFD was $75,759
($.005 per share; .10% of average net assets, annualized) for the six months
ended February 28, 1994.
Pursuant to the Class D Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class D shares at an annual rate
of up to .75 of 1% of the average daily net assets of the Class D shares.
The Class D distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, the cost of printing and
mailing prospectuses to potential investors and of advertising incurred in
connection with the distribution of shares.
PMFD recovers the distribution expenses and service fees incurred through the
receipt of reimbursement payments from the Series under the plan and the receipt
of initial sales charges (Class A only). PSI is compensated for its distribution
expenses and service fees incurred through receipt of the distribution fee.
PMFD has advised the Series that it has received approximately $633,000 in
front-end sales charges resulting from sales of the Series' Class A shares
during the six months ended February 28, 1994. From these fees, PMFD paid such
sales charges to dealers (PSI and Prusec) which in turn paid commissions to
salespersons.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $22,200 for the services of PMFS. As of February 28, 1994,
approximately $3,800 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Expense PMF has voluntarily agreed
Subsidy to subsidize all operating
expenses (except management and distribution fees)
of the Class A and Class D shares of the Series until further notice. For the
six months ended February 28, 1994, PMF subsidized $133,808 ($.01 per share;
.18% of average net assets, annualized) of the Series' expenses. The Series is
not required to reimburse PMF for such subsidy.
Note 5. Portfolio Purchases and sales of port-
Securities folio securities, excluding
short-term investments, for the six months ended
February 28, 1994 were $64,991,713 and $50,861,219, respectively.
The cost basis of investments for federal income tax purposes as of February
28, 1994 was $152,152,660 and, accordingly, net unrealized appreciation
$4,700,395 (gross unrealized appreciation--$6,350,840; gross unrealized
depreciation--$1,650,445).
At February 28, 1994 the Series sold 75 financial futures contracts on the
Municipal Bond Index expiring in March 31, 1994. The value at disposition of
such contracts was $7,722,906. The value of such contracts on February 28,
B-83
<PAGE>
1994 was $7,464,843, thereby resulting in an unrealized gain of $258,063. The
Series has pledged $2,100,000 principal amount of Florida State Broward County
Expressway Authority bonds as initial margin on such contracts.
Note 6. Capital The Series offers both Class
A and Class D shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class D shares are sold with a deferred
sales load of 1% during the first year and 0% thereafter. Offering of Class D
shares commenced on July 26, 1993. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value per share. Transactions in shares of beneficial interest for
the six months ended February 28, 1994 and the year ended August 31, 1993 were
as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold................... 1,631,568 $ 17,651,066
Shares issued in reinvestment
of dividends and
distributions............... 306,159 3,255,663
Shares reacquired............. (1,200,634) (12,914,605)
---------- ------------
Net increase in shares
outstanding................. 737,093 $ 7,992,124
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 4,710,788 $ 49,235,380
Shares issued in reinvestment
of dividends and
distributions............... 358,775 3,737,322
Shares reacquired............. (1,530,543) (15,961,401)
---------- ------------
Net increase in shares
outstanding................. 3,539,020 $ 37,011,301
---------- ------------
---------- ------------
<CAPTION>
Class D Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold................... 842,086 $ 9,115,416
Shares issued in reinvestment
of dividends and
distributions............... 21,337 226,259
Shares reacquired............. (47,500) (514,041)
---------- ------------
Net increase in shares
outstanding................. 815,923 $ 8,827,634
---------- ------------
---------- ------------
July 26, 1993* through August
31, 1993:
Shares sold................... 288,326 $ 3,093,863
Shares issued in reinvestment
of dividends................ 235 2,548
Shares reacquired............. (567) (6,040)
---------- ------------
Net increase in shares
outstanding................. 287,994 $ 3,090,371
---------- ------------
---------- ------------
</TABLE>
- ------------------
* Commencement of offering of Class D shares.
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-84
<PAGE>
PUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class D
--------------------------------------------------------------- -----------------------------
December 28, July 26,
Six Months 1990* Six Months 1993(dag)(dag)
Ended Years Ended August 31, Through Ended Through
February -------------------------- August 31, February August 31,
28,1994 1993 1992 1991 28,1994 1993
------------ ---------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period............... $ 10.87 $ 10.27 $ 9.76 $ 9.55 $ 10.87 $ 10.58
------------ ---------- ---------- ------------- ------------ -----------
Income from investment
operations
Net investment
income(dag)............. .30 .57 .65 .44 .26 .03
Net realized and
unrealized gain on
investment
transactions............ (.24) .73 .51 .21 (.24) .29
------------ ---------- ---------- ------------- ------------ -----------
Total from investment
operations............ .06 1.30 1.16 .65 .02 .32
------------ ---------- ---------- ------------- ------------ -----------
Less distributions
Dividends from net
investment income....... (.30) (.57) (.65) (.44) (.26) (.03)
Distributions from net
realized gains.......... (.20) (.13) -- -- (.20) --
------------ ---------- ---------- ------------- ------------ -----------
Total distributions..... (.50) (.70) (.65) (.44) (.46) (.03)
------------ ---------- ---------- ------------- ------------ -----------
Net asset value, end of
period.................. $ 10.43 $ 10.87 $ 10.27 $ 9.76 $ 10.43 $ 10.87
------------ ---------- ---------- ------------- ------------ -----------
------------ ---------- ---------- ------------- ------------ -----------
TOTAL RETURN#:............ 0.57% 13.78% 12.26% 6.90% 0.19% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 150,444 $ 148,900 $ 104,335 $63,929 $ 11,511 $ 3,132
Average net assets
(000)................... $ 152,774 $ 123,820 $ 82,893 $41,528 $ 7,893 $ 1,038
Ratios to average net
assets(dag):
Expenses, including
distribution fees..... .19%** .20% 0.09% 0 .94%** .95%**
Expenses, excluding
distribution fees..... .19%** .20% 0.09% 0 .19%** .20%**
Net investment income... 5.55%** 5.94% 6.41% 6.68%** 4.87%** 5.19%**
Portfolio turnover........ 33% 68% 56% 39% 33% 68%
- ---------------
* Commencement of investment operations.
** Annualized.
(dag) Net of expense subsidy and fee waiver.
(dag)(dag) Commencement of offering of Class D shares.
# Total return does not consider the effects of sales loads. Total return is calculated
assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-85
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
GEORGIA SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--95.0%
Atlanta Urban Res. Fin.
Auth.,
Dorm Fac. Rev.,
Atlanta Gen. Oblig.,
Aa $ 585(D) 7.10%, 12/1/10........... $ 670,076
Clark Atlanta Univ.
Proj.,
NR 955(D) 9.25%, 6/1/10............ 1,194,982
Atlanta Wtr. & Swr. Rev.,
Aa 500 4.75%, 1/1/23............ 433,730
Clarke Cnty. Sch. Dist.,
Aaa 425 5.50%, 7/1/08,
F.G.I.C................ 433,751
Clayton Cnty. Solid Waste
Mgmt.
Auth. Rev.,
Aa 500 6.50%, 2/1/12, Ser. A.... 529,970
Clayton Cnty. Wtr. Auth.,
Wtr. & Sewage Rev.,
Aaa 500(D) 6.65%, 5/1/12............ 569,045
Cobb Cnty. Kennestone
Hosp.,
Auth. Rev.,
Aaa 750 5.00%, 4/1/24, Ser. A,
M.B.I.A................ 675,810
Cobb-Marietta Coliseum &
Exhibit Hall Auth. Rev.,
Aaa 500 5.50%, 10/1/18,
M.B.I.A................ 493,990
Columbus Hosp. Auth. Rev., Antic.
Cert., St. Francis Hosp.,
Aaa 500 8.25%, 1/1/07, B.I.G..... 565,005
DeKalb Cnty. Hlth. Facs.,
Gen. Oblig.,
Aa1 750 5.50%, 1/1/20............ 723,885
DeKalb Cnty. Wtr. & Swr.
Rev.,
Aa 750 5.25%, 10/1/23........... 700,950
DeKalb Private Hosp.
Auth. Rev.,
Wesley Svcs. Inc. Proj.,
Aa3 500 8.25%, 9/1/15............ 526,740
Douglasville-Douglas
Cnty.,
Wtr. & Swr. Auth. Rev.,
Aaa 750 5.625%, 6/1/15,
A.M.B.A.C.............. 760,643
Downtown Savannah Auth.
Rev.,
Chatham Co. Proj.,
Aa 250 5.00%, 1/1/11............ 234,280
Floyd Cnty. Wtr. & Swr.
Rev.,
Aaa $ 250 5.10%, 11/1/13,
F.G.I.C................ $ 237,760
Forsyth Cnty. Sch. Dist. Dev. Rev.,
A1 500 6.75%, 7/1/16, Ser. A.... 572,730
Fulco Hosp. Auth. Rev., Antic. Cert.,
Baptist Hlth.,
A 750 6.375%, 9/1/22, Ser. B... 774,622
Shepherd Spinal Ctr.
Proj.,
Aa3 750 7.75%, 10/1/08, Ser. A... 832,665
Fulton Cnty. Bldg. Auth. Rev.,
Human Res. & Gov't. Facs. Proj.,
Aa 250 7.00%, 1/1/10............ 277,443
Judicial Ctr. Proj.,
Aa 1,325 Zero Coupon, 1/1/11...... 501,486
Fulton Cnty. Sch. Dist.
Rev.,
Lindbrook Square Fndtn.,
Aa 750@ 6.375%, 5/1/17........... 839,535
Fulton-DeKalb Hosp. Auth.
Rev.,
Grady Hosp.,
Aaa 500 5.50%, 1/1/12,
M.B.I.A................ 492,145
Georgia Mun. Elec. Auth.
Pwr.
Rev. Ref.,
A1 250 5.30%, 1/1/07, Ser. Z.... 249,980
A1 250 6.00%, 1/1/14, Ser. A.... 253,530
A1 475 6.25%, 1/1/17, Ser. B.... 505,571
Green Cnty. Dev. Auth.,
Ind. Park Rev.,
NR 680 6.875%, 2/1/04........... 726,594
Gwinnett Cnty. Hosp.
Auth.,
Hosp. Sys. Proj.,
Aaa 500 5.00%, 9/1/13,
A.M.B.A.C.............. 462,985
Henry Cnty. Sch. Dist. Dev. Rev.,
A 750 6.45%, 8/1/11, Ser. A.... 820,312
Marietta Dev. Auth. Rev.,
Life Coll. Inc. Proj.,
Aaa 500 7.20%, 12/1/09,
C.G.I.C................ 562,990
Monroe Cnty. Dev. Auth.,
Poll. Ctrl. Rev.,
Gulf Pwr. Co. Proj.,
A2 500 10.50%, 12/1/14.......... 538,270
</TABLE>
See Notes to Financial Statements.
B-86
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Puerto Rico Hsg. Fin.
Corp., Sngl. Fam. Mtge.
Rev., G.N.M.A.,
Aaa $ 640 7.65%, 10/15/22, Ser.
1-B.................... $ 675,744
Puerto Rico, Gen. Oblig.,
Aaa 450 8.932%, 7/1/20, F.S.A.... 473,063
Pub. Impvt. Ref.,
Baa1 750 5.40%, 7/1/07............ 756,322
Savannah Hosp. Auth.
Rev.,
Candler Hosp.,
Baa 500 7.00%, 1/1/23............ 525,530
Toombs Cnty. Hosp.,
Dr. John Meadows Mem.
Hosp.,
BBB* 500 7.00%, 12/1/17........... 530,595
Virgin Islands Pub. Fin. Auth. Rev.,
Gen. Oblig.,
NR 200 7.25%, 10/1/18, Ser. A... 224,884
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 200 7.60%, 1/1/12, Ser. B.... 223,458
Wtr. Sys. Rev.,
NR 300 8.50%, 1/1/10, Ser. A.... 338,244
-----------
Total long-term
investments
(cost $19,477,352)..... 20,909,315
-----------
SHORT-TERM INVESTMENTS--4.5%
Georgia St. Hosp. Fin. Auth. Rev.,
F.R.D.D.,
VMIG1 500 2.30%, 3/1/94............ 500,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 $ 500 2.25%, 3/1/94, Ser. 85... $ 500,000
-----------
Total short-term
investments
(cost $1,000,000)...... 1,000,000
-----------
Total Investments--99.5%
(cost $20,477,352; Note
4)..................... 21,909,315
Other assets in excess of
liabilities--0.5%...... 108,790
-----------
Net Assets--100%......... $22,018,105
-----------
-----------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's Rating.
@ Pledged as initial margin on futures contracts.
(D) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-87
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
------------------
<S> <C>
Investments, at value (cost $20,477,352)................................................. $ 21,909,315
Interest receivable...................................................................... 333,627
Receivable for Fund shares sold.......................................................... 48,219
Deferred expenses and other assets....................................................... 586
------------------
Total assets......................................................................... 22,291,747
------------------
Liabilities
Payable for Fund shares reacquired....................................................... 129,620
Accrued expenses and other liabilities................................................... 118,566
Management fee payable................................................................... 8,638
Distribution fee payable................................................................. 8,283
Due to broker-variation margin payable................................................... 4,375
Dividends payable........................................................................ 3,446
Deferred trustees' fees.................................................................. 714
------------------
Total liabilities.................................................................... 273,642
------------------
Net Assets............................................................................... $ 22,018,105
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 18,863
Paid-in capital in excess of par....................................................... 20,528,417
------------------
20,547,280
Accumulated net realized gain on investments........................................... 4,487
Net unrealized appreciation on investments............................................. 1,466,338
------------------
Net assets, February 28, 1994.......................................................... $ 22,018,105
------------------
------------------
Class A:
Net asset value and redemption price per share
($1,152,882 / 98,751 shares of beneficial interest issued and outstanding)........... $11.67
Maximum sales charge (4.5% of offering price).......................................... .55
------------------
Maximum offering price to public....................................................... $12.22
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($20,865,223 / 1,787,501 shares of beneficial interest issued and outstanding)....... $11.67
------------------
------------------
</TABLE>
See Notes to Financial Statements.
B-88
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest........................... $ 674,205
------------
Expenses
Management fee..................... 55,084
Distribution fee--Class A.......... 563
Distribution fee--Class B.......... 52,268
Custodian's fees and expenses...... 25,000
Transfer agent's fees and
expenses........................... 8,500
Registration fees.................. 8,500
Reports to shareholders............ 6,000
Audit fee.......................... 5,300
Legal fees......................... 5,000
Trustees's fees.................... 1,700
Miscellaneous...................... 1,429
------------
Total expenses................... 169,344
------------
Net investment income................ 504,861
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ 86,799
Financial futures contract
transactions..................... (13,162)
------------
73,637
------------
Net change in unrealized
appreciation/
depreciation on:
Investments........................ (635,297)
Financial futures contracts........ 45,937
------------
(589,360)
------------
Net loss on investments.............. (515,723)
------------
Net Decrease in Net Assets
Resulting from Operations............ $ (10,862)
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 504,861 $ 926,363
Net realized gain on
investment
transactions........... 73,637 312,202
Net change in unrealized
appreciation/depreciation
of investments......... (589,360) 1,071,362
------------ -----------
Net increase (decrease)
in net assets resulting
from operations........ (10,862) 2,309,927
------------ -----------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................ (27,934) (24,841)
Class B................ (476,927) (901,522)
------------ -----------
(504,861) (926,363)
------------ -----------
Distributions to
shareholders from net
realized gain on
investment transactions
Class A................ (15,680) (8,466)
Class B................ (302,050) (631,421)
------------ -----------
(317,730) (639,887)
------------ -----------
Fund share transactions
(Note 6)
Net proceeds from shares
subscribed............. 1,973,223 4,700,499
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 556,920 1,006,072
Cost of shares
reacquired............. (1,596,335) (2,411,522)
------------ -----------
Net increase in net
assets from Fund share
transactions........... 933,808 3,295,049
------------ -----------
Total increase............. 100,355 4,038,726
Net Assets
Beginning of period........ 21,917,750 17,879,024
------------ -----------
End of period.............. $ 22,018,105 $21,917,750
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-89
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Georgia Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
B-90
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $9,400 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the six months ended
February 28, 1994, it received approximately $3,600 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that at February 28, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $859,300. This amount may
be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $6,700 for the services of PMFS. As of February 28, 1994,
approximately $1,100 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
B-91
<PAGE>
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $2,408,730 and $2,554,967, respectively.
The cost basis of investments for federal income tax purposes at February 28,
1994 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes is $1,431,963 (gross unrealized appreciation--$1,543,553, gross
unrealized depreciation-- $111,590).
At February 28, 1994, the Fund sold 10 financial futures contracts on the
Municipal Bond Index expiring in March 1994. The value at disposition of such
contracts was $1,029,688. The value of such contracts on February 28, 1994 was
$995,313, thereby resulting in an unrealized gain of $34,375. The Series has
pledged $750,000 principal amount of Fulton County School District Revenue Bonds
as initial margin on such contracts.
Note 5. Expense PMF has agreed to subsidize
Subsidy expenses so that total fund
operating expenses do not exceed 1.40% and 1.80%
of the average net assets of the Class A shares and Class B shares,
respectively. No subsidy was required for the six months ended February 28,
1994.
Note 6. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for six months ended February 28, 1994 and the fiscal year ended August
31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- -------- ----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold....................... 21,757 $ 263,691
Shares issued in reinvestment of
dividends and distributions..... 2,095 24,972
Shares reacquired................. (16,411) (198,513)
-------- ----------
Net increase in shares
outstanding..................... 7,441 $ 90,150
-------- ----------
-------- ----------
Year ended August 31, 1993:
Shares sold....................... 76,007 $ 894,503
Shares issued in reinvestment of
dividends and distributions..... 1,747 20,330
Shares reacquired................. (1,557) (18,441)
-------- ----------
Net increase in shares
outstanding..................... 76,197 $ 896,392
-------- ----------
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 142,147 $ 1,709,532
Shares issued in reinvestment of
dividends and distributions.... 44,678 531,948
Shares reacquired................ (116,858) (1,397,822)
-------- -----------
Net increase in shares
outstanding.................... 69,967 $ 843,658
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 323,985 $ 3,805,996
Shares issued in reinvestment of
dividends and distributions.... 85,416 985,742
Shares reacquired................ (206,341) (2,393,081)
-------- -----------
Net increase in shares
outstanding.................... 203,060 $ 2,398,657
-------- -----------
-------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results
for the interim period presented.
B-92
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- --------------------------------------------------------------
January 22,
Six Months 1990(D)(D) Six Months
Ended Year Ended August 31, through Ended Year Ended August 31,
February 28, ------------------------ August 31, February 28, -----------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $12.12 $11.69 $11.39 $11.05 $ 11.26 $ 12.12 $ 11.69 $ 11.39 $ 11.05 $ 11.23 $ 10.97
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Income
from
investment
operations
Net
investment
income... .30 .62 .65) .64 .41 .27 .57 .61) .60 .65 .68
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... (.28) .85 .54 .43 (.21) (.28) .85 .54 .43 (.18) .26
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Total
from
investment
operations... .02 1.47 1.19 1.07 .20 (.01) 1.42 1.15 1.03 .47 .94
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Less
distributions
Dividends
from
net
investment
income.. (.30) (.62) (.65) (.64) (.41) (.27) (.57) (.61) (.60) (.65) (.68)
Distributions
from net
realized
gains... (.17) (.42) (.24) (.09) -- (.17) (.42) (.24) (.09) -- --
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Total
distri-
butions... (.47) (1.04) (.89) (.73) (.41) (.44) (.99) (.85) (.69) (.65) (.68)
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Net asset
value,
end of
period... $11.67 $12.12 $11.69 $11.39 $ 11.05 $ 11.67 $ 12.12 $ 11.69 $ 11.39 $ 11.05 $ 11.23
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
TOTAL
RETURN#:... 0.20% 13.28% 10.84% 10.03% 1.71% 0.00% 12.83% 10.40% 9.57% 4.18% 8.74%
RATIOS/SUPPLEMENTAL DATA:
Net
assets,
end of
period
(000)... $1,153 $1,107 $ 177 $ 102 $ 83 $ 20,865 $20,811 $17,702 $17,722 $20,310 $24,124
Average
net
assets
(000)... $1,136 $ 475 $ 155 $ 98 $ 21 $ 21,080 $18,437 $17,436 $19,008 $22,614 $25,292
Ratios to
average
net
assets:
Expenses,
including
distribution
fees... 1.16%* 1.27% 1.24) 1.70% 1.46%* 1.56%* 1.67% 1.64) 2.08% 1.67% 1.58%
Expenses,
excluding
distribution
fees... 1.06%* 1.17% 1.14) 1.60% 1.36%* 1.06%* 1.17% 1.14) 1.58% 1.22% 1.20%
Net
investment
income... 4.96%* 5.29% 5.68) 5.67% 5.92%* 4.56%* 4.89% 5.28) 5.36% 5.85% 6.02%
Portfolio
turnover... 11% 41% 58% 33% 49% 11% 41% 58% 33% 49% 83%
</TABLE>
- ---------------
* Annualized.
(D) Net of expense subsidy.
(D)(D) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are
not annualized.
See Notes to Financial Statements.
B-93
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MARYLAND SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.0%
Anne Arundel Cnty.,
Annapolis Life Care
Inc.,
Ginger Cove,
NR $ 750 6.00%, 1/1/18............ $ 727,733
Cons. Gen. Impvt.,
Aa1 1,000 6.00%, 7/15/11........... 1,041,480
Baltimore Cert. of Part.,
M.B.I.A.,
Aaa 1,000 5.25%, 4/1/16............ 952,230
Pension Funding,
Aaa 1,000(dag) 7.25%, 4/1/16, Ser. A.... 1,153,920
Baltimore City Hsg. Corp.
Rev.,
Multifamily Hsg. Mtg.
Rev., Ser. A,
AAA* 960 7.25%, 7/1/23,
F.N.M.A................ 1,015,478
Baltimore Econ. Dev.
Lease
Rev., Armistead
Partnership,
BBB* 1,000 7.00%, 8/1/11............ 1,100,090
Baltimore Gen. Oblig.,
Aaa 1,000 7.05%, 10/15/07,
Ser. B, M.B.I.A........ 1,180,030
A1 1,000 7.15%, 10/15/08, Ser.
B...................... 1,191,110
Baltimore Util. Pub.
Impvt.,
Aaa 500 7.00%, 10/15/09,
Ser. A, M.B.I.A........ 587,180
Charles Cnty., Gen.
Oblig.,
A1 1,580 6.375%, 12/1/03.......... 1,755,680
Dist. Of Columbia Met.
Area Transit Auth.
Gross Rev.,
Aaa 600 6.00%, 7/1/09,
F.G.I.C................ 643,674
Aaa 1,000 5.25%, 7/1/14,
F.G.I.C................ 954,230
Gaithersburg Econ. Dev.
Rev.,
Asbury Methodist,
A 1,000 5.50%, 1/1/20............ 916,300
Harford Cnty.,
Cons. Pub. Impvt.,
Aa 1,500 4.90%, 12/1/10........... 1,413,120
Howard Cnty., Met. Dist.,
Aa1 2,115 Zero Coupon, 8/15/09,
Ser. B................. 899,742
Kent Cnty., Coll. Rev. Proj. & Ref.,
Washington Coll. Proj.,
Baa1 1,500 7.70%, 7/1/18............ 1,695,585
Maryland St. Hlth. &
Higher Edl. Facs. Auth.
Rev.,
Anne Arundel Med. Ctr.,
Aaa 1,000 5.00%, 7/1/23,
A.M.B.A.C.............. 907,310
Maryland St. Hlth. &
Higher Edl. Facs. Auth.
Rev.,
Baltimore Cnty., Gen.
Hosp.,
Aaa $ 750(dag) 7.75%, 7/1/13,
A.M.B.A.C.............. $ 864,120
Broadmead Proj.,
NR 500 7.625%, 7/1/10........... 543,180
Church Hosp.,
A 500 8.00%, 7/1/13............ 569,905
Franklin Square Hosp.,
Aaa 1,000 7.50%, 7/1/19,
M.B.I.A................ 1,140,800
Good Samaritan Hosp.,
A 1,100 5.75%, 7/1/19............ 1,088,318
Hartford Mem. Hosp. & Fallston,
Baa1 750 8.50%, 7/1/14............ 850,448
Howard Cnty. Gen. Hosp.,
Baa1 1,000(dag) 7.00%, 7/1/17............ 1,107,750
Montgomery Gen. Hosp.,
Baa1 1,500 5.00%, 7/1/23............ 1,335,495
No. Arundel Hosp.,
Aaa 1,250(dag) 7.875%, 7/1/21, B.I.G.... 1,444,862
Peninsula Reg. Med.,
A 1,200 5.00%, 7/1/23............ 1,065,312
Roland Park Proj.,
NR 1,000 7.75%, 7/1/12............ 1,108,450
Sinai Hosp. of Baltimore,
Aaa 1,000 5.25%, 7/1/19,
A.M.B.A.C.............. 943,800
Aaa 600 5.25%, 7/1/23,
A.M.B.A.C.............. 561,678
Maryland St. Hsg. &
Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev.
Prog.,
Aa 850 7.125%, 4/1/14, Sixth
Ser.................... 908,259
Aa 925 7.70%, 4/1/15, Fifth
Ser.................... 1,009,231
Aa 750 8.00%, 4/1/18, Third
Ser.................... 809,565
Maryland St. Ind. Auth.
Econ. Dev.,
Holy Cross Hlth. Sys.
Corp.,
A1 1,500 5.50%, 12/1/15........... 1,462,710
Maryland St. Ind. Dev. Fin. Auth.
Rev., Amer. Ctr. For Physics,
BBB* 1,000 6.625%, 1/1/17........... 1,047,550
Maryland Wtr. Quality
Fin. Admin.,
Revolving Loan Fund Rev.,
A1 1,000 7.25%, 9/1/12, Ser. B.... 1,132,200
Aa 500 5.40%, 9/1/13............ 493,470
</TABLE>
See Notes to Financial Statements.
B-94
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Montgomery Cnty. Hsg.
Opportunities Comn.,
Multifamily Mtge. Rev.,
A $ 1,000 7.00%, 7/1/23............ $ 1,026,510
Sngl. Fam. Mtge. Rev.,
Aa 1,500 7.625%, 7/1/17, Ser. A... 1,586,190
Montgomery Cnty.,
Cons. Pub. Impvt.,
Aaa 450 9.75%, 6/1/01............ 597,816
Northeast Waste Disp.
Auth.,
Baltimore City Sludge
Proj.,
NR 1,000 7.25%, 7/1/07............ 987,270
Montgomery Cnty.,
A 2,200 6.30%, 7/1/16............ 2,244,440
Prince Georges Cnty.,
Cons. Pub. Impvt.,
A 750 5.00%, 1/15/09........... 710,722
Hosp. Rev., Dimensions
Hlth. Corp.,
A 750 5.30%, 7/1/24............ 689,198
Stormwater Mgmt.,
A1 1,140 6.50%, 3/15/03........... 1,260,566
Puerto Rico Comnwlth.
Aqueduct & Swr. Auth.
Rev.,
Aaa 100 10.125%, 7/1/99.......... 123,332
Aaa 225 10.25%, 7/1/09........... 318,312
Puerto Rico Comnwlth., Gen. Oblig.,
Aaa 1,000 8.932%, 7/1/20, F.S.A.... 1,051,250
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
Baa 1,500 5.125%, 12/1/04.......... 1,454,640
Puerto Rico Tel. Auth.
Rev.,
8.03%, 1/16/15,
Aaa 1,000 M.B.I.A., Ser. I......... 998,750
Virgin Islands Pub. Fin.
Auth. Rev.,
Ref. Matching Loan
Notes,
NR 600 7.25%, 10/1/18, Ser. A... 674,652
Virgin Islands Wtr. &
Pwr. Auth.,
Wtr. Sys. Rev.,
NR 400 7.20%, 1/1/02, Ser. B.... 437,208
NR 600 8.50%, 1/1/10, Ser. A.... 676,488
Washington Suburban San.
Dist.,
Gen. Construction,
Aa1 $ 1,750 5.00%, 6/1/15............ $ 1,628,515
Aa1 1,000 5.25%, 6/1/16, Ser. 2.... 958,140
Sewage Disp.,
Aa 1,500 5.375%, 6/1/12........... 1,475,040
Water Ref.,
Aa1 1,000 5.00%, 6/1/15............ 930,580
-----------
Total long-term
investments
(cost $54,270,373)..... 57,451,614
-----------
SHORT-TERM INVESTMENTS--2.1%
Maryland St. Energy Fin.
Admin.,
Hsg. Mtge. Rev.,
VMIG1 1,200 2.30%, 3/1/94, F.R.D.D.
(cost $1,200,000)...... 1,200,000
-----------
Total Investments--99.1%
(cost $55,470,373; Note
4)..................... 58,651,614
Other assets in excess of
liabilities--0.9%...... 562,487
-----------
Net Assets--100%........ $59,214,101
-----------
-----------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's Rating.
(dag) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-95
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
February 28,
Assets 1994
------------
Investments, at value (cost $55,470,373)................................................... $ 58,651,614
Interest receivable........................................................................ 847,310
Receivable for Fund shares sold............................................................ 20,167
Other assets............................................................................... 1,162
------------
Total assets............................................................................. 59,520,253
------------
Liabilities
Bank overdraft............................................................................. 7,607
Payable for Fund shares reacquired......................................................... 191,571
Accrued expenses........................................................................... 48,824
Management fee payable..................................................................... 23,231
Distribution fee payable................................................................... 22,268
Dividends payable.......................................................................... 11,937
Deferred trustees' fees.................................................................... 714
------------
Total liabilities........................................................................ 306,152
------------
Net Assets................................................................................. $ 59,214,101
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 52,987
Paid-in capital in excess of par......................................................... 55,447,666
------------
55,500,653
Accumulated net realized gain on investments............................................. 532,207
Net unrealized appreciation.............................................................. 3,181,241
------------
Net assets, February 28, 1994............................................................ $ 59,214,101
------------
------------
Class A:
Net asset value and redemption price per share ($3,099,210 (div) 277,590 shares of
beneficial interest issued and outstanding)............................................ $11.16
Maximum sales charge (4.5% of offering price)............................................ .53
------------
Maximum offering price to public......................................................... $11.69
------------
------------
Class B:
Net asset value, offering price and redemption price per share ($56,114,891 (div)
5,021,078 shares of
beneficial interest issued and outstanding)............................................ $11.18
------------
------------
</TABLE>
See Notes to Financial Statements.
B-96
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest.............................. $ 1,829,821
------------
Expenses
Management fee........................ 150,769
Distribution fee--Class A............. 1,488
Distribution fee--Class B............. 143,326
Custodian's fees and expenses......... 38,000
Transfer agent's fees and expenses.... 18,000
Reports to shareholders............... 12,000
Registration fees..................... 10,000
Audit fee............................. 5,300
Legal fees............................ 5,000
Trustee's fees........................ 1,700
Miscellaneous......................... 645
------------
Total expenses...................... 386,228
------------
Net investment income................. 1,443,593
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... 962,736
Financial futures contract
transactions.......................... (83,881)
------------
878,855
------------
Net change in unrealized
appreciation/depreciation on:
Investments........................... (2,285,167)
Financial futures contracts........... 28,875
------------
(2,256,292)
------------
Net loss on investments................. (1,377,437)
------------
Net Increase in Net Assets
Resulting from Operations............... $ 66,156
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income..... $ 1,443,593 $ 2,860,729
Net realized gain on
investment
transactions............ 878,855 1,079,334
Net change in unrealized
appreciation/depreciation
of investments.......... (2,256,292) 2,218,425
------------ -----------
Net increase in net assets
resulting from
operations.............. 66,156 6,158,488
------------ -----------
Dividends and distributions (Note 1):
Dividends to shareholders
from net investment
income
Class A................... (77,036) (112,413)
Class B................... (1,366,557) (2,748,316)
------------ -----------
(1,443,593) (2,860,729)
------------ -----------
Distributions to
shareholders from net
realized gains on
investments
Class A................... (53,117) (18,889)
Class B................... (1,057,112) (562,219)
------------ -----------
(1,110,229) (581,108)
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 3,252,643 8,738,496
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 1,807,867 2,374,657
Cost of shares
reacquired................ (3,887,077) (5,949,464)
------------ -----------
Net increase in net assets
from Fund share
transactions............ 1,173,433 5,163,689
------------ -----------
Total increase (decrease)... (1,314,233) 7,880,340
Net Assets
Beginning of period......... 60,528,334 52,647,994
------------ -----------
End of period............... $ 59,214,101 $60,528,334
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-97
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Maryland Series (the ``Series'') commenced
investment operations in January, 1985. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting policies
followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-98
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''). PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Series under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $16,900 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the six months
ended February 28, 1994, it received approximately $21,600 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $1,312,000.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $13,600 for the services of PMFS. As of February 28, 1994,
approximately $2,300 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of
Securities portfolio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $13,673,995 and $12,761,824, respectively.
B-99
<PAGE>
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of February 28, 1994, net unrealized appreciation of investments for federal
income tax purposes is $3,181,241 (gross unrealized appreciation-- $3,604,385;
gross unrealized depreciation $423,144).
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1994 and the fiscal year ended
August 31, 1993 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Shares Amount
-------- ----------
Six months ended February 28, 1994:
Shares sold....................... 41,972 $ 481,524
Shares issued in reinvestment
of dividends and
distributions................... 8,547 97,260
Shares reacquired................. (24,714 ) (285,272)
-------- ----------
Net increase in shares
outstanding..................... 25,805 $ 293,512
-------- ----------
-------- ----------
Year ended August 31, 1993:
Shares sold....................... 178,669 $2,012,997
Shares issued in reinvestment
of dividends and
distributions................... 9,349 104,954
Shares reacquired................. (56,465 ) (642,673)
-------- ----------
Net increase in shares
outstanding..................... 131,553 $1,475,278
-------- ----------
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Class B Shares Amount
-------- -----------
Six months ended February 28, 1994:
Shares sold...................... 240,435 $ 2,771,119
Shares issued in reinvestment
of dividends and
distributions.................. 150,166 1,710,607
Shares reacquired................ (312,432) (3,601,805)
-------- -----------
Net increase in shares
outstanding.................... 78,169 $ 879,921
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 598,587 $ 6,725,499
Shares issued in reinvestment
of dividends and
distributions.................. 202,460 2,269,703
Shares reacquired................ (473,226) (5,306,791)
-------- -----------
Net increase in shares
outstanding.................... 327,821 $ 3,688,411
-------- -----------
-------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-100
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- --------------------------------------------------------------
January 22,
Six Months 1990 (dag) Six Months
Ended Year Ended August 31, through Ended Year Ended August 31,
February 28, ------------------------ August 31, February 28, -----------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $11.64 $11.11 $10.67 $10.23 $ 10.44 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Income
from
investment
operations
Net
investment
income... .29 .62 .63 .67 .40 .27 .58 .59 .63 .62 .65
Net
realized
and
unrealized
gain
(loss)
on
investment
transactions...(.27) .65 .44 .44 (.21) (.26) .65 .44 .45 (.25) .25
------ ------ ------ ------ ------- ------- ------- ------- ------- ------- ------
Total
from
investment
operations... .02 1.27 1.07 1.11 .19 .01 1.23 1.03 1.08 .37 .90
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Less
distributions
Dividends
from
net
investment
income... (.29) (.62) (.63) (.67) (.40) (.27) (.58) (.59) (.63) (.62) (.65)
Distributions
from net
realized
gains... (.21) (.12) -- -- -- (.21) (.12) -- -- -- --
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Total
distributions..(.50) (.74) (.63) (.67) (.40) (.48) (.70) (.59) (.63) (.62) (.65)
------ ------ ------ ------ ------- -------- ------- ------- ------- ------- -------
Net asset
value,
end of
period.. $11.16 $11.64 $11.11 $10.67 $ 10.23 $ 11.18 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
TOTAL
RETURN#:... 0.27% 11.89% 10.35% 10.84% 1.71% 0.16% 11.43% 9.90% 10.49% 3.58% 9.17%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000).. $3,099 $2,930 $1,335 $ 804 $ 349 $ 56,115 $57,598 $51,313 $51,110 $48,226 $47,409
Average
net
assets
(000)... $3,002 $2,068 $1,080 $ 518 $ 141 $ 57,805 $53,780 $50,970 $48,422 $48,573 $44,243
Ratios to
average
net
assets:
Expenses,
including
distribution
fees... .90%* .96% .96% 1.10% 1.01%* 1.30%* 1.36% 1.37% 1.49% 1.40% 1.37%
Expenses,
excluding
distribution
fees... .80%* .86% .86% 1.00% .91%* .80%* .86% .87% .99% .92% .90%
Net
investment
income... 5.17%* 5.51% 5.80% 6.07% 6.31%* 4.77%* 5.11% 5.42% 5.70% 5.95% 6.26%
Portfolio
turnover... 22% 41% 34% 18% 46% 22% 41% 34% 18% 46% 47%
</TABLE>
- ---------------
* Annualized.
(dag) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
See Notes to Financial Statements.
B-101
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MASSACHUSETTS SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.4%
Boston, Gen. Oblig., Ser. A,
A* $ 500(dag)9.75%, 1/1/05............ $ 540,485
Aaa 2,000 7.375%, 2/1/10,
A.M.B.A.C.............. 2,314,300
Boston Ind. Dev. Fin. Auth., Swr. Fac.
Rev., Harbor Elec. Energy Co. Proj.,
Baa1 1,500 7.375%, 5/15/15.......... 1,648,905
Boston Wtr. & Swr. Comn. Rev.,
A 495+ 7.875%, 11/1/13, Ser.
A...................... 555,162
A 875 7.875%, 11/1/13, Ser.
A...................... 973,105
Brockton Mass.,
Baa1 530 6.125%, 6/15/18.......... 537,049
Holyoke, Gen. Oblig.,
Sch. Proj.,
Aaa 700 8.10%, 6/15/05,
M.B.I.A................ 856,520
Lowell, Gen. Oblig.,
Baa1 750+ 7.625%, 2/15/10.......... 890,482
Lynn Wtr. & Swr. Comn.,
Gen. Rev., Ser. A,
Aaa 2,100+ 7.25%, 12/1/10,
M.B.I.A................ 2,449,440
Mass. Bay Trans. Auth.,
A 1,500 6.20%, 3/1/16, Ser. B.... 1,626,990
Mass. St. Gen. Oblig.,
Dedicated Inc. Tax,
A 1,000 7.875%, 6/1/97, Ser. A... 1,078,780
A 665 Zero Coupon, 8/1/06, Ser.
A...................... 347,177
A 500 5.50%, 11/1/07, Ser. B... 506,680
Mass. St. Hlth. & Edl.
Facs. Auth. Rev.,
Bentley Coll.,
A 1,325+ 8.125%, 7/1/17, Ser. G... 1,429,092
Beth Israel Hosp.
Aaa 1,500 9.384%, 7/1/25,
A.M.B.A.C.............. 1,567,500
Beverly Hosp., Ser. D,
Aaa 750 7.30%, 7/1/13,
M.B.I.A................ 842,947
Holy Cross Coll., Ser. F,
A1 1,500+ 8.35%, 11/1/07........... 1,612,800
Mass. St. Hlth. & Edl.
Facs.
Auth. Rev.,
Jordan Hosp.,
A/X/* $ 650 6.875%, 10/1/22.......... $ 696,696
Mass. Gen. Hosp.,
Aaa 1,250 5.25%, 7/1/23, Ser. G,
A.M.B.A.C.............. 1,165,125
Mass. Inst. Techn.,
Aaa 1,885 5.00%, 7/1/23, Ser. H.... 1,715,275
Morton Hosp. & Med. Ctr.,
AAA* 1,000 5.50%, 7/1/23............ 961,920
New England Med. Ctr.,
A1 1,175 7.875%, 7/1/11, Ser. E... 1,354,117
Aaa 1,000 6.875%, 4/1/22, Ser. D,
A.M.B.A.C.............. 1,111,380
Newton-Wellesley Hosp.,
Aaa 2,000 8.00%, 7/1/18, Ser. C,
B.I.G.................. 2,292,380
Northeastern Univ., Ser.
D,
Aaa 1,500 7.125%, 10/1/10,
A.M.B.A.C.............. 1,700,505
St. Elizabeth Hosp.,
AA* 1,200+ 7.75%, 8/1/27, Ser. B,
F.H.A.................. 1,360,284
Tufts Univ.,
Aaa 1,235+ 7.40%, 8/1/18, Ser. C.... 1,407,097
A1 265 7.40%, 8/1/18, Ser. C.... 293,096
Valley Regl. Hlth. Sys.,
Baa 1,000 8.00%, 7/1/18, Ser. B.... 1,113,330
Mass. St. Hsg. Fin. Agcy. Hsg. Rev.,
Sngl. Fam. Mtge.,
Aa 165 11.00%, 12/1/09, Ser.
1984A.................. 172,864
Aa 1,755 8.10%, 12/1/14, Ser. 6... 1,913,459
Aa 570 9.50%, 12/1/16, Ser.
1985A.................. 599,082
Aa 330 6.30%, 6/1/25............ 332,435
Aa 985 7.125%, 6/1/25, Ser.
21..................... 1,048,542
Mass. St. Ind. Fin. Agcy.
Rev.,
Brooks School,
A 640 5.95%, 7/1/23............ 652,090
Cape Cod Hlth. Sys.,
Aaa 2,000+ 8.50%, 11/15/20.......... 2,466,220
Merrimack College,
BBB-* 990 7.125%, 7/1/12........... 1,070,823
</TABLE>
See Notes to Financial Statements.
B-102
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Mass St. Ind. Fin. Agcy.
Rev.,
Springfield College,
Baa1 $ 900 5.625%, 9/15/10.......... $ 855,801
Mass. St. Indl. Fin.
Agcy.,
Poll. Ctrl. Rev.,
Eastern Edison Co.
Project,
Baa 1,000 5.875%, 8/1/08........... 990,830
Mass. St. Mun. Wholesale
Elec. Co. Pwr. Supply
Sys. Rev.,
Aaa 1,000 5.00%, 7/1/13,
M.B.I.A................ 926,800
Baa1 750 6.75%, 7/1/17, Ser.B..... 810,810
Mass. St. Port Auth.
Rev.,
Aa 260 9.375%, 7/1/15, Ser. B... 282,656
Aa 500 5.00%, 7/1/18............ 460,975
Mass. St. Tpke. Auth.
Rev.,
Aaa 450 5.125%, 1/1/23, Ser. A,
F.G.I.C................ 413,537
Mass. St. Wtr. Res.
Auth., Ser. A,
A 1,000 6.50%, 7/15/19........... 1,102,250
A 800 5.75%, 12/1/21........... 783,624
New England Ed. Loan Mkt. Corp.,
Mass. Student Loan Rev.,
A 1,500 6.75%, 9/1/02, Ser. C.... 1,630,260
Palmer, Gen. Oblig., Ser.
F,
Aaa 500 7.30%, 3/1/10,
A.M.B.A.C.............. 578,345
Plymouth Cnty. Corr. Facs. Proj.,
Cert. of Part.,
BBB* 500 7.00%, 4/1/22, Ser. A.... 541,975
Puerto Rico Aqueduct &
Swr. Auth. Rev.,
Aaa 400 10.25%, 7/1/09, E.T.M.... 565,888
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 750 7.00%, 7/1/10,
A.M.B.A.C.............. 917,348
Aaa 1,250 8.932%, 7/1/20, F.S.A.... 1,314,062
Puerto Rico Commwlth.,
Gen.
Oblig., Pub. Impvt.
Ref.,
Baa1 $ 1,500 5.40%, 7/1/07............ $ 1,512,645
Baa1 250 7.00%, 7/1/10............ 299,760
Puerto Rico Comnwlth.,
Hwy. & Trans. Auth.
Hwy. Rev.,
Baa1 1,000 5.25%, 7/1/21, Ser. X.... 927,530
Puerto Rico Hsg. Fin.
Auth. Rev., Sngl. Fam.
Mtge.,
Baa 750 5.125%, 12/1/05.......... 721,418
Quincy Hosp. Rev.,
Aaa 1,000 5.25%, 1/15/16, F.S.A.... 939,300
Virgin Islands Pub. Fin. Auth. Rev.,
Ref. Matching Loan Notes,
NR 400 7.25%, 10/1/18, Ser. A... 449,768
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys. Rev.,
NR 1,000 8.50%, 1/1/10, Ser. A.... 1,127,480
NR 270 7.60%, 1/1/12, Ser. B.... 301,668
-----------
Total long-term
investments
(cost $56,579,569)..... 61,658,864
-----------
SHORT-TERM INVESTMENTS--3.0%
Mass. Comnwlth., Ded.
Inc. Tax,
F.R.D.D.,
VMIG1 1,000 2.25%, 3/1/94, Ser.
90E.................... 1,000,000
Mass. St. Hlth. & Edl.
Facs. Auth. Rev.,
Cap. Asset Prog.,
F.R.D.D.,
VMIG1 200 2.15%, 3/1/94, Ser.
85B.................... 200,000
VMIG1 700 2.15%, 3/1/94, Ser.
85C.................... 700,000
-----------
Total short-term
investments
(cost $1,900,000)........ 1,900,000
-----------
Total Investments--100.4%
(cost $58,479,569; Note
4)..................... 63,558,864
Liabilities in excess of
other
assets--(0.4%)......... (234,409)
-----------
Net Assets--100%......... $63,324,455
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-103
<PAGE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
(dag) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-104
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February
Assets 28, 1994
---------
<S> <C>
Investments, at value (cost $58,479,569)............................................... $63,558,864
Cash................................................................................... 28,641
Interest receivable.................................................................... 925,161
Receivable for Fund shares sold........................................................ 137,631
Deferred expenses and other assets..................................................... 1,311
-----------------
Total assets......................................................................... 64,651,608
-----------------
Liabilities
Payable for investments purchased...................................................... 978,291
Payable for Fund shares reacquired..................................................... 229,279
Accrued expenses....................................................................... 62,141
Management fee payable................................................................. 24,775
Distribution fee payable............................................................... 23,908
Dividends payable...................................................................... 8,045
Deferred Trustees' fees................................................................ 714
-----------------
Total liabilities.................................................................... 1,327,153
-----------------
Net Assets............................................................................. $63,324,455
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 53,501
Paid-in capital in excess of par..................................................... 58,197,055
-----------------
58,250,556
Distributions in excess of net realized gains........................................ (5,396)
Net unrealized appreciation on investments........................................... 5,079,295
-----------------
Net assets, February 28, 1994........................................................ $63,324,455
-----------------
-----------------
Class A:
Net asset value and redemption price per share ($2,641,171 3 223,017 shares of
beneficial interest
issued and outstanding)............................................................ $11.84
Maximum sales charge (4.5% of offering price)........................................ .56
-----------------
Maximum offering price to public..................................................... $12.40
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share ($60,683,284 /
5,127,106 shares of
beneficial interest issued and outstanding)........................................ $11.84
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-105
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income February 28, 1994
-----------------
<S> <C>
Income
Interest............................ $2,043,689
------------
Expenses
Management fee...................... 160,006
Distribution fee--Class A........... 1,341
Distribution fee--Class B........... 153,303
Custodian's fees and expenses....... 40,100
Transfer agent's fees and
expenses............................ 16,300
Registration fees................... 9,800
Audit fee........................... 5,300
Legal fees.......................... 5,000
Reports to shareholders............. 4,000
Trustees' fees...................... 1,700
Miscellaneous....................... 70
------------
Total expenses.................... 396,920
------------
Net investment income................. 1,646,769
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 222,788
Financial futures transactions...... (66,531)
------------
156,257
------------
Net change in unrealized
appreciation/depreciation of:
Investments......................... (1,592,968)
Financial futures contracts......... 61,875
------------
(1,531,093)
------------
Net loss on investments............... (1,374,836)
------------
Net Increase in Net Assets
Resulting from Operations............. $ 271,933
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) in Net February 28, August 31,
Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 1,646,769 $ 3,093,949
Net realized gain on
investment
transactions........... 156,257 1,042,349
Net change in unrealized
appreciation/depreciation
of investments......... (1,531,093) 2,273,453
------------ -----------
Net increase in net
assets
resulting from
operations............. 271,933 6,409,751
------------ -----------
Dividends and distributions (Note 1):
Dividends to shareholders
from net investment
income
Class A................ (74,235) (76,855)
Class B................ (1,572,534) (3,017,094)
------------ -----------
(1,646,769) (3,093,949)
------------ -----------
Distributions to
shareholders from net
realized gain on
investment transactions
Class A................ (16,934) --
Class B................ (376,754) --
------------ -----------
(393,688) --
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............. 4,258,824 10,228,873
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 1,261,680 1,821,686
Cost of shares
reacquired............... (3,873,039) (6,272,800)
------------ -----------
Net increase in net
assets from Fund share
transactions........... 1,647,465 5,777,759
------------ -----------
Total increase
(decrease)............... (121,059) 9,093,561
Net Assets
Beginning of period........ 63,445,514 54,351,953
------------ -----------
End of period.............. $ 63,324,455 $63,445,514
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-106
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Series (the ``Series'')
commenced investment operations in September, 1984. The Series is diversified
and seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-107
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributor for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement, at the
rates noted below, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares, at an annual rate of up to .30 of 1% of the average
daily net asset value of the Class A shares. Such expenses under the Class A
Plan were .10 of 1% of the average daily net assets of the Class A shares for
the six months ended February 28, 1994. PMFD pays various broker-dealers,
including PSI and Pruco Securities Corporation (``Prusec'') affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net asset value of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the Plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $24,400 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the six months ended
February 28, 1994, it received approximately $17,000 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
Distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $1,547,000.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the six months ended February 28, 1994, the Series incurred fees of
approximately $13,500 for the services of PMFS. As of February 28, 1994,
approximately $2,300 of such fees were due to PMFS. Transfer agent fees and
expenses in the statement of operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $5,963,126 and $4,762,991, respectively.
B-108
<PAGE>
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, at
February 28, 1994, net unrealized appreciation of investments, including
short-term investments for federal income tax purposes was $5,079,295 (gross
unrealized appreciation--$5,348,874, gross unrealized depreciation--$269,579).
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. The Fund has authorized an unlimited number of shares of
beneficial interest of each class at $.01 par value per share. Transactions in
shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- -------------- -----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 55,990 $ 682,890
Shares issued in reinvestment of
dividends and distributions.... 3,999 48,218
Shares reacquired................ (27,998) (335,281)
-------------- -----------
Net increase in shares
outstanding.................... 31,991 $ 395,827
-------------- -----------
-------------- -----------
Year ended August 31, 1993:
Shares sold...................... 117,227 $ 1,391,818
Shares issued in reinvestment of
dividends...................... 3,409 40,192
Shares reacquired................ (8,122) (95,498)
-------------- -----------
Net increase in shares
outstanding.................... 112,514 $ 1,336,512
-------------- -----------
-------------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- --------------------------------- -------------- -----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 294,653 $ 3,575,934
Shares issued in reinvestment of
dividends and distributions.... 100,694 1,213,462
Shares reacquired................ (291,522) (3,537,758)
-------------- -----------
Net increase in shares
outstanding.................... 103,825 $ 1,251,638
-------------- -----------
-------------- -----------
Year ended August 31, 1993:
Shares sold...................... 750,946 $ 8,837,055
Shares issued in reinvestment of
dividends...................... 151,724 1,781,494
Shares reacquired................ (529,282) (6,177,302)
-------------- -----------
Net increase in shares
outstanding.................... 373,388 $ 4,441,247
-------------- -----------
-------------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-109
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- --------------------------------------------------------------
January 22,
PER SHARE Six Months 1990+ Six Months
OPERATING Ended Year Ended August 31, through Ended Year Ended August 31,
February 28, ------------------------ August 31, February 28, -----------------------------------------------
PERFORMANCE: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning
of
period... $12.17 $11.50 $10.94 $10.44 $ 10.70 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Income
from
investment
operations
Net
investment
income... .33 .68 .69 .70 .41 .31 .63 .64 .65 .65 .68
Net
realized
and
unrealized
gain
(loss) on
investment
transac-
tions... (.26) .67 .56 .50 (.26) (.26) .68 .55 .50 (.30) .21
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Total
from
investment
opera-
tions... .07 1.35 1.25 1.20 .15 .05 1.31 1.19 1.15 .35 .89
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Less
distributions
Dividends
from
net
investment
income... (.33) (.68) (.69) (.70) (.41) (.31) (.63) (.64) (.65) (.65) (.68)
Distribution
from net
realized
gains on
investment
transac-
tions... (.07) -- -- -- -- (.07) -- -- -- -- --
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Total
distri-
butions... (.40) (.68) (.69) (.70) (.41) (.38) (.63) (.64) (.65) (.66) (.68)
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Net asset
value,
end of
period... $11.84 $12.17 $11.50 $10.94 $ 10.44 $ 11.84 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
TOTAL
RETURN#:... 0.68% 12.10% 11.76% 11.81% 1.41% 0.48% 11.77% 11.23% 11.38% 3.40% 8.67%
RATIOS TO
AVERAGE
NET
ASSETS:
Net
assets,
end of
period
(000).. $2,641 $2,325 $ 903 $ 665 $ 257 $ 60,683 $61,121 $53,449 $49,641 $50,575 $52,754
Average
net
assets
(000)... $2,704 $1,336 $ 770 $ 344 $ 127 $ 61,829 $55,965 $50,607 $49,083 $52,974 $49,841
Ratios to
average
net
assets:
Expenses,
including
distribution
fees... .86%* .95% .99% 1.05% 1.04%* 1.26%* 1.35% 1.39% 1.45% 1.37% 1.34%
Expenses,
excluding
distribution
fees... .76%* .85% .89% .95% .95%* .76%* .85% .89% .95% .90% .87%
Net
investment
income... 5.53%* 5.79% 6.14% 6.53% 6.60%* 5.13%* 5.39% 5.74% 6.13% 6.21% 6.24%
Portfolio
turnover... 8% 56% 32% 34% 33% 8% 56% 32% 34% 33% 23%
<FN>
- ---------
* Annualized.
(dag) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full year are not annualized.
See Notes to Financial Statements.
</TABLE>
B-110
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PORTFOLIO OF INVESTMENTS
MASSACHUSETTS MONEY MARKET SERIES FEBRUARY 28, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
Boston Wtr., & Swr. Comn. F.R.W.D.,
VMIG1 $ 300 2.20%, 3/2/94, Ser. 85a . . . . . . $ 300,000
Lexington Mass.
Aaa 395 6.30%, 8/15/94 401,475
Mass., Bay Trans. Auth., 1,000,000
S.E.M.O.T.,
P1 1,000 2.75%, 9/1/94
T.E.C.P.
P1 600 2.25%, 4/13/94, Ser. A 600,000
Mass. Comn., Ded., Inc., Tax, 2,000,000
VMIG1 2,000 2.25%, 3/1/94, Ser. E
F.R.D.D.,
VMIG1 2,000 2.25%, 3/1/94, sER. 90S 200,000
F.R.W.D.
VMIG1 700 2.60%, 3/2/94, Ser. 90A 700,000
Massm. Gen Oblig.,
VMIG1 1,000 2.45%, 3/2/94, Ser D 1,000,000
Mass. Hlth. & Ed. Facts. Auth. Rev.,
Cap. Asset Prog., F.R.D.D.,
VMIG1 1,700 2.15%, 3/1/94, Ser. 85B 1,700,000
VMIG1 300 2.15%, 3/1/94, Ser. 85C 300,000
Harvard Univ., F.R.W.D.,
VMIG1 2,850 2.25%, 3/3/94, Ser. 85 2,850,000
Mass. Gen. Hosp.,
Aaa 1,650+ 7.75%, 1/1/95, Ser. D 1,745,177
Tufts Univ., T.E.C.P.,
VMIG1 1,000 2.45%, 3/4/94, Ser. E 1,000,000
Weiesley Coll., F.R.W.D.,
VMIG1 1,300 2.05%, 3/2/94, Ser. 89E 1,300,000
Mass. Hsg. Fin. Agcy
Sngl. Fam. Hsg. Rev.,
VMIG1 700 A.N.N.M.T
2.80%, 6/1/94, Ser.5 700,000
Q.T.R.O.T
Asa 1,380 2.80%, 6/1/94, Ser, 5 1,380,000
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
Mass. Ind. Fin. Agcy. Ind. Rev.,
Holyoke Wtr. Pwr. Co., F.R.W.D.,
VMIG1 1,700 2.00%, 3/2/94, Ser. 92A 1,700,000
Mass. Ind. Fn. Agcy. Ind. Rev.,
New England Democtates,
F.R.W.D.,
VMIG1 $1,500 2.30%, 3/2/94, Ser. 93B $ 1,500,000
A+* 1,180 Ocean Spray Cranberry,
A.N.N.O.T.,
3.00%, 10/15/94 1,180,000
Asa 1,495 Residential Div. Bds., F.N.M.A.,
2.70%, 11/15/94, Ser. 92 1,504,866
United Med. Corp., F.R.W.D.,
P1 900 2.45%, 3/2/94, Ser. 92 900,000
Mass. Ind. Fin. Agcy., Poll. Ctrl. Rev.,
New England Pwr., Co., T.E.C.P.,
VMIG1 1,500 2.30%, 4/4/94, Ser. 92B 1,500,000
VMIG1 1,500 2.15%, 4/8/94, Ser. 92B 1,500,000
VMIG1 1,250 2.60%, 4/12/94, Ser. 93B 1,250,000
VMIG1 1,000 2.45%, 4/27/94, Ser. 92B 1,000,000
Mass. Ind. Fin. Agcy. Res. Rec. Rev.,
Ogden Havertill Proj., F.R.W.D.,
VMIG1 1,800 2.30%, 3/2/94, Ser 92A 1,800,000
Puerto Rico Comnwlth., Hwy. &
Trans, Auth Rev., F.R.W.D.,
VMIG1 1,500 2.30%, 3/2/94, Ser. 85 1,500,000
Puerto Rico Commwelth.
Gov't. Dev. Bank., F.R.W.D.,
VMIG1 200 2.25%, 3/2/94, Ser. 85 200,000
Puerto Rico Ind. Med. &
Environ. Facs.,
Ann G. Mendez Ed. Fndtn.,
F.R.W.D.
A1+* 1,500 2.25%, 3/2/94, Ser. 85 1,500,000
Reynolds Metal Co. Proj.,
A.N.N.O.T.,
P1 1,000 2.90%, 9/1/94, Ser. 83A 1,000,489
Schernig-Plough Corp.,
A.N.N.O.T.,
AAA* 500 2.80%, 12/1/94, Ser. 83A 500,000
</TABLE>
See Notes To Financial Statements.
B-111
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(000) Description (a) (Note 1)
<S> <C> <C> <C>
Revere Hsg. Auth.,
Multifamily Mtge. Rev., F.R.W.D.,
A-1+* $ 990 2.60%, 3/4/94, Ser. 91C.... $ 990,000
Univ. Mass. Bldg. Auth. Rev.,
Aaa 1,000+ 9.675%, 5/1/94, Ser. 84A... 1,041,772
Worcester, Gen. Oblig.,
Aaa 1,830 6.70%, 5/15/94............. 1,844,863
-----------
Total Investments--96.5%
(amortized cost-
$41,388,642**).......... 41,388,642
Other assets in excess of
liabilities--1.5%....... 617,620
-----------
Net Assets--100%............ $42,006,262
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender
A.N.N.O.T.--Annual Optional Tender
F.R.D.D.--Floating Rate (Daily) Demand Note #
F.R.W.D.--Floating Rate (Weekly) Demand Note #
Q.T.R.O.T.--Quarterly Tax & Revenue Optional Tender
S.E.M.O.T.--Semi-Monthly Tender
T.E.C.P.--Tax-Exempt Commercial Paper
F.N.M.A.--Federal National Mortgage Association
# For purposes of amortized cost valuation, the maturity date of
Floating Rate Demand Notes is considered to be the later of
the next date on which the security can be redeemed at par or
the next date on which the rate of interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is sub-
stantially the same as for financial reporting purposes.
+ Prerefunded issues are secured by escrowed cash and/or direct
U.S. guaranteed obligations.
The Fund's current Statement of Additional Information contains
a description of Moody's and Standard & Poor's ratings.
</TABLE>
B-112 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28,
1994
-----------
<S> <C>
Investments, at amortized cost which approximates market value............................. $41,388,642
Cash....................................................................................... 213,158
Receivable for investments sold............................................................ 2,395,485
Receivable for Fund shares sold............................................................ 326,806
Interest receivable........................................................................ 255,890
Deferred organization expenses and other assets............................................ 27,376
-----------
Total assets........................................................................... 44,607,357
-----------
Liabilities
Payable for investments purchased.......................................................... 2,389,315
Payable for Fund shares reacquired......................................................... 155,386
Accrued expenses........................................................................... 41,900
Due to Distributor......................................................................... 6,858
Due to Manager............................................................................. 4,203
Dividends payable.......................................................................... 2,719
Deferred Trustees' fees.................................................................... 714
-----------
Total liabilities...................................................................... 2,601,095
-----------
Net Assets................................................................................. $42,006,262
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value......................................... $ 420,062
Paid-in capital in excess of par......................................................... 41,586,200
-----------
Net assets, February 28, 1994............................................................ $42,006,262
-----------
-----------
Net asset value, offering price and redemption price per share ($42,006,262 (div)
42,006,262 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized)..................................................................... $1.00
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-113
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................... $ 512,435
------------
Expenses
Management fee, net of waiver of
$87,181................................ 18,181
Distribution fee....................... 26,715
Custodian's fees and expenses.......... 32,000
Registration fees...................... 12,000
Transfer agent's fees and expenses..... 12,000
Reports to shareholders................ 10,000
Amortization of organization
expenses............................... 6,025
Audit fee.............................. 5,000
Legal fees............................. 5,000
Trustees' fees......................... 1,700
Miscellaneous.......................... 1,247
------------
Total expenses....................... 129,868
Less: expense subsidy (Note 4)....... (7,121)
------------
Net expenses......................... 122,747
------------
Net investment income.................... 389,688
------------
Net Increase in Net Assets
Resulting from Operations................ $ 389,688
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Increase (Decrease) Six Months Year
in Net Assets Ended Ended
February 28, August 31,
1994 1993
------------- ------------
<S> <C> <C>
Operations
Net investment
income................. $ 389,688 $ 679,277
Net realized gain on
investment
transactions......... -- 369
------------- ------------
Net increase in net
assets
resulting from
operations........... 389,688 679,646
------------- ------------
Dividends and
distributions to
shareholders (Note
1)..................... (389,688) (679,646)
------------- ------------
Fund share transactions
(at $1 per share)
Net proceeds from
shares
subscribed........... 78,268,152 139,607,603
Net asset value of
shares
issued in
reinvestment of
dividends and
distributions........ 380,512 638,146
Cost of shares
reacquired............. (73,250,108) (121,656,791)
------------- ------------
Net increase in net
assets
from Fund share
transactions......... 5,398,556 18,588,958
------------- ------------
Total increase........... 5,398,556 18,588,958
Net Assets
Beginning of period...... 36,607,706 18,018,748
------------- ------------
End of period............ $ 42,006,262 $ 36,607,706
------------- ------------
------------- ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-114
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Money Market Series (the
``Series'') commenced investment operations on August 5, 1991. The Series is
non-diversified and seeks to provide the highest level of income that is exempt
from Massachusetts State, local and federal income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities having a
maturity of thirteen months or less and whose ratings are within the two highest
ratings categories by a nationally recognized statistical rating organization,
or if not rated, are of comparable quality. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $51,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses except as set forth in Note 4.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. PMF
voluntarily agreed to waive its management fee until October 31, 1993. Effective
November 1, 1993, PMF reduced the management fee waiver to 75%. The amount of
fees waived for the six months ended February 28, 1994 amounted to $87,181
($.002 per share; .41% of average net assets).
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-115
<PAGE>
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $10,000 for the services of PMFS. As of February 28, 1994,
approximately $1,900 of such fees were due to PMFS.
Note 4. Expense PMF voluntarily agreed to
Subsidy subsidize 25% of the operating
expenses of the Series (other than management
and distribution fees) through October 31, 1993. Effective November 1, 1993, PMF
eliminated the expense subsidy. For the two months ended October 31, 1993, PMF
subsidized $7,121 ($.0002 per share; .03% of average net assets, annualized) of
the Series' expenses. The Series is not required to reimburse PMF for such
expense subsidy.
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-116
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Six Months Year Ended August August 5, 1991*
Ended 31, through
February 28, ------------------- August 31,
1994 1993 1992 1991
------------ ------- ------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains (dag)....................... .009 .021 .034 .003
Dividends and distributions to shareholders.......................... (.009) (.021) (.034) (.003)
---------- ------- ------- ------
Net asset value, end of period....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ------- ------- ------
---------- ------- ------- ------
TOTAL RETURN#:....................................................... .94% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...................................... $ 42,006 $36,608 $18,019 $ 6,365
Average net assets (000)............................................. $ 42,855 $32,246 $15,477 $ 3,200
Ratio to average net assets: (dag)
Expenses, including distribution fee............................... .577%** .365% .125% .125%**
Expenses, excluding distribution fee............................... .452%** .240% .00% .00%**
Net investment income.............................................. 1.83%** 2.11% 3.20% 4.46%**
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(dag)Net of management fee waiver and expense subsidy.
# Total returns for periods less than a full year are not annualized.
See Notes to Financial Statements.
B-117
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MICHIGAN SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.0%
Bay De Noc Comm. Coll.
Dist.,
Aaa $ 575 4.60%, 5/1/13,
M.B.I.A................ $ 511,606
Breitung Twnshp. Sch. Dist. Rev.,
Gen. Oblig.,
Aaa 250 6.30%, 5/1/15,
M.B.I.A................ 262,615
Canton Charter Twnshp. Bldg. Auth.,
Wayne Cnty. Golf Course,
Aaa 450 4.75%, 1/1/11, F.S.A..... 413,208
Aaa 450 4.75%, 1/1/12, F.S.A..... 411,907
Aaa 500 4.75%, 1/1/13, F.S.A..... 453,580
Aaa 500 4.75%, 1/1/14, F.S.A..... 449,990
Central Michigan Univ.
Rev.,
A 700(dag) 7.00%, 10/1/10........... 806,225
Chippewa Valley Sch.
Dist.,
Aaa 2,400 5.00%, 5/1/21,
F.G.I.C................ 2,178,264
Clinton Twnshp. Bldg.
Auth.,
Macomb Cnty.,
Aaa 2,810 4.75%, 11/1/10,
A.M.B.A.C.............. 2,616,475
Detroit Conv. Fac. Rev.,
Cobo Hall Expansion
Proj.,
A* 500(dag)@ 9.00%, 9/30/10........... 530,735
Detroit Econ. Dev. Corp.,
Res. Rec. Rev.,
Aaa 1,000 6.875%, 5/1/09, Ser. A,
F.S.A.................. 1,098,430
Detroit Sewage Disp.
Rev.,
Aaa 1,500 6.25%, 7/1/11,
M.B.I.A................ 1,553,640
Aaa 1,000 8.56%, 7/1/23, Ser. A,
F.G.I.C................ 985,000
Detroit St. Aid, Gen.
Oblig.,
Baa 1,500 5.625%, 5/1/97........... 1,566,210
Detroit Wtr. Supply Sys.
Rev.,
Aaa 1,000 6.25%, 7/1/12,
F.G.I.C................ 1,063,320
Aaa 1,000 6.50%, 7/1/15,
F.G.I.C................ 1,109,830
Aaa 1,000(dag) 7.25%, 7/1/20,
F.G.I.C................ 1,158,630
Ferris St. Univ. Gen.
Rev.,
Aaa 440 5.80%, 10/1/05,
A.M.B.A.C.............. 462,744
Grand Rapids San. Swr. Sys. Rev.,
A1 500 7.00%, 1/1/16............ 550,605
Grand Rapids Wtr. Supply Sys. Rev.,
Aaa 515(dag) 7.05%, 1/1/05,
F.G.I.C................ 587,703
Aaa 2,100(dag) 7.875%, 1/1/18........... 2,401,119
Huron Valley Sch. Dist.,
Gen. Oblig.,
Aaa $ 3,500 Zero Coupon, 5/1/10,
F.G.I.C................ $ 1,385,930
Kent Hosp. Fac. Fin.
Auth. Rev.,
Blodgette Mem. Med.
Ctr.,
A 500 7.25%, 7/1/05, Ser. A.... 552,105
Butterworth Hosp.,
Aaa 500(dag) 7.25%, 1/15/12, Ser. A... 573,530
Michigan Higher Ed.,
Student Loan Auth.
Rev., M.B.I.A.,
Aaa 500 7.55%, 10/1/08, Ser.
XIII-A................. 562,395
Michigan Mun. Bond Auth.
Rev.,
Local Gov't. Loan
Prog.,
AAA* 500(dag) 7.80%, 5/1/13............ 581,085
Michigan Pub. Pwr. Agcy.
Rev.,
Belle River Proj.,
A1 1,250 5.25%, 1/1/18, Ser. A.... 1,164,738
Michigan St. Comp.Trans.
Rev.,
A1 1,250 5.875%, 5/15/05, Ser.
B...................... 1,320,137
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr.,
Baa1 2,000 8.25%, 7/1/12, Ser. A.... 2,252,640
McLaren Obligated Group,
Aaa 800(dag) 7.50%, 9/15/21, Ser. A... 949,528
Oakwood Hosp. Obligated
Group,
Aaa 1,000(dag)@ 6.95%, 7/1/02,
F.G.I.C................ 1,142,900
Sisters of Mercy,
M.B.I.A.,
Aaa 2,000 7.50%, 8/15/07, Ser. H... 2,237,000
Michigan St. Hsg. Dev. Auth. Rev.,
Multifamily Mtge. Insured Hsg.,
A+* 1,000 7.15%, 4/1/10, Ser. A.... 1,055,570
Aaa 1,000@ 8.875%, 7/1/17, Ser. A,
F.G.I.C................ 1,068,860
A+* 500 7.70%, 4/1/23, Ser. A.... 532,210
Sngl. Fam. Mtge.,
AA* 445 7.70%, 12/1/16, Ser. A... 474,170
Michigan St. Strategic
Fund Ltd. Obligated
Rev., Waste Mgmt. Inc.
Proj.,
A1 2,000 6.625%, 12/1/12.......... 2,118,120
Michigan St. Trunk Line
Hwy.,
AAA* 2,000(dag) 7.00%, 8/15/17, Ser. A... 2,269,040
</TABLE>
See Notes to Financial Statements.
B-118
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Michigan St. Trunk Line
Hwy.,
Ser. A, A.M.B.A.C.,
Aaa $ 2,600 Zero Coupon, 10/1/05..... $ 1,409,876
Aaa 1,250 Zero Coupon, 10/1/06..... 635,125
Michigan St. Univ. Rev.,
A1 640 5.50%, 8/15/22, Ser. A... 605,715
Monroe Cnty. Poll. Ctrl.
Rev.,
Detroit Edison Co.,
Baa1 1,500 10.50%, 12/1/16, Ser.
A...................... 1,699,365
Aaa 2,000 7.65%, 9/1/20,
F.G.I.C................ 2,283,120
Oak Park, Gen. Oblig.,
Aaa 375(dag) 7.00%, 5/1/11,
A.M.B.A.C.............. 434,854
Aaa 400(dag) 7.00%, 5/1/12,
A.M.B.A.C.............. 463,844
Oakland Cnty., City of Lathrup,
Evergreen Farmington Swr. Rev.,
A 600 6.00%, 11/1/08........... 616,152
A 700 6.00%, 11/1/09........... 715,421
Oakland Cnty., Leuders
Drainage Dept.,
Aaa 350 5.50%, 5/1/09,
A.M.B.A.C.............. 353,563
Okemos Pub. Sch. Dist.,
Aaa 2,610 Zero Coupon, 5/1/16,
M.B.I.A................ 705,065
Ottawa Cnty., Gen. Oblig.,
Northwest Ottawa Wtr. Supply,
A1 415 6.25%, 10/1/08........... 433,384
Wtr. Supply Sys.,
NR 1,045(dag) 7.60%, 8/1/07............ 1,154,673
Pinckney Comm. Sch.,
Livingston & Washtenaw Cntys.,
Aaa 1,250 5.00%, 5/1/14,
F.G.I.C................ 1,154,238
Puerto Rico Elec. Pwr. Auth. Rev.,
Baa1 2,500 7.125%, 7/1/14, Ser. N... 2,793,600
Puerto Rico Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.,
Baa 500 5.125%, 12/1/05.......... 480,945
Puerto Rico Hwy. Auth.
Rev.,
Baa1 1,000 6.75%, 7/1/05, Ser. R.... 1,109,790
Baa1 1,500(dag)@ 7.75%, 7/1/16, Ser. Q.... 1,784,655
Puerto Rico Pub. Bldgs.
Auth.,
Gtd. Pub. Ed. & Hlth.
Facs.,
Baa1 $ 625(dag) 8.00%, 7/1/12, Ser. F.... $ 699,194
A* 1,325(dag)@ 6.875%, 7/1/21, Ser. L... 1,530,587
Pub. Ed. & Hlth. Facs.,
Aaa 990(dag) 7.875%, 7/1/16, Ser. H... 1,126,422
Puerto Rico, Gen. Oblig.,
Aaa 1,000 8.92%, 7/1/08, Ser. A,
M.B.I.A................ 1,091,250
Saginaw Valley St. Univ. Gen. Rev.,
Aaa 790 5.375%, 7/1/16,
M.B.I.A................ 756,757
Saline Area Sch. Dist.,
Aaa 700 5.00%, 5/1/04, Ser. 1,
M.B.I.A................ 697,739
Tri-Cnty. Area Schs.,
Gen. Oblig.,
Aaa 2,000 5.25%, 5/1/20,
F.G.I.C................ 1,880,780
Univ. of Michigan Major
Cap. Proj. Rev.,
Aa 355 5.50%, 4/1/13............ 350,847
Univ. of Michigan Rev.,
Pkg. Sys. Rfdg.,
Aa 500 5.00%, 6/1/15............ 464,700
Virgin Islands Pub. Fin. Auth. Rev.,
Matching Loan Notes,
NR 500 7.25%, 10/1/18, Ser. A... 562,210
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser. A.... 569,605
Wtr. Sys. Rev.,
NR 500 8.50%, 1/1/10, Ser. A.... 563,740
NR 200 7.60%, 1/1/12, Ser. B.... 223,458
Wayne Cnty. Bldg. Auth.,
Baa 1,250 8.00%, 3/1/17, Ser. A.... 1,456,637
Western Michigan Univ. Gen. Rev.,
Aaa 500 5.00%, 7/15/21,
F.G.I.C................ 453,020
Wixom, Gen. Oblig.,
Aaa 475 6.00%, 4/1/07,
A.M.B.A.C.............. 513,522
Aaa 475 6.00%, 4/1/08,
A.M.B.A.C.............. 509,371
Aaa 500 6.00%, 4/1/09,
A.M.B.A.C.............. 532,235
Wyandotte Elec. Rev.,
Aaa 2,000 6.25%, 10/1/08,
M.B.I.A................ 2,206,260
-----------
Total long-term
investments
(cost $69,981,505)..... 76,433,513
-----------
</TABLE>
See Notes to Financial Statements.
B-119
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--1.6%
Michigan Strategic Fund
Poll. Ctrl. Rev.,
Consumers Pwr. Proj.,
F.R.D.D.,
P1 $ 1,000 2.35%, 3/1/94, Ser. A.... $ 1,000,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.D.D.,
VMIG1 300 2.25%, 3/1/94, Ser. 85... 300,000
-----------
Total short-term
investments
(cost $1,300,000)...... 1,300,000
-----------
Total Investments--98.6%
(cost $71,281,505; Note
4)..................... 77,733,513
Other assets in excess of
liabilities--1.4%...... 1,095,165
-----------
Net Assets--100%......... $78,828,678
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
(dag)Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
@ Pledged either in whole or in part as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
See Notes to Financial Statements.
B-120
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $71,281,505)............................................... $77,733,513
Interest receivable.................................................................... 1,139,467
Receivable for Fund shares sold........................................................ 285,032
Receivable for investments sold........................................................ 45,450
Other assets........................................................................... 1,274
-----------------
Total assets......................................................................... 79,204,736
-----------------
Liabilities
Bank overdraft......................................................................... 37,677
Payable for Fund shares reacquired..................................................... 203,412
Accrued expenses....................................................................... 51,178
Management fee payable................................................................. 30,660
Distribution fee payable............................................................... 29,208
Dividends payable...................................................................... 12,485
Due to broker-variation margin payable................................................. 10,724
Deferred trustees' fees................................................................ 714
-----------------
Total liabilities.................................................................... 376,058
-----------------
Net Assets............................................................................. $78,828,678
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 64,528
Paid-in capital in excess of par..................................................... 72,593,878
-----------------
72,658,406
Distributions in excess of net realized gains........................................ (367,486)
Net unrealized appreciation on investments........................................... 6,537,758
-----------------
Net assets, February 28, 1994........................................................ $78,828,678
-----------------
-----------------
Class A:
Net asset value and redemption price per share ($4,689,094 (div) 383,713 shares of
beneficial interest
issued and outstanding)............................................................ $12.22
Maximum sales charge (4.5% of offering price)........................................ .58
-----------------
Maximum offering price to public..................................................... $12.80
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share ($74,139,584 (div)
6,069,039 shares of beneficial interest issued and outstanding).................... $12.22
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-121
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
Net Investment Income 28, 1994
----------
<S> <C>
Income
Interest............................. $2,338,072
----------
Expenses
Management fee....................... 191,622
Distribution fee--Class A............ 2,156
Distribution fee--Class B............ 180,842
Custodian's fees and expenses........ 40,500
Transfer agent's fees and expenses... 30,700
Reports to shareholders.............. 9,900
Registration fees.................... 8,900
Audit fee............................ 5,300
Legal fees........................... 5,000
Trustees' fees....................... 1,700
Miscellaneous........................ 603
----------
Total expenses..................... 477,223
----------
Net investment income.................. 1,860,849
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.............. 250,524
Financial futures contract
transactions......................... (105,690)
----------
144,834
----------
Net change in unrealized
appreciation/depreciation on:
Investments.......................... (1,688,507)
Financial futures contracts.......... 104,813
----------
(1,583,694)
----------
Net loss on investments................ (1,438,860)
----------
Net Increase in Net Assets
Resulting from Operations.............. $ 421,989
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 1,860,849 $ 3,273,879
Net realized gain on
investment
transactions........... 144,834 72,559
Net change in unrealized
appreciation/depreciation
of investments......... (1,583,694) 3,763,379
------------ -----------
Net increase in net
assets resulting from
operations............. 421,989 7,109,817
------------ -----------
Dividends and distributions (Note 1)
Dividends to shareholders
from net investment
income
Class A................ (112,999) (125,767)
Class B................ (1,747,850) (3,148,112)
------------ -----------
(1,860,849) (3,273,879)
------------ -----------
Distributions to
shareholders from net
realized gains on
investments
Class A................ (25,697) (15,062)
Class B................ (429,244) (460,116)
------------ -----------
(454,941) (475,178)
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............. 8,864,671 16,968,562
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 1,555,814 2,426,469
Cost of shares
reacquired............... (3,813,525) (6,352,793)
------------ -----------
Net increase in net
assets from Fund share
transactions........... 6,606,960 13,042,238
------------ -----------
Total increase............. 4,713,159 16,402,998
Net Assets
Beginning of period........ 74,115,519 57,712,521
------------ -----------
End of period.............. $ 78,828,678 $74,115,519
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements.
B-122
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Michigan Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging it's existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-123
<PAGE>
These differences are due to differing treatments of certain financial futures
transactions.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''). PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated, (``PSI''),
which acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Series under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $32,900 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the six months
ended February 28, 1994, it received approximately $35,200 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $2,261,000.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect),
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund ser-
Transactions with vices, Inc. (``PMFS''), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $20,100 for the services of PMFS. As of February 28, 1994,
approximately $3,400 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
B-124
<PAGE>
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $8,058,555 and $2,948,934, respectively.
At February 28, 1994, the Fund sold 30 financial futures contracts on the
Municipal Bond Index which expire in March, 1994. The value at disposition of
such contracts is $3,071,688. The value of such contracts on February 28, 1994
was $2,985,938, thereby resulting in an unrealized gain of $85,750. The Fund has
pledged $500,000 principal amount of Detroit Convention Facilities Revenue
Bonds, $600,000 principal amount of Michigan State Housing Development Bonds,
$1,000,000 principal amount of Michigan State Hospital Finance Authority Revenue
Bonds, $1,500,000 principal amount of Puerto Rico Highway Authority Revenue
Bonds and $1,325,000 principal amount of Puerto Rico Public Buildings Authority
Bonds as initial margin on such contracts.
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of February 28, 1994, net unrealized appreciation for federal income tax
purposes was $6,452,008 (gross unrealized appreciation--$6,669,394; gross
unrealized depreciation--$217,386.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1994 and the fiscal year ended
August 31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- --------- -----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 87,481 $ 1,097,477
Shares issued in reinvestment of
dividends and distributions.... 7,921 98,431
Shares reacquired................ (16,445) (206,474)
--------- -----------
Net increase in shares
outstanding.................... 78,957 $ 989,434
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold...................... 184,780 $ 2,261,702
Shares issued in reinvestment of
dividends and distributions.... 7,339 88,939
Shares reacquired................ (23,307) (285,030)
--------- -----------
Net increase in shares
outstanding.................... 168,812 $ 2,065,611
--------- -----------
--------- -----------
Class B
- -------------------------------
Six months ended February 28,
1994:
Shares sold..................... 620,400 $ 7,767,194
Shares issued in reinvestment of
dividends and distributions... 117,287 1,457,383
Shares reacquired............... (288,735) (3,607,051)
--------- -----------
Net increase in shares
outstanding................... 448,952 $ 5,617,526
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold..................... 1,212,261 $14,706,860
Shares issued in reinvestment of
dividends and distributions... 193,681 2,337,530
Shares reacquired............... (501,158) (6,067,763)
--------- -----------
Net increase in shares
outstanding................... 904,784 $10,976,627
--------- -----------
--------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-125
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------- --------------------------------------------------------------
January 22,
PER Six Months 1990+ Six Months
SHARE Ended Year Ended August 31, through Ended Year Ended August 31,
OPERATING February 28, -------------------------- August 31, February 28, -----------------------------------------------
PERFORMANCE: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
asset
value,
beginning
of period.. $12.51 $11.90 $11.30 $10.81 $ 11.02 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.03 $ 10.57
------ ------ ------ ------ ------- -------- ------- ------- ------- ------- -------
Income
from
investment
operations
Net
investment
income... .32 .67 .68 .67 .41 .30 .62 .63 .63 .65 .68
Net
realized
and
unrealized
gain (loss)
on investment
trans
actions... (.22) .71 .60 .49 (.21) (.22) .71 .60 .49 (.22) .46
------ ------ ------ ------ --------- ------------ ------- ------- ------- ------- -------
Total
from
investment
opera
tions... .10 1.38 1.28 1.16 .20 .08 1.33 1.23 1.12 .43 1.14
------ ------ ------ ------ --------- ----------- ------- ------- ------- ------- -------
Less
distributions
Dividends
from net
investment
income... (.32) (.67) (.68) (.67) (.41) (.30) (.62) (.63) (.63) (.65) (.68)
Distributions
from net
realized
gains... (.07) (.10) -- -- -- (.07) (.10) -- -- -- --
------ ------ ------ ------ --------- ------------ ------- ------- ------- ------- -------
Total
distri
butions... (.39) (.77) (.68) (.67) (.41) (.37) (.72) (.63) (.63) (.65) (.68)
------ ------ ------ ------ ------- -------- ------- ------- ------- ------- -------
Net
asset
value,
end of
period... $12.22 $12.51 $11.90 $11.30 $ 10.81 $ 12.22 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.03
------ ------ ------ ------ ------- -------- ------- ------- ------- ------- -------
------ ------ ------ ------ ------- -------- ------- ------- ------- ------- -------
TOTAL
RETURN#:. 0.93% 11.95% 11.63% 11.04% 1.82% 0.72% 11.51% 11.18% 10.60% 4.02% 11.08%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)... $4,689 $3,814 $1,618 $ 835 $ 501 $ 74,140 $70,302 $56,095 $59,400 $49,923 $47,025
Average
net
assets
(000)... $4,348 $2,285 $1,235 $ 694 $ 365 $ 72,936 $61,548 $52,137 $50,809 $48,694 $43,957
Ratios to
average
net assets:
Expenses,
including
distribution
fees... .87%* 1.06% .98% 1.09% 1.09%* 1.27%* 1.46% 1.38% 1.49% 1.44% 1.35%
Expenses,
excluding
distribution
fees... .77%* .96% .88% .99% .99%* .77%* .96% .88% .99% .97% .96%
Net
investment
income... 5.24%* 6.15% 5.82% 6.09% 6.25%* 4.84%* 5.75% 5.42% 5.66% 5.95% 6.20%
Portfolio
turnover... 4% 14% 30% 62% 55% 4% 14% 30% 62% 55% 36%
- ------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares
on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-126
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MINNESOTA SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.6%
Braham Indpt. Sch. Dist.
No. 314,
AA* $ 425 5.20%, 2/1/13........... $ 409,615
Breckenridge Hosp. Facs.
Rev.,
Franciscan Sisters
Healthcare,
A-* 800 9.375%, 9/1/17, Ser.
B1.................... 950,752
Dakota Cnty. Hsg. &
Redev. Auth.,
Burnsville & Inver
Grove, Sngl. Fam.
Mtge.,
Aaa 10 9.375%, 5/1/18,
F.G.I.C............... 10,559
Met. Council of
Minneapolis,
Hubert H. Humphrey
Metrodome,
A 500 6.00%, 10/1/09.......... 518,205
St. Paul Met. Area,
Aaa 750 6.25%, 12/1/06, Ser.
A..................... 802,635
Aaa 500 6.75%, 9/1/10, Ser. D... 544,915
Minneapolis Cmnty. Dev.
Agcy.,
St. Paul Hsg. & Redev.
Auth. Rev.,
Aa 10 9.875%, 12/1/15......... 10,689
Tax Increment Rev.,
M.B.I.A.,
Aaa 750 Zero Coupon, 9/1/01..... 520,672
Aaa 1,000 Zero Coupon, 3/1/06..... 535,450
Aaa 1,000 Zero Coupon, 9/1/07..... 490,710
Minneapolis Hosp. Rev.,
Lifespan Inc., Ser. B,
A1 820 8.70%, 12/1/02.......... 964,771
Minneapolis Childrens
Hosp.,
A 800 8.125%, 8/1/17.......... 910,608
Minneapolis-St. Paul
Hsg. & Redev. Auth.,
Hlth. Care Sys. Rev.,
A.M.B.A.C.,
Aaa 1,500 4.75%, 11/15/18, Ser.
A..................... 1,346,970
Minneapolis-St. Paul
Hsg. Fin.
Brd. Rev., Sngl. Fam.
Mtge.,
AAA* 1,000 7.30%, 8/1/31,
G.N.M.A............... 1,052,100
Minneapolis-St. Paul
Met. Arpts.,
Aaa 1,000 7.80%, 1/1/14, Ser. 7... 1,139,360
Minnesota Pub. Facs.
Auth.,
Wtr. Poll. Ctrl. Rev.,
AA+* $ 500 6.90%, 3/1/03, Ser. A... $ 564,560
AA+* 650 7.00%, 3/1/09........... 715,592
Minnesota St. Higher Ed.
Facs. Auth. Rev.,
Macalester Coll.,
Aa 500 6.40%, 3/1/22........... 526,845
St. Mary's Coll.,
Baa 625 6.10%, 10/1/16.......... 642,744
Univ. of St. Thomas,
A1 300 5.60%, 9/1/14........... 301,005
Northern Mun. Pwr.
Agcy.,
Elec. Sys. Rev.,
A 370 7.25%, 1/1/16, Ser. A... 412,043
5.50%, 1/1/18, Ser. B,
Aaa 750 A.M.B.A.C............. 743,055
Northfield Coll. Fac.
Rev.,
St. Olaf Coll.,
A 370 6.30%, 10/1/12.......... 392,278
Ramsey Cnty., Gen.
Oblig.,
Aaa 500 7.25%, 2/1/04........... 550,025
Red. Wing Indpt. Sch.
Dist.
No. 256,
Aa 500 5.60%, 2/1/09........... 508,755
Rochester Hlth. Care
Facs. Rev.,
Mayo Med. Ctr.,
NR 500(dag) 8.30%, 11/15/07, Ser.
A..................... 578,345
Science Museum,
St. Paul Cert. of Part.,
AAA* 1,343 7.50%, 12/15/01......... 1,594,968
Southern Minn. Mun. Pwr.
Agcy.,
Pwr. Supply Sys. Rev.,
Ser. B,
Aaa 500 5.50%, 1/1/15,
A.M.B.A.C............. 492,340
St. Cloud Multifamily
Rev.,
St. Cloud Hosp., Ser. B,
Aaa 1,205 5.40%, 10/1/23,
A.M.B.A.C............. 1,155,173
St. Louis Healthcare
Facs.,
Health Oblig. Group,
Aaa 500 5.20%, 7/1/16, Ser. C... 475,865
</TABLE>
See Notes to Financial Statements.
B-127
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
St. Louis Park Hosp.
Rev.,
Methodist Hosp.,
A.M.B.A.C.,
Aaa $1,400(dag)/@ 7.25%, 7/1/18, Ser. C.. $ 1,617,896
St. Paul Hsg. & Redev.
Auth., A.M.B.A.C.,
Ramsey Med. Ctr. Proj.,
Aaa 420 5.55%, 5/15/23.......... 412,805
Tax Increment Rev.,
Aaa 1,530 5.25%, 9/1/05........... 1,547,228
St. Paul Port Auth.,
Energy Park
Tax Increment Rev.,
Baa 855(dag) 8.00%, 12/1/07.......... 986,037
Univ. of Minnesota Rev.,
AAA* 150(dag) 9.625%, 2/1/05.......... 161,546
A1 1,000 6.00%, 2/1/11, Ser. A... 1,079,900
Verndale Indpt. Sch.
Dist.
No. 818,
AA* 955 4.875%, 2/1/14.......... 871,380
Western Minn. Mun. Pwr.
Agcy.,
Power Supply Rev.,
A 500 5.50%, 1/1/15, Ser. A... 494,455
-----------
Total long-term
investments
(cost $24,897,914)...... 27,032,851
-----------
SHORT-TERM INVESTMENT--1.4%
Beltrami Cnty. Envirn.
Ctl. Rev.,
Northwood Panel Brd.
Prog.,
2.15%, 3/1/94, F.R.D.D
A1+* 400 (cost $400,000)....... 400,000
-----------
Total Investments--98.0%
(cost $25,297,914; Note
4).................... 27,432,851
Other assets in excess
of
liabilities--2.0%..... 572,142
-----------
Net Assets--100%........ $28,004,993
-----------
-----------
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate Daily Demand Note. #
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(dag) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
# For purposes of amortized cost valuation, the maturity date of these
instruments is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
@ Pledged as initial margin on financial futures contracts.
* Standard & Poor's rating.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-128
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $25,297,914)............................................... $ 27,432,851
Cash................................................................................... 45,274
Interest receivable.................................................................... 440,217
Receivable for Fund shares sold........................................................ 141,698
Other assets........................................................................... 624
-----------------
Total assets......................................................................... 28,060,664
-----------------
Liabilities
Accrued expenses....................................................................... 24,725
Management fee payable................................................................. 10,831
Distribution fee payable............................................................... 10,465
Due to broker-variation margin......................................................... 3,942
Dividends payable...................................................................... 3,783
Payable for Fund shares reacquired..................................................... 1,211
Deferred trustees' fees................................................................ 714
-----------------
Total liabilities.................................................................... 55,671
-----------------
Net Assets............................................................................. $ 28,004,993
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 23,219
Paid-in capital in excess of par..................................................... 25,670,469
-----------------
25,693,688
Accumulated net realized gain on investments......................................... 151,899
Net unrealized appreciation on investments........................................... 2,159,406
-----------------
Net assets, February 28, 1994........................................................ $28,004,993
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($1,318,540 (div) 109,331 shares of beneficial interest issued and outstanding).... $12.06
Maximum sales charge (4.5% of offering price)........................................ .57
-----------------
Maximum offering price to public..................................................... $12.63
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($26,686,453 (div) 2,212,530 shares of beneficial interest issued and
outstanding)....................................................................... $12.06
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-129
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................. $ 828,795
------------
Expenses
Management fee....................... 68,950
Distribution fee--Class A............ 513
Distribution fee--Class B............ 66,388
Custodian's fees and expenses........ 30,100
Transfer agent's fees and expenses... 17,900
Registration fees.................... 8,700
Reports to shareholders.............. 7,400
Audit fee............................ 5,300
Legal fees........................... 5,000
Trustees' fees....................... 1,700
Miscellaneous........................ 2,211
------------
Total expenses..................... 214,162
------------
Net investment income.................. 614,633
------------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain on:
Investment transactions.............. 282,150
Financial futures transactions....... 7,784
------------
289,934
------------
Net change in unrealized appreciation on:
Investments.......................... (737,227)
Financial futures contracts.......... 24,906
------------
(712,321)
------------
Net loss on investments................ (422,387)
------------
Net Increase in Net Assets
Resulting from Operations.............. $ 192,246
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 614,633 $ 1,238,313
Net realized gain on
investment
transactions........... 289,934 142,719
Net change in unrealized
appreciation on
investments............ (712,321) 1,111,143
------------ -----------
Net increase in net
assets
resulting from
operations............. 192,246 2,492,175
------------ -----------
Dividends and distributions (Note 1)
Dividends to shareholders
from net investment
income
Class A................ (24,855) (31,491)
Class B................ (589,778) (1,206,822)
------------ -----------
(614,633) (1,238,313)
------------ -----------
Distributions to
shareholders from net
realized gains on
investments
Class A................ (6,669) (992)
Class B................ (189,576) (46,636)
------------ -----------
(196,245) (47,628)
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............. 2,543,943 4,761,162
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 562,100 838,823
Cost of shares
reacquired............... (1,942,267) (4,494,663)
------------ -----------
Net increase in net
assets from Fund share
transactions........... 1,163,776 1,105,322
------------ -----------
Total increase............. 545,144 2,311,556
Net Assets
Beginning of period........ 27,459,849 25,148,293
------------ -----------
End of period.............. $ 28,004,993 $27,459,849
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-130
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Minnesota Series (the ``Series'')
commenced investment operations in October, 1984. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies followed by the Fund and the Series in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-131
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers and employees of the Fund,
and occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A shares
of the Fund and Prudential Securities Incorporated (``PSI''), who acts as
distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse PMFD and PSI for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, and the cost of printing and mailing prospectuses to potential
investors and of advertising incurred in connection with the distribution of
shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the Plans,
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $13,800 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Plan. PSI has advised the Series that for the six months ended February
28, 1994, it received approximately $15,300 in contingent deferred sales charges
imposed upon certain redemptions by shareholders. PSI, as Distributor, has also
advised the Series that at February 28, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $998,300. This amount may
be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the six months ended February 28, 1994, the Series incurred fees of
approximately $10,800 for the services of PMFS. As of February 28, 1994,
approximately $1,900 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994, were $4,393,571 and $3,664,886, respectively.
B-132
<PAGE>
At February 28, 1994 the Series sold 9 financial futures contracts on the
Municipal Bond Index expiring in March, 1994. The value at disposition of such
contracts was $920,250. The value of such contracts on February 28, 1994 was
$895,781, thereby resulting in an unrealized gain of $24,469. The Series had
pledged $1,400,000 principal amount of St. Louis Park Hospital Revenue bonds as
initial margin on such contracts.
The cost basis of investments for federal income tax purposes at February 28,
1994 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes was $2,134,937 (gross
unrealized appreciation--$2,251,719; gross unrealized depreciation--$116,782).
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the six months ended
February 28, 1994 and fiscal year ended August 31, 1993 were as follows:
<TABLE>
<S> <C> <C>
Class A Shares Amount
------------- -----------
Six months ended February 28,
1994:
Shares sold...................... 39,654 $ 484,586
Shares issued in reinvestment of
dividends and distributions.... 2,263 27,701
Shares reacquired................ (5,151) (63,682)
------------- -----------
Net increase in shares
outstanding.................... 36,766 $ 448,605
------------- -----------
------------- -----------
Year ended August 31, 1993:
Shares sold...................... 40,044 $ 478,217
Shares issued in reinvestment of
dividends and distributions.... 2,253 26,990
Shares reacquired................ (3,877) (46,769)
------------- -----------
Net increase in shares
outstanding.................... 38,420 $ 458,438
------------- -----------
------------- -----------
<CAPTION>
Class B
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 166,964 $ 2,059,357
Shares issued in reinvestment of
dividends and distributions.... 43,659 534,399
Shares reacquired................ (152,975) (1,878,585)
------------- -----------
Net increase in shares
outstanding.................... 57,648 $ 715,171
------------- -----------
------------- -----------
Year ended August 31, 1993:
Shares sold...................... 359,576 $ 4,282,945
Shares issued in reinvestment of
dividends and distributions.... 68,005 811,833
Shares reacquired................ (373,090) (4,447,894)
------------- -----------
Net increase in shares
outstanding.................... 54,491 $ 646,884
------------- -----------
------------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-133
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
--------------------------------------------------- --------------------------------------------------------------
January 22,
1990 (dag)
Six Months (dag) Six Months
Ended Year Ended August 31, Through Ended Year Ended August 31,
February 28, ------------------------ August 31, February 28, -----------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period.. $12.33 $11.78 $11.40 $10.98 $ 11.14 $ 12.33 $ 11.78 $ 11.41 $ 10.98 $ 11.14 $ 10.80
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Income
- -------
from investment
---------------
operations:
-----------
Net
investment
income... .30 .62 .66 .64 .39 .27 .58 .61 .60 .62 .66)
Net realized
and unrealized
gain (loss)
on investment
transac-
tions... (.18) .57 .38 .42 (.16) (.18) .57 .37 .43 (.16) .34
------ ------ ------ ------ --------- --------- ------- ------- ------- ------- -------
Total from
investment
operations.. .12 1.19 1.04 1.06 .23 .09 1.15 .98 1.03 .46 1.00
------ ------ ------ ------ ----------- ------------ ------- ------- ------- ------- -------
Less
- ----
distributions
- -------------
Dividends from
net investment
income... (.30) (.62) (.66) (.64) (.39) (.27) (.58) (.61) (.60) (.62) (.66)
Distributions
from net
realized
gains... (.09) (.02) -- -- -- (.09) (.02) -- -- -- --
------ ------ ------ ------ -------- ---------- ------- ------- ------- ------- -------
Total
distributions.. (.39) (.64) (.66) (.64) (.39) (.36) (.60) (.61) (.60) (.62) (.66)
------ ------ ------ ------ -------- ---------- ------- ------- ------- ------- -------
Net asset
value,
end of
period... $12.06 $12.33 $11.78 $11.40 $ 10.98 $ 12.06 $ 12.33 $ 11.78 $ 11.41 $ 10.98 $ 11.14
------ ------ ------ ------ --------- ----------- ------- ------- ------- ------- -------
------ ------ ------ ------ --------- ----------- ------- ------- ------- ------- -------
TOTAL
RETURN#:... 0.99% 10.45% 9.38% 9.93% 2.00% 0.79% 9.99% 8.83% 9.64% 4.20% 9.51%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)... $1,319 $894 $402 $229 $130 $26,686 $26,565 $24,746 $23,600 $24,080 $22,933
Average
net assets
(000)... $1,034 $616 $291 $202 $87 $26,775 $25,387 $24,038 $23,997 $23,558 $21,198
Ratios to average
net assets:
Expenses,
including
distribution
fees... 1.17%* 1.29% 1.22% 1.41% 1.46%* 1.57%* 1.69% 1.62% 1.81% 1.78% 1.64(dag)
Expenses,
excluding
distribution
fees... 1.07%* 1.19% 1.11% 1.31% 1.33%* 1.07%* 1.19% 1.12% 1.31% 1.28% 1.17(dag)
Net
investment
income... 4.84%* 5.15% 5.69% 5.73% 5.80%* 4.44%* 4.75% 5.29% 5.33% 5.49% 5.87(dag)
Portfolio
turnover... 14% 27% 32% 56% 30% 14% 27% 32% 56% 30% 31%
- ---------
<FN>
* Annualized.
(dag) Net of expense subsidy.
(dag) (dag) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
return for periods of less than one full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-134
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW JERSEY SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.0%
Atlantic City, Gen.
Oblig., Ser. A,
Baa1 $ 1,490 Zero Coupon, 11/1/06... $ 744,002
Atlantic City Mun.
Utils. Auth.
Rev., Wtr. System,
A-* 2,000 7.75%, 5/1/17.......... 2,358,220
Bergen Cnty., Utils.
Auth.,
Wtr. Poll. Ctrl. Rev.,
F.G.I.C.,
Aaa 1,000 5.75%, 12/15/05, Ser.
B.................... 1,060,650
Aaa 7,250 Zero Coupon, 12/15/08,
Ser. B............... 3,309,697
Aaa 1,000 5.50%, 12/15/15, Ser.
A.................... 996,130
Camden Cnty. Fin.
Auth.,
Aaa 1,600 Zero Coupon, 2/15/03... 1,024,096
Camden Cnty. Mun.
Utils. Auth.,
Sewage Rev.,
Aaa 1,750 8.25%, 12/1/17,
F.G.I.C.............. 2,015,825
Camden Cnty. Poll. Ctrl. Fin. Auth.,
Solid Waste Res. Recovery Rev.,
Baa1 2,000 6.70%, 12/1/99, Ser.
D.................... 2,161,860
Baa1 3,500 7.50%, 12/1/09, Ser.
B.................... 3,774,960
Cape May Cnty. Ind. Poll. Ctrl.,
Fin. Auth. Rev.,
Aaa 2,615 6.80%, 3/1/21,
M.B.I.A.............. 3,106,908
Cherry Hill Township,
Aa 1,000 5.90%, 6/1/05.......... 1,078,950
Aa 2,000 6.30%, 6/1/12.......... 2,177,780
Cinnaminson Sewage
Auth. Rev.,
A1 1,600 7.40%, 2/1/15.......... 1,848,976
Delaware River Jt. Toll
Bridge Comn., Bridge
Rev.,
A 3,050(D) 7.875%, 7/1/18......... 3,525,464
Delaware River Port Auth. Rev.,
Pennsylvania & New Jersey
River Bridges,
Aaa 4,470 7.375%, 1/1/07,
A.M.B.A.C............ 5,007,875
Edison Twnshp., Gen.
Oblig., A.M.B.A.C.,
Aaa 5,390 6.00%, 1/1/08.......... 5,756,304
Aaa 1,200 5.10%, 1/1/09.......... 1,190,052
Egg Harbor Twnshp. Sch. Dist.,
Cert. of Part.,
Aaa $ 1,000 7.40%, 4/1/02,
M.B.I.A.............. $ 1,147,530
Essex Cnty. Impvt.
Auth.,
Gibraltar Building
Project,
Aaa 2,000 5.20%, 12/1/24,
F.G.I.C.............. 1,876,140
Evesham Mun. Utils.
Auth. Rev.,
Ser. B, M.B.I.A.,
Aaa 2,000 7.00%, 7/1/10.......... 2,213,760
Aaa 1,600 5.55%, 7/1/18.......... 1,602,528
Guam Pwr. Auth. Rev.,
BBB* 1,750 6.30%, 10/1/22, Ser.
A.................... 1,818,390
Hammonton, Gen. Oblig.,
A.M.B.A.C.,
Aaa 500 6.85%, 8/15/03......... 582,180
Aaa 500 6.85%, 8/15/04......... 583,980
Aaa 500 6.85%, 8/15/05......... 587,135
Howell Twnshp. Mun.
Utils. Auth. Rev.,
NR 750(D) 8.60%, 1/1/14, 2nd
Ser.................. 889,178
Hudson Cnty. Impr.
Auth.,
Solid Waste Sys.,
BBB-* 6,500 7.10%, 1/1/20.......... 6,892,730
Hudson Cnty. Qualified
Water
Auth. Rev., F.S.A.,
Aaa 600 5.00%, 12/15/16........ 559,752
Aaa 1,200 5.00%, 12/15/17........ 1,110,312
Aaa 1,200 5.00%, 12/15/18........ 1,108,536
Irvington Twnshp.,
F.S.A.,
Aaa 1,700 5.00%, 10/1/17......... 1,573,537
Jackson Twnshp. Sch.
Dist., F.G.I.C.,
Aaa 1,020 6.60%, 6/1/04.......... 1,164,585
Aaa 940 6.60%, 6/1/05.......... 1,076,930
Aaa 1,600 6.60%, 6/1/10.......... 1,830,288
Aaa 1,600 6.60%, 6/1/11.......... 1,831,184
</TABLE>
See Notes to Financial Statements.
B-135
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Jersey City, Gen.
Oblig.,
Aaa $ 4,310 9.25%, 5/15/04, Ser. A,
F.S.A................ $ 5,801,906
Jersey City, Redev. Auth. Rev.,
Red Dixon Mill Apts. Proj.,
AAA* 5,000 6.10%, 5/1/12,
F.N.M.A.............. 5,431,550
Jersey City Swr. Auth.,
Aaa 6,250 4.50%, 1/1/19,
F.G.I.C.............. 5,416,000
Keansburg Mun. Utils.
Auth. Rev.,
Monmouth Cnty.,
Aaa 4,000 6.00%, 12/1/19,
F.G.I.C.............. 4,166,920
Lakewood Twnshp., Gen.
Oblig., F.G.I.C.,
Aaa 450 6.60%, 12/1/04......... 513,738
Aaa 445 6.60%, 12/1/05......... 509,383
Lenape Regl. High Sch.
Dist.,
Gen. Oblig.,
Aaa 400 7.625%, 1/1/12,
M.B.I.A.............. 502,400
Manchester Twnshp.,
F.G.I.C.,
Aaa 3,250 5.00%, 10/1/16, Ser.
B.................... 3,033,095
Mercer Cnty. Impvt. Auth. Rev.,
Aa1 2,500 Zero Coupon, 4/1/06.... 1,323,450
Aa1 2,725 Zero Coupon, 4/1/07.... 1,356,478
Solid Waste Site Proj.,
AAA* 1,500(D) 7.80%, 4/1/13, Ser.
A.................... 1,686,930
West Windsor Twnshp.
Police Proj.,
Aa 1,250 6.00%, 11/15/10........ 1,337,187
Middle Twnshp. Sch.
Dist.,
Aaa 1,200 7.00%, 7/15/05,
F.G.I.C.............. 1,407,420
Middlesex Cnty.,
Aaa 1,000 4.60%, 7/15/02......... 995,820
Monmouth Cnty. Impvt. Auth. Rev.,
Asbury Park Proj.,
Baa 1,315 7.375%, 12/1/09........ 1,460,570
Howell Twnshp. Brd. of
Ed. Proj. Rev.,
AA* 2,000 6.45%, 7/1/08.......... 2,206,220
Nat'l Auth. Rev.,
AA* 4,065 6.55%, 7/1/12.......... 4,467,760
Water & Sewage Facs
Rev.,
Aaa 1,600 5.00%, 2/1/13,
M.B.I.A.............. 1,502,976
Monmouth Cnty. Impvt. Auth. Rev.,
Wtr. Treatment Fac.,
Aaa $ 750 6.875%, 8/1/12,
M.B.I.A.............. $ 855,143
New Jersey St. Bldg.
Auth. Rev.,
Garden St. Svg. Bonds,
Aa 890 Zero Coupon, 6/15/03,
Ser. A............... 562,320
New Jersey St. Econ.
Dev. Auth.,
Amer. Airlines Inc.
Proj.,
Baa2 4,000 7.10%, 11/1/31......... 4,315,200
Jersey Central Pwr. & Light,
Aa 400 7.10%, 7/1/15.......... 444,184
Morris Hall St.
Lawrence Proj.,
A+* 2,400 6.25%, 4/1/25.......... 2,525,400
Nat'l. Assoc. of Accountants,
NR 1,050 7.50%, 7/1/01.......... 1,135,816
NR 950 7.65%, 7/1/09.......... 1,041,685
Natural Gas Facs. Rev.,
A2 1,000 7.25%, 3/1/21, Ser.
B.................... 1,094,920
St. Barnabas Realty
Project,
Aaa 3,000 5.25%, 7/1/20,
M.B.I.A.............. 2,846,130
New Jersey St. Econ.
Dist. Heating &
Cool.,
Trigen Trenton Proj.,
BBB-* 2,725 6.20%, 12/1/07, Ser.
B.................... 2,788,629
BBB-* 600 6.20%, 12/1/10......... 614,010
New Jersey St. Edl.
Facs. Fin. Auth.
Rev.,
Inst. For Advanced
Study,
Aaa 5,620 6.35%, 7/1/21, Ser.
B.................... 6,145,357
Seton Hall Univ. Proj.,
Aaa 680 6.25%, 7/1/07, Ser. B,
M.B.I.A.............. 740,221
Baa 2,900 7.00%, 7/1/21, Ser.
D.................... 3,181,822
New Jersey St. Higher
Ed.,
Assistance Auth.,
Student Loan Rev., Ser.
A,
A 960 6.70%, 1/1/99.......... 1,022,957
A 800 6.70%, 7/1/99.......... 857,192
A 1,145 6.85%, 1/1/01.......... 1,243,573
A 1,220 6.85%, 7/1/01.......... 1,331,337
A 800 7.00%, 7/1/05.......... 826,440
</TABLE>
See Notes to Financial Statements.
B-136
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
New Jersey St. Hlth.
Care Facs. Fin. Auth.
Rev.,
Atlantic City Med.
Ctr.,
A $ 4,150 6.80%, 7/1/11, Ser.
C.................... $ 4,522,919
Burdette Tomlin Mem.
Hosp.,
Aaa 1,000(D) 8.125%, 7/1/12,
F.G.I.C., Ser. C..... 1,142,550
Deborah Heart & Lung Ctr.,
Baa1 1,000 6.20%, 7/1/13.......... 1,005,550
Baa1 1,100 6.30%, 7/1/23.......... 1,104,301
East Orange Gen. Hosp.,
BBB+* 2,250 7.75%, 7/1/20, Ser.
B.................... 2,490,817
Helene Fuld Med. Ctr.,
A* 2,700 8.00%, 7/1/08, Ser.
C.................... 3,067,254
A* 500 8.125%, 7/1/13, Ser.
C.................... 567,060
Intercare Hlth.
Systems-JFK Ctr.,
A 1,000 7.50%, 7/1/07.......... 1,110,870
A 1,000 7.625%, 7/1/18......... 1,109,060
Kensington Cmnty. Med.
Ctr.,
Aaa 3,700 7.00%, 7/1/20,
M.B.I.A.............. 4,147,367
Shore Mem. Hosp., Ser.
C,
Aaa 3,000(D) 7.875%, 7/1/07,
M.B.I.A.............. 3,408,510
St. Claires Riverside
Med. Ctr.,
Aaa 1,750 7.60%, 7/1/02, Ser. D,
B.I.G................ 1,983,993
Aaa 1,380 7.75%, 7/1/14,
B.I.G................ 1,550,071
St. Peters Med. Ctr.,
M.B.I.A.,
Aaa 1,725(D) 6.50%, 7/1/07, Ser.
E.................... 1,938,003
Aaa 3,000 5.00%, 7/1/21, Ser.
F.................... 2,753,220
New Jersey St. Hsg. &
Mtge. Fin. Agcy.,
Aaa 6,560 7.70%, 10/1/29, Ser. D,
M.B.I.A.............. 7,076,665
Multi-family Hsg. Rev.,
AAA* 8,000 7.00%, 5/1/30,
F.H.A................ 8,574,160
Tiffany Manor,
A+* 2,190 6.75%, 11/1/11, Ser.
B.................... 2,342,271
New Jersey St. Hwy.
Auth.,
Garden St. Pkwy. Gen.
Rev.,
A1 3,035 6.20%, 1/1/10.......... 3,294,371
Aaa 4,365(D) 7.25%, 1/1/16.......... 4,956,108
New Jersey St. Tpke.
Auth. Rev.,
A $ 2,000 6.75%, 1/1/08, Ser.
A.................... $ 2,215,520
A 1,000 6.50%, 1/1/09, Ser.
C.................... 1,117,760
A 5,240 6.50%, 1/1/16, Ser.
C.................... 5,886,564
New Jersey St.
Trans.Trust Fund
Auth.,
Aa 2,000 6.00%, 6/15/02, Ser.
A.................... 2,144,100
New Jersey St.
Wastewater
Treatment, Trust Loan
Rev.,
Aa 1,000 6.875%, 6/15/06........ 1,109,400
Aa 7,090 6.875%, 6/15/08........ 7,920,026
Aa 2,210 6.00%, 7/1/09, Ser.
A.................... 2,354,468
North Brunswick
Twnshp.,
Brd. of Ed.,
AA* 350 6.80%, 6/15/06......... 406,966
AA* 350 6.80%, 6/15/07......... 407,645
Rict Hosp. Rev.,
Aa 2,000 6.40%, 5/15/10......... 2,190,440
Old Bridge Twnshp. Mun.
Utils.
Auth., Sys. Rev.,
Aaa 1,000(D) 8.00%, 11/1/16,
F.G.I.C.............. 1,124,140
Paterson Cnty.,
Aaa 2,000 6.50%, 2/15/05,
F.S.A................ 2,243,540
Pennsauken Twnshp.,
Brd. of Ed., Cert. of
Part.,
Aaa 1,030 7.70%, 7/15/09,
B.I.G................ 1,184,974
Pequannock Twnshp. Brd.
of Ed.,
Cert. of Part.,
Aaa 750 7.875%, 3/1/08,
B.I.G................ 823,080
Port Auth. of New York
&
New Jersey,
A1 2,000 5.00%, 7/15/16, Ser.
92................... 1,851,360
A1 1,000 5.20%, 9/1/18, Ser.
85................... 950,840
A1 1,575 5.00%, 7/15/19, Ser.
92................... 1,455,694
A1 2,000 5.00%, 7/15/23, Ser.
92................... 1,835,940
A1 1,000 5.00%, 7/15/24, Ser.
92................... 925,130
A1 5,300 7.125%, 6/1/25, Ser.
69................... 6,028,909
A1 5,000 6.50%, 11/1/26, Ser.
76................... 5,300,150
Puerto Rico Comnwlth.,
Gen. Oblig.,
Baa1 4,190 5.00%, 7/1/01.......... 4,217,863
Baa1 3,000 5.50%, 7/1/08.......... 3,122,730
Aaa 4,000 7.00%, 7/1/10,
A.M.B.A.C............ 4,892,520
</TABLE>
See Notes to Financial Statements.
B-137
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Puerto Rico Comnwlth.,
Pub. Impvt.,
Baa1 $ 3,000 5.40%, 7/1/07.......... $ 3,025,290
Baa1 1,000 7.00%, 7/1/10.......... 1,199,040
Puerto Rico Elec. Pwr.
Auth. Rev. Ref.,
Baa1 1,500 8.40%, 7/1/15, Ser.
L.................... 1,711,620
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 745 7.50%, 4/1/22.......... 786,958
Sngl. Fam., Mtge.
Baa 4,260 5.125%, 12/1/05........ 4,097,652
Baa 1,000 5.25%, 12/1/06......... 960,370
Puerto Rico Hwy. Auth.
Rev.,
Baa1 1,000 6.75%, 7/1/05, Ser.
R.................... 1,109,790
Baa1 2,000(D) 7.75%, 7/1/10, Ser.
Q.................... 2,379,540
Baa1 5,550(D) 7.75%, 7/1/16, Ser.
Q.................... 6,603,223
Baa1 750(D) 6.50%, 7/1/22, Ser.
S.................... 847,170
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth.
Facs.,
Baa1 4,000 5.20%, 7/1/02.......... 4,045,560
Aaa 5,500(D) 7.875%, 7/1/16, Ser.
H.................... 6,257,900
A* 3,750(D) 6.875%, 7/1/21, Ser.
L.................... 4,331,850
Puerto Rico Tel. Auth.
Rev.
Aaa 7,875 7.813%, 1/25/07, Ser.
M., M.B.I.A.......... 8,002,969
A 2,000 5.50%, 1/1/22, Ser.
N.................... 1,991,340
Rutgers St. Univ. Rev.,
A1 2,000 5.10%, 5/1/05, Ser.
S.................... 1,998,160
Aaa 1,500(D) 8.10%, 5/1/07, Ser.
A.................... 1,703,715
A1 2,060 5.25%, 5/1/11, Ser.
S.................... 2,027,782
A1 2,015 5.25%, 5/1/11, Ser.
T.................... 1,983,485
A1 2,810 6.85%, 5/1/12, Ser.
P.................... 3,139,473
A1 1,375 5.25%, 5/1/14.......... 1,336,541
Sayreville, Hsg. Dev.
Corp., Mtge. Rev.,
AAA* 2,000 7.75%, 8/1/24,
F.H.A................ 2,133,500
South Brunswick
Twnshp.,
Wtr. & Swr. Utils.,
Gen. Impvt.,
Aa 850 6.90%, 8/1/05.......... 969,314
Aa 850 6.90%, 8/1/06.......... 969,315
South Jersey Trans.
Auth.,
Aaa $ 1,200 5.90%, 11/1/07, Ser. B,
M.B.I.A.............. $ 1,265,028
Stony Brook Regl. Swr.
Auth., New Jersey
Rev.,
Aa 2,895 5.45%, 12/1/12, Ser.
B.................... 2,911,675
Union Cnty. Utils.
Auth.,
Solid Waste Rev., Ser.
A,
A-* 1,255 7.10%, 6/15/06......... 1,356,730
A-* 6,850 7.20%, 6/15/14......... 7,440,539
Univ. of Medicine &
Dentistry,
A 1,750 6.50%, 12/1/18, Ser.
E.................... 1,914,675
Virgin Islands Port
Auth.
Marine Div. Rev.,
NR 1,330 10.125%, 11/1/05, Ser.
A.................... 1,475,529
Virgin Islands Pub.
Fin. Auth., Rev.,
Hwy. Trans. Trust Fund,
BBB* 2,750 7.70%, 10/1/04......... 3,066,965
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
NR 2,070 7.75%, 10/1/06, Ser.
91................... 2,384,537
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 1,400 8.50%, 1/1/10, Ser.
A.................... 1,578,472
West Morris Regl. High
Sch. Dist.,
Cert. of Part.,
Aaa 1,500 7.50%, 3/15/09,
B.I.G................ 1,701,015
West New York & New Jersey,
Mun. Utils., Auth. Swr. Rev.,
Aaa 3,540 Zero Coupon, 12/15/06,
F.G.I.C.............. 1,835,207
Aaa 1,410 Zero Coupon,
12/15/12............. 498,365
Aaa 2,910 Zero Coupon,
12/15/13............. 963,850
------------
Total long-term
investments
(cost
$334,111,784)........ 358,137,586
------------
SHORT-TERM INVESTMENTS--0.4%
New Jersey St. Tpke.
Auth. Rev., Ser. D,
VMIG1 700 2.25%, 7/1/94,
F.R.W.D.............. 700,000
</TABLE>
See Notes to Financial Statements.
B-138
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS (cont'd)
Port Auth. of New York & New
Jersey Spec. Oblig. Rev.
VMIG1 $ 600 2.20%, 7/1/94, Ser. 1,
F.R.D.D.............. $ 600,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank., Ser.
85
VMIG1 100 2.25%, 3/1/94,
F.R.W.D.............. 100,000
------------
Total short-term
investments
(cost $1,400,000)...... 1,400,000
------------
Total Investments--97.4%
(cost $335,511,784;
Note 4).............. 359,537,586
Other assets in excess
of
liabilities--2.6%.... 9,765,516
------------
Net Assets--100%....... $369,303,102
------------
------------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's Rating.
(D) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-139
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $335,511,784).............................................. $ 359,537,586
Cash................................................................................... 2,671,396
Interest receivable.................................................................... 4,945,886
Receivable for investments sold........................................................ 2,685,365
Receivable for Fund shares sold........................................................ 683,700
Deferred expenses and other assets..................................................... 2,912
-----------------
Total assets......................................................................... 370,526,845
-----------------
Liabilities
Payable for Fund shares reacquired..................................................... 852,432
Distribution fee payable............................................................... 144,204
Management fee payable................................................................. 108,150
Accrued expenses....................................................................... 62,856
Dividends payable...................................................................... 55,387
Deferred trustees' fees................................................................ 714
-----------------
Total liabilities.................................................................... 1,223,743
-----------------
Net Assets............................................................................. $ 369,303,102
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 326,418
Paid-in capital in excess of par..................................................... 343,757,543
-----------------
344,083,961
Accumulated net realized gain on investments......................................... 1,193,339
Net unrealized appreciation on investments........................................... 24,025,802
-----------------
Net assets, February 28, 1994........................................................ $ 369,303,102
-----------------
-----------------
Class A:
Net asset value and redemption price per share ($15,646,746 / 1,382,920 shares of
beneficial interest issued and outstanding)........................................ $11.31
Maximum sales charge (4.5% of offering price)........................................ .53
-----------------
Maximum offering price to public..................................................... $11.84
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share ($353,656,356 /
31,258,833 shares of beneficial interest issued and outstanding)................... $11.31
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-140
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest........................... $ 10,886,250
------------
Expenses
Management fee, net of waiver of
$231,380........................... 694,140
Distribution fee--Class A.......... 7,794
Distribution fee--Class B.......... 886,551
Transfer agent's fees and
expenses........................... 69,900
Custodian's fees and expenses...... 54,500
Registration fees.................. 15,400
Reports to shareholders............ 14,900
Audit fee.......................... 5,300
Legal fees......................... 5,000
Insurance expense.................. 4,700
Trustees' fees..................... 1,700
Miscellaneous...................... 2,215
------------
Total expenses................ 1,762,100
------------
Net investment income................ 9,124,150
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............ 2,989,356
Financial futures transactions..... (85,700)
------------
2,903,656
------------
Net change in unrealized appreciation/depreciation
of:
Investments........................ (11,128,168)
Financial futures contracts........ 82,500
------------
(11,045,668)
------------
Net loss on investments.............. (8,142,012)
------------
Net Increase in Net Assets
Resulting from Operations............ $ 982,138
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income................ $ 9,124,150 $ 17,308,485
Net realized gain on
investment
transactions........ 2,903,656 4,417,042
Net change in
unrealized
appreciation/depreciation
of investments...... (11,045,668) 16,729,314
------------ ------------
Net increase in net
assets resulting
from operations..... 982,138 38,454,841
------------ ------------
Dividends and distributions (Note 1):
Dividends to
shareholders from
net investment
income
Class A............. (414,107) (755,963)
Class B............. (8,710,043) (16,552,522)
------------ ------------
(9,124,150) (17,308,485)
------------ ------------
Distributions to
shareholders from
net realized gains
on investment
transactions
Class A............. (237,646) (130,182)
Class B............. (5,452,932) (3,218,353)
------------ ------------
(5,690,578) (3,348,535)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from
shares subscribed... 26,568,884 66,639,119
Net asset value of
shares issued in
reinvestment of
dividends and
distributions....... 9,326,872 12,440,617
Cost of shares
reacquired............ (20,138,759) (37,221,332)
------------ ------------
Net increase in net
assets from Fund
share
transactions........ 15,756,997 41,858,404
------------ ------------
Total increase.......... 1,924,407 59,656,225
Net Assets
Beginning of period..... 367,378,695 307,722,470
------------ ------------
End of period........... $369,303,102 $367,378,695
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-141
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984, and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Series (the ``Series'')
commenced investment operations in March 1988. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-142
<PAGE>
These differences are primarily due to differing treatments for short-term
capital gains and market discount.
Deferred Organization Expenses: The Series incurred $21,000 in organization and
initial registration expenses. Such amount was deferred and amortized over a
period of 60 months ended March 1993.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''), PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the six months ended February 28, 1994, PMF waived 25% of its management fee.
The amount of fees waived for the six months ended February 28, 1994, amounted
to $231,380 ($0.007 per share; 0.13% of average net assets, annualized).
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net asset value of the Class A shares. Such expenses under the Class A
Plan were .10 of 1% of the average daily net asset value of the Class A shares
for the six months ended February 28, 1994. PMFD pays various broker-dealers,
including PSI and Pruco Securities Corporation (``Prusec''), affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the Plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $63,000 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI advised the Series that for the six months
ended February 28, 1994, it received approximately $128,500 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
Distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $10,188,300.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the six months ended February 28, 1994, the Series incurred fees of
approximately $58,300 for the services of PMFS. As of February 28, 1994,
approximately $9,900 of such fees were due to PMFS. Transfer
B-143
<PAGE>
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994, were $63,074,847 and $49,444,381, respectively.
The federal income tax basis of the Series' investments at February 28, 1994,
was $335,524,058 and, accordingly, net unrealized appreciation for federal
income tax purposes was $24,013,528 (gross unrealized appreciation-
$25,687,422; gross unrealized depreciation-$1,673,894).
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. The Fund has authorized an unlimited number of shares of
beneficial interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ------- -------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 181,755 $ 2,120,028
Shares issued in reinvestment
of dividends and
distributions.................. 38,149 439,734
Shares reacquired................ (157,039) (1,835,890)
---------- ------------
Net increase in shares
outstanding.................... 62,865 $ 723,872
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold...................... 481,101 $ 5,443,721
Shares issued in reinvestment
of dividends and
distributions.................. 49,263 555,537
Shares reacquired................ (280,954) (3,184,387)
---------- ------------
Net increase in shares
outstanding.................... 249,410 $ 2,814,871
---------- ------------
---------- ------------
Class B
- --------
Six months ended February 28,
1994:
Shares sold...................... 2,095,762 $ 24,448,856
Shares issued in reinvestment
of dividends and
distributions.................. 771,055 8,887,138
Shares reacquired................ (1,575,625) (18,302,869)
---------- ------------
Net increase in shares
outstanding.................... 1,291,192 $ 15,033,125
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold...................... 5,414,811 $ 61,195,397
Shares issued in reinvestment
of dividends and
distributions.................. 1,055,089 11,885,079
Shares reacquired................ (3,024,547) (34,036,945)
---------- ------------
Net increase in shares
outstanding.................... 3,445,353 $ 39,043,531
---------- ------------
---------- ------------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-144
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------------- -----------------------------------
January 22,
Six Months 1990(D) Six Months Year Ended August
Ended Year Ended August 31, Through Ended 31,
February 28, -------------------------- August 31, February 28, -------------------
1994 1993 1992 1991 1990 1994 1993 1992
------------- ------- ------- ------ ------ ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period..................... $ 11.74 $ 11.15 $ 10.73 $10.16 $10.30 $ 11.74 $ 11.15 $ 10.73
------------- ------- ------- ------ ------ ------------- -------- --------
Income from investment
operations
Net investment
income(D)(D)............... .31 .64 .67 .69 .41 .28 .59 .63
Net realized and unrealized
gain (loss) on investment
transactions............... (.25) .71 .51 .59 (.14) (.25) .71 .51
------------- ------- ------- ------ ------ ------------- -------- --------
Total from investment
operations............... .06 1.35 1.18 1.28 .27 .03 1.30 1.14
------------- ------- ------- ------ ------ ------------- -------- --------
Less distributions
Dividends from net investment
income..................... (.31) (.64) (.67) (.69) (.41) (.28) (.59) (.63)
Distributions from net
realized gains on
investment
transactions............... (.18) (.12) (.09) (.02) -- (.18) (.12) (.09)
------------- ------- ------- ------ ------ ------------- -------- --------
Total distributions........ (.49) (.76) (.76) (.71) (.41) (.46) (.71) (.72)
------------- ------- ------- ------ ------ ------------- -------- --------
Net asset value, end of
period..................... $ 11.31 $ 11.74 $ 11.15 $10.73 $10.16 $ 11.31 $ 11.74 $ 11.15
------------- ------- ------- ------ ------ ------------- -------- --------
------------- ------- ------- ------ ------ ------------- -------- --------
TOTAL RETURN#:............... .53% 12.57% 11.35% 12.96% 2.70% .32% 12.12% 10.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $15,647 $15,501 $11,941 $8,041 $3,616 $ 353,656 $351,878 $295,781
Average net assets (000)..... $15,717 $13,444 $ 9,759 $5,637 $1,902 $ 357,559 $316,372 $269,318
Ratios to average net as-
sets:(D)(D)
Expenses, including
distribution fees........ .57%* .61% .48% .29% .20%* .97%* 1.01% .88%
Expenses, excluding
distribution fees........ .47%* .51% .38% .19% .10%* .47%* .51% .38%
Net investment income...... 5.31%* 5.63% 6.14% 6.58% 6.79%* 4.91%* 5.23% 5.74%
Portfolio turnover........... 14% 32% 38% 116% 87% 14% 32% 38%
<CAPTION>
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period..................... $ 10.16 $ 10.33 $ 9.95
-------- -------- --------
Income from investment
operations
Net investment
income(D)(D)............... .65 .67 .73
Net realized and unrealized
gain (loss) on investment
transactions............... .59 (.14) .38
-------- -------- --------
Total from investment
operations............... 1.24 .53 1.11
-------- -------- --------
Less distributions
Dividends from net investment
income..................... (.65) (.67) (.73)
Distributions from net
realized gains on
investment
transactions............... (.02) (.03) --
-------- -------- --------
Total distributions........ (.67) (.70) (.73)
-------- -------- --------
Net asset value, end of
period..................... $ 10.73 $ 10.16 $ 10.33
-------- -------- --------
-------- -------- --------
TOTAL RETURN#:............... 12.52% 5.28% 11.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $244,322 $180,636 $125,650
Average net assets (000)..... $208,893 $155,162 $ 79,269
Ratios to average net as-
sets:(D)(D)
Expenses, including
distribution fees........ .69% .50% .20%
Expenses, excluding
distribution fees........ .19% .10% .14%
Net investment income...... 6.18% 6.50% 6.55%
Portfolio turnover........... 116% 87% 20%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Net of management and/or distribution fee waiver.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a
purchase of shares on the first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
See Notes to Financial Statements.
B-145
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PORTFOLIO OF INVESTMENTS
NEW JERSEY MONEY MARKET SERIES FEBRUARY 28, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
Atlantic Cnty. Impvt. Auth. Rev.,
2.40% 3/2/94, Ser. 86,
VMIG1 $3,800 F.R.W.D. . . . . . . . . . . . $ 3,800,000
Bayonne B.A.N.,
MIG1 4,775 2.82%, 3/30/94 . . . . . . . . 4,775,802
Burlington Cnty., B.A.N.
NR 2,000 2.93%, 8/12/94 . . . . . . . . 2,000,261
Cape May Cnty., Mun. Utils. Auth.,
Waste Rev.
A 4,500 2.80%, 11/30/94 . . . . . . . . 4,500,000
Evesham Twnshp., B.A.N.,
NR 7,000 2.70%,3/9/94 . . . . . . . . . 6,999,828
Gloucester Cnty. Ind. Poli. Ctrl.,
Fin. Auth. Rev.,
P1 4,610 2.30% 3/2/94, Ser. 93 . . . . . 4,610,000
P1 3,120 2.40% 3/2/94, Ser. 92 . . . . . 3,120,000
Hamilton Twnshp., Mercer Cnty.,
NR 2,500 2.54%, 7/20/94, B.A.N. . . . . 2,501,338
Hudson Cnty., Impvt. Auth.,
Pooled Gov't. Loan Prog.,
A-1* 4,445 2.70%, 3/3/94, Ser. 86,
F.R.W.D. . . . . . . . . . . . 4,445,000
Jersey City, Gen. Oblig.,
NR 8,000 3.50%, 9/30/94, F.S.A. . . . . 8,018,160
Mercer Cnty., T.A.N.,
NR 4,000 2.60%, 4/15/94 . . . . . . . . 4,000,000
Middlesex Cnty.,
AAA* 1,800 6.75%, 4/1/94, Ser. 1988 . . . 1,819,699
Montgomery Twnshp., B.A.N.,
NR 2,806 3.00%, 12/16/94 . . . . . . . . 2,816,340
New Jersey St. Econ. Dev. Auth.,
AA1 1,885 2.20% 3/1/94 . . . . . . . . . 1,885,000
A1* 500 2.35%, 3/2/94 . . . . . . . . . 500,000
A1* 2,000 2.45%, 3/3/94 . . . . . . . . . 2,000,000
Catholic Cmnty. Scvs. Proj.,
VMIG1 6,000 2.35%, 3/3/94, F.R.W.D. . . . . 6,000,000
North Plainfield Holding Corp.,
Dev. Rev., O.T.,
VMIG1 4,335 3.05%, 9/1/94 . . . . . . . . . 4,335,000
</TABLE>
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
Hoffman Louisiana Roche
Inc. Proj.,
Aaa $5,100 2.20%, 3/1/94 . . . . . . . . . $ 5,100,000
New Jersey St. Econ. Dev.
Auth., F.R.W.D.,
Applewood Ctr. for Aging,
A-1* 9,400 2.45%, 3/3/94, Ser. 89 . . . . 9,400,000
GSA Bldg. Assoc.,
A1* 4,200 2.70%, 3/2/94, Ser. 85 . . . . 4,200,000
Kent Place,
VMIG1 2,000 2.45%, 3/3/94, Ser. 92L,
F.R.W.D. . . . . . . . . . . . 2,000,000
Marriot Corp. Project,
P1 6,700 2.45%, 3/2/94, Ser. 84 . . . . 6,700,000
Owens Drive Bldg. Ltd.,
A1* 1,200 2.70%, 3/2/94, Ser. 84 . . . . 1,200,000
A1* 1,450 2.70%, 3/2/94, Ser. 90 . . . . 1,450,000
Raritan Bldg. Assoc.,
P1 3,500 2.60%, 3/2/94, Ser. 85 . . . . 3,500,000
Russ Berrie & Co.,
A-1* 200 2.40%, 3/2/94, Ser. 83 . . . . 200,000
West Essex Assoc. Ltd.,
A1* 1,300 2.60%, 3/2/94, Ser. 84 . . . . 1,300,000
New Jersey St. Econ. Dev. Auth.,
F.R.W.D., Poli. Ctrl. Rev.,
Gen. Motors Proj.,
VMIG2 7,350 2.55%, 3/1/94, F.R.W.D. . . . . 7,350,000
New Jersey St. Econ. Dev.
Auth., T.E.C.P.,
Rev. Adj.,
VMIG1 5,000 2.20%, 4/13/94 . . . . . . . . 5,000,000
VMIG1 4,400 2.50%, 4/22/94 . . . . . . . . 4,400,000
Rev. Keystone Proj.,
VMIG1 2,360 2.15%, 4/7/94 . . . . . . . . . 2,360,000
VMIG1 1,500 2.45%, 4/7/94 . . . . . . . . . 1,500,000
VMIG1 5,000 2.20%, 4/31/94 . . . . . . . . 5,000,000
New Jersey St. Hsg. & Mtge.
Fin. Agcy. Rev., M.T.,
VMIG1 5,000 2.95%, 9/29/94 . . . . . . . . 5,000,000
</TABLE>
See Notes To Financial Statements.
B-146
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
New Jersey St. Tpks. Auth. Rev.,
VMIG1 $ 600 2.25%, 3/2/94, Ser. D,
F.W.R.D. . . . . . . . . . . . $ 600,000
New Jersey St. O.T.,
VMIG1 4,000 2.85%, 8/15/94 . . . . . . . . 4,000,000
New Jersey, Gen. Oblig.,
Tax & Rev.
MIG1 13,000 3.00%, 6/15/94 . . . . . . . . 13,038,441
Passaic Cnty., Gen. Oblig.,
NR 2,000 2.75%, 6/7/94 . . . . . . . . 2,001,055
Port Auth. of New York &
New Jersey,
KIAC Partners, F.R.W.D.,
VMIG1 2,900 2.30%, 3/2/94, Ser. 3 . . . . . 2,900,000
Spec. Oblig. Rev.,
NR 8,000 2.375%, 3/1/94 . . . . . . . . 8,000,000
Spec. Oblig. Rev., F.R.D.D.,
VMIG1 300 2.25%, 3/1/94, Ser. 1 . . . . . 300,000
Puerto Rico Comnwth.,
Gen. Oblig., T.R.A.N.,
MIG1 5,000 3.00%, 7/29/94, Ser. 94A . . . 5,014,914
Ridgewood,
NR 3,135 2.78%, 8/3/94 . . . . . . . . . 3,135,506
Salem Cnty. Ind. Poll. Ctrl.
Fin. Auth. Rev., T.E.C.P.,
VMIG1 2,600 2.45%, 3/9/94, Ser. A . . . . . 2,600,000
VMIG1 3,000 2.00%, 4/11/94, Ser. A . . . . 3,000,000
VMIG1 1,000 2.15%, 4/11/94, Ser. A . . . . 1,000,000
</TABLE>
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
Union Cty. Ind. Poll. Ctrl. Fin.
Auth. Rev.
Poll. Ctrl. Rev.,
P1 $1,200 2.20%, 3/1/94 . . . . . . . . . $ 1,200,000
------------
TOTAL INVESTMENTS - 99.4%
(amortized cost -
$180,576,344**) . . . . . . . . 180,576,344
Other assets in excess of
liabilities - 0.6% . . . . . . . 1,169,461
------------
NET ASSETS - 100% . . . . . . . . $181,745,805
------------
------------
<FN>
- ----------------
(a) The following abbreviations are used in portfolio descriptions:
B.A.N. - Bond Anticipation Note.
F.R.D.D. - Floating Rate (Daily) Demand Note #.
F.R.W.D. - Floating Rate (Weekly) Demand Note #.
F.S.A. - Financial Security Assurance, Inc.
O.T. - Optional Tender.
M.T. - Mandatory Tender.
T.A.N. - Tax Anticipation Note.
T.E.C.P. - Tax Exempt Commercial Paper.
# For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR - Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
See Notes to Financial Statements
B-147
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at amortized cost which approximates market value......................... $ 180,576,344
Cash................................................................................... 43,019
Receivable for investments sold........................................................ 8,027,452
Receivable for Fund shares sold........................................................ 1,846,643
Accrued interest receivable............................................................ 1,165,385
Deferred expenses and other assets..................................................... 10,602
-----------------
Total assets....................................................................... 191,669,445
-----------------
Liabilities
Payable for investments purchased...................................................... 8,018,160
Payable for Fund shares reacquired..................................................... 1,708,113
Accrued expenses and other liabilities................................................. 123,656
Due to Manager......................................................................... 52,678
Dividends payable...................................................................... 11,578
Due to Distributor..................................................................... 8,741
Deferred trustees fees................................................................. 714
-----------------
Total liabilities.................................................................. 9,923,640
-----------------
Net Assets............................................................................. $ 181,745,805
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value..................................... $ 1,817,458
Paid-in capital in excess of par..................................................... 179,928,347
-----------------
Net assets, February 28, 1994........................................................ $ 181,745,805
-----------------
-----------------
Net asset value, offering price and redemption price per share ($181,745,805 (div>
181,745,805 shares of beneficial interest issued and outstanding; unlimited number
of shares authorized).............................................................. $1.00
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-148
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
28,
Net Investment Income 1994
----------
<S> <C>
Income
Interest............................ $2,110,691
----------
Expenses
Management fees, net of waiver of
$108,247............................ 324,739
Distribution fee.................... 108,247
Transfer agent's fees and
expenses............................ 39,000
Custodian's fees and expenses....... 38,000
Reports to shareholders............. 26,000
Registration fees................... 15,000
Audit fees.......................... 5,300
Legal fees and expenses............. 5,000
Deferred organization expenses...... 3,292
Trustees' fees...................... 1,700
Miscellaneous....................... 825
----------
Total expenses.................... 567,103
----------
Net investment income................. 1,543,588
----------
Net Increase in Net Assets
Resulting from Operations............. $1,543,588
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Increase (Decrease)
in Net Assets
Six Months
Ended Year Ended
February 28, August 31,
1994 1993
------------- -------------
Operations
<S> <C> <C>
Net investment income... $ 1,543,588 $ 3,443,063
------------- -------------
Net increase in net
assets
resulting from
operations............ 1,543,588 3,443,063
------------- -------------
Dividends and
distributions to
shareholders (Note 1)... (1,543,588) (3,443,063)
------------- -------------
Fund share transactions
(at $1 per share)
Net proceeds from shares
subscribed............ 311,189,944 492,846,812
Net asset value of
shares
issued in reinvestment
of
dividends............. 1,531,581 3,379,946
Cost of shares
reacquired.............. (294,062,521) (497,232,130)
------------- -------------
Net increase (decrease)
in net assets from
Fund share
transactions.......... 18,659,004 (1,005,372)
------------- -------------
Total increase
(decrease).............. 18,659,004 (1,005,372)
Net Assets
Beginning of period....... 163,086,801 164,092,173
------------- -------------
End of period............. $ 181,745,805 $ 163,086,801
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-149
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Money Market Series (the
``Series'') commenced investment operations on December 3, 1990. The Series is
non-diversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New Jersey State and federal income
taxes with a minimum of risk by investing in ``investment grade'' tax-exempt
securities maturing within 13 months or less and whose ratings are within the
two highest ratings categories by a nationally recognized statistical rating
organization, or if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series'
gross income consists of tax-exempt interest, no federal income tax provision
is required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Deferred Organization Expenses: The Series incurred $32,200 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending December 1995.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of
such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost
of the subadviser's services, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of each of the Series.
During the six months ended February 28, 1994, PMF waived 25% of its
managements fee. The amount of such fees waived for the six months ended
February 28, 1994 amounted to $108,247 ($.001 per share; .10% of average net
assets).
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including
Prudential Securities Incorporated (``PSI'') and Pruco Securities Corporation,
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-150
<PAGE>
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $39,000 for the services of PMFS. As of February 28, 1994,
approximately $7,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-151
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Six Months December 3,
Ended Year Ended August 1990*
February 31, Through
28, -------------------- August 31,
1994 1993 1992 1991
---------- -------- -------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains+........................ .01 .02 .04 .03
Dividends and distributions.......................................... (.01) (.02) (.04) (.03)
---------- -------- -------- -----------
Net asset value, end of period....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- -------- -----------
---------- -------- -------- -----------
TOTAL RETURN#:....................................................... 0.89% 2.31% 3.48% 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...................................... $ 181,746 $163,087 $164,092 $ 117,460
Average net assets (000)............................................. $ 174,630 $170,103 $155,915 $ 89,273
Ratios to average net assets(D):
Expenses, including distribution fee............................... .65%** .64% .32% .13%**
Expenses, excluding distribution fee............................... .52%** .51% .19% .00%**
Net investment income.............................................. 1.78%** 2.02% 3.33% 4.48%**
<FN>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of management fee waiver and/or expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total returns for periods of less than
one year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-152
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW YORK SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.9%
Babylon Ind. Dev. Agcy.
Res.
Recovery Rev.,
Babylon Cmnty. Waste
Mgmt. Facs.,
Baa1 $ 3,520 7.875%, 7/1/06, Ser. A... $ 4,134,698
Ogden Martin Sys., Inc.,
Baa1 495 8.50%, 1/1/19, Ser. B.... 563,751
Baa1 3,450 8.50%, 1/1/19, Ser. C.... 3,937,795
Buffalo Swr. Auth. Sys.
Rev., F.G.I.C.,
Aaa 1,400 5.00%, 7/1/12, Ser. G.... 1,327,410
City of New Rochelle Ind.
Dev.
Agcy., Coll. of New
Rochelle,
BBB* 500 6.625%, 7/1/12........... 522,200
BBB* 2,000 6.75%, 7/1/22............ 2,096,820
Dutchess Cnty. Res. Rec. Agcy. Rev.,
Solid Waste Mgmt., F.G.I.C.,
Aaa 1,150 7.50%, 1/1/09, Ser. A.... 1,317,520
Great Neck No. Wtr.
Auth.,
Wtr. Sys. Rev.,
A1 1,750 7.00%, 1/1/18, Ser. A.... 1,983,905
Guam Pwr. Auth. Rev.,
BBB* 1,750 6.30%, 10/1/22, Ser. A... 1,818,390
Jefferson Cnty. Ind. Dev.
Agcy.
Solid Waste Disposal
Rev.,
Baa1 1,500 7.20%, 12/1/20........... 1,637,175
Metro. Trans. Auth. Facs.
Rev.,
Aaa 675 Zero Coupon, 7/1/12, Ser.
N, F.G.I.C............. 238,633
Aaa 6,400 Zero Coupon, 7/1/13, Ser.
N, F.G.I.C............. 2,148,992
Commuter Facs., Ser. O,
Baa1 1,000 5.75%, 7/1/13............ 998,750
Baa1 1,000 5.50%, 7/1/17............ 960,570
Transit Facs.,
Baa1 3,000 7.00%, 7/1/12, Ser. 5.... 3,351,300
Nassau Cnty., Gen. Oblig., F.G.I.C.,
Aaa 3,000 4.75%, 5/1/06, Ser. B.... 2,937,360
Aaa 3,845 4.80%, 5/1/07, Ser. B.... 3,738,609
Nassau Cnty. Ind. Dev.
Agcy. Rev.,
Hofstra Univ. Proj.,
A 2,500(dag) 8.25%, 7/1/03............ 2,898,750
Nassau Cnty. Ind. Dev.
Agcy. Rev.,
Long Beach Proj.,
NR $ 1,420 9.25%, 1/1/97............ $ 1,306,400
S&S Incinerator Jt. Venture Proj.,
NR 2,785 9.00%, 1/1/07............ 2,562,200
New York City, Gen.
Oblig.,
Baa1 1,900 8.00%, 6/1/99, Ser. B.... 2,151,104
Baa1 4,000 7.50%, 2/1/01, Ser. B.... 4,513,960
Baa1 3,500 7.75%, 3/15/03, Ser. A... 4,015,970
Baa1 2,500 8.00%, 8/1/03, Ser. D.... 2,969,100
Baa1 3,000 8.20%, 11/15/03, Ser.
F...................... 3,595,800
Baa1 3,040 7.70%, 2/1/09, Ser. D.... 3,504,998
Baa1 2,275 7.00%, 10/1/10, Ser. B... 2,514,194
New York City Ind. Dev. Agcy.,
Spec. Fac. Rev.,
Y.M.C.A. Of Greater N.Y. Proj.,
NR 1,350 8.00%, 8/1/16............ 1,503,913
New York City Mun. Wtr.
Fin.
Auth. Rev., Wtr. & Swr.
Sys.,
Aaa 4,000(dag) 7.375%, 6/15/13, Ser.
C...................... 4,711,320
Aaa 3,000 7.25%, 6/15/15, Ser. A,
M.B.I.A................ 3,467,430
New York City Transit
Auth.,
Aaa 7,900 5.40%, 1/1/18, Ser. 1993,
F.S.A.................. 7,667,503
New York St. Dorm. Auth.
Rev.,
City Univ. Sys. Cons.,
Baa1 5,000 8.75%, 7/1/02, Ser. D.... 6,188,400
Aaa 5,000(dag) 8.00%, 7/1/07, Ser. A.... 5,708,850
Baa1 3,435 8.125%, 7/1/07, Ser. A... 3,921,705
Baa1 1,880 7.00%, 7/1/09, Ser. D.... 2,140,004
Aaa 3,500 7.50%, 7/1/10, Ser. C,
F.G.I.C................ 4,321,310
Baa1 2,000 5.75%, 7/1/18, Ser. A.... 1,976,560
Coll. & Univ. Ed.,
M.B.I.A.,
Aaa 2,255 Zero Coupon, 7/1/04...... 1,328,781
Aaa 3,750 Zero Coupon, 7/1/05...... 2,076,488
Aaa 1,000 Zero Coupon, 7/1/06...... 519,330
Aaa 1,700 Zero Coupon, 7/1/07...... 825,333
Aaa 500 Zero Coupon, 7/1/08...... 224,560
Dept. of Hlth.,
Baa1 2,000 5.50%, 7/1/20............ 1,885,880
Episcopal Hlth. Svcs.,
AAA* 4,500 7.55%, 8/1/29,
G.N.M.A................ 5,109,345
</TABLE>
See Notes to Financial Statements.
B-153
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
New York St. Dorm. Auth.
Rev.,
Long Island Med. Ctr.,
F.H.A.,
Aa $ 3,595 7.625%, 8/15/08, Ser.
A...................... $ 3,988,149
Aa 4,100 7.75%, 8/15/27, Ser. A... 4,566,580
Menorah Campus,
AA* 3,000 7.40%, 2/1/31, F.H.A..... 3,467,220
Spec. Act Sch. Districts,
Aaa 3,050 7.00%, 7/1/13,
F.G.I.C................ 3,422,313
St. Univ. Edl. Facs.,
Baa1 500 5.50%, 5/15/08, Ser. A... 498,000
Aaa 2,500 5.50%, 5/15/08, Ser. A,
A.M.B.A.C.............. 2,574,475
Baa1 2,000 5.875%, 5/15/11, Ser.
A...................... 2,037,860
Baa1 6,800 5.25%, 5/15/15, Ser. A... 6,338,416
Aaa 2,200 5.25%, 5/15/15, Ser. A,
A.M.B.A.C.............. 2,131,404
Aaa 2,500 7.25%, 5/15/15, Ser. B,
F.G.I.C................ 2,891,975
Baa1 1,770(dag) 7.25%, 5/15/18, Ser. A... 2,087,963
New York St. Energy
Research & Dev. Auth.
Rev.,
Brooklyn Union Gas Co.,
A1 5,225 7.125%, 12/1/20, Ser.
1...................... 5,620,846
Aaa 3,000 6.75%, 2/1/24,
M.B.I.A................ 3,278,940
Aaa 2,000 8.528%, 7/8/26, Ser. D,
M.B.I.A.,.............. 1,930,000
Con. Edison Co.,
Aa2 6,735 7.50%, 7/1/25............ 7,440,289
Aa2 4,775 7.50%, 1/1/26............ 5,285,877
New York St. Environ.
Facs.
Corp., Poll. Ctrl.
Rev.,
St. Wtr. Revolving
Fund,
Aa 5,000 7.25%, 6/15/10........... 5,773,300
Aa 1,300 7.50%, 3/15/11, Ser. B... 1,490,606
Aa 1,000 6.50%, 6/15/14, Ser. E... 1,091,750
New York St. Hsg. Fin. Agcy. Rev.,
Multifamily Hsg.,
Aa 1,000 7.05%, 8/15/24, Ser. A... 1,079,140
St. Univ. Constr.,
Aaa 1,000(dag) 8.10%, 11/1/10, Ser. A... 1,180,700
Aaa 3,600 8.00%, 5/1/11, Ser. A.... 4,596,552
New York St. Hsg. Fin. Agcy. Rev.,
Svc. Contract,
Aaa $ 2,000(dag) 7.375%, 9/15/21, Ser.
A...................... $ 2,375,420
New York St. Local Gov't.
Assistance Corp.,
A 1,500 5.25%, 4/1/16, Ser. E.... 1,431,990
A 5,860 5.50%, 4/1/21, Ser. B.... 5,620,853
New York St. Med. Care
Facs.
Fin. Agcy. Rev.,
Booth Silvercrest &
Kings
Brook Hosp.,
Aa 2,750 7.60%, 2/15/29, Ser. A,
F.H.A.................. 3,118,115
Buffalo Gen. Hosp.
& Nursing Home,
AA* 2,000 7.60%, 2/15/08, Ser. C,
F.H.A.................. 2,252,340
Ellis & Ira Davenport
Hosp.,
Aa 1,495 8.00%, 2/15/28, Ser. B,
F.H.A.................. 1,708,666
Good Samaritian Hosp.,
F.H.A.,
Aa 3,500 7.625%, 2/15/23, Ser.
A...................... 3,882,760
Hosp. & Nursing Home,
F.H.A.,
AA* 2,260 8.625%, 2/15/06, Ser.
C...................... 2,395,713
Aa 1,000(dag) 7.70%, 2/15/25, Ser. A... 1,184,660
Long Island Coll. Hosp.,
F.H.A.,
Aa 3,000 8.00%, 2/15/08, Ser. B... 3,325,560
AAA* 4,000 8.50%, 1/15/22, Ser. A... 4,422,040
Mental Hlth. Svcs.,
Baa1 2,185(dag) 7.50%, 8/15/07, Ser. A... 2,570,631
Baa1 815 7.50%, 8/15/07, Ser. A... 921,415
Baa1 365(dag) 7.75%, 8/15/11, Ser. A... 436,219
Baa1 135 7.75%, 8/15/11, Ser. A... 154,645
Baa1 3,000 5.25%, 2/15/19, Ser. F,
F.S.A.................. 2,739,510
Aaa 11,250 5.25%, 2/15/21, Ser. F... 10,660,162
Baa1 3,135(dag) 7.50%, 2/15/21, Ser. A... 3,688,296
Baa1 1,165 7.50%, 2/15/21, Ser. A... 1,324,395
Aaa 5,000 5.80%, 8/15/22, Ser. A,
A.M.B.A.C.............. 5,060,500
</TABLE>
See Notes to Financial Statements.
B-154
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
New York St. Med. Care
Facs.,
Fin. Agcy. Rev.,
St. Francis Hosp.,
F.G.I.C.,
Aaa $ 2,350 7.60%, 11/1/08, Proj.
A...................... $ 2,691,972
New York St. Mtge. Agcy.
Rev.,
Homeowner Mtge.,
Aa 3,525 7.50%, 4/1/16, Ser.
EE2.................... 3,765,299
Aa 1,850 6.875%, 4/1/17, Ser.
8A..................... 1,954,914
Aa 3,290 8.05%, 10/1/21........... 3,672,627
New York St. Mun. Bond
Bank
Agcy., Spec. Proj.
Rev.,
A* 3,000 6.75%, 3/15/11, Ser. A... 3,345,780
New York St. Pwr. Auth.
Rev.
& Gen. Purpose,
Aa 2,000 6.75%, 1/1/18, Ser. Y.... 2,215,520
Aa 1,000 6.25%, 1/1/23............ 1,073,610
New York St. Urban Dev.
Corp. Rev.,
Baa1 2,000 5.25%, 1/1/21............ 1,810,820
Correctional Cap. Facs.,
Baa1 10,000 Zero Coupon, 1/1/08...... 4,411,800
Aaa 6,350 5.25%, 1/1/14, F.S.A..... 6,129,401
Niagara Falls Bridge
Comn.,
Aaa 3,000(dag) 6.125%, 10/1/19,
F.G.I.C................ 3,316,920
Toll Bridge Sys. Rev.,
Aaa 2,350 5.25%, 10/1/21,
F.G.I.C................ 2,227,095
Oneida Herkimer Solid Waste Mgmt.
Auth., Solid Waste Sys. Rev.,
Baa 3,000 6.75%, 4/1/14............ 3,172,590
Port Auth. of New York &
New
Jersey,
A1 5,100 7.125%, 6/1/25, Ser.
69..................... 5,801,403
A1 1,000 7.25%, 8/1/25, Ser. 70... 1,133,690
A1 2,500 6.00%, 1/15/28, Ser.
84..................... 2,574,325
A1 3,000 5.375%, 3/1/28........... 2,969,880
Puerto Rico, Gen. Oblig.,
Aaa 4,000 7.00%, 7/1/10,
A.M.B.A.C.............. 4,892,520
Pub. Impvt. Ref.,
Baa1 1,250 7.00%, 7/1/10............ 1,498,800
Puerto Rico Hsg. Fin.
Auth. Rev.,
Baa 2,750 5.125%, 12/1/05.......... 2,645,198
Aaa 1,000 6.85%, 10/15/24, Ser. B,
G.N.M.A................ 1,063,690
Multifamily Mtge.,
AA* $ 2,385 7.50%, 4/1/22............ $ 2,519,323
Puerto Rico Tel. Auth.
Rev., M.B.I.A.,
Aaa 7,875 7.813%, 1/25/07, Ser.
M...................... 8,002,969
Suffolk Cnty. Ind. Dev.
Agcy., F.G.I.C.,
Aaa 1,000 6.00%, 2/1/07............ 1,084,380
Aaa 5,000 6.00%, 2/1/08............ 5,408,100
Aaa 1,000 4.75%, 2/1/09............ 939,790
Suffolk Cnty. Water.
Auth.,
Waterworks Rev.,
Aaa 5,000 5.00%, 6/1/17,
M.B.I.A................ 4,569,650
Aaa 1,110 5.25%, 6/1/17, Ser. A,
A.M.B.A.C.............. 1,059,717
Triborough Bridge & Tunl.
Auth. Rev.,
Aaa 2,035(dag) 7.50%, 1/1/15, Ser. M.... 2,306,103
Aa 3,405 4.75%, 1/1/19, Ser. A.... 2,977,707
Aaa 2,500(dag) 6.00%, 1/1/20, Ser. R.... 2,677,325
Aa 4,595 5.00%, 1/1/24............ 4,117,625
United Nations Dev.
Corp.,
A 4,500 6.00%, 7/1/26, Ser. A.... 4,569,840
Virgin Islands Pub. Fin.
Auth.
Rev.,
NR 2,550 7.25%, 10/1/18, Ser. A... 2,867,271
Hwy. Trans. Trust Fund,
BBB* 2,500 7.70%, 10/1/04........... 2,788,150
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys.,
NR 2,300 8.50%, 1/1/10, Ser. A.... 2,593,204
Wtr. Sys. Rev.,
NR 500 7.20%, 1/1/02, Ser. B.... 546,510
NR 1,120 7.60%, 1/1/12, Ser. B.... 1,251,365
------------
Total long-term
investments
(cost $334,309,862).... 362,016,194
------------
SHORT-TERM INVESTMENTS--1.3%
New York City, Ind. Dev.
Agcy.,
NR 4,800 2.40%, 3/1/94, F.R.D.D.,
(cost $4,800,000)...... 4,800,000
------------
</TABLE>
See Notes to Financial Statements.
B-155
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
<TABLE>
<CAPTION>
Value
Description (a) (Note 1)
<S> <C> <C> <C>
Total Investments--98.2%
(cost $339,109,862; Note
4)..................... $366,816,194
Other assets in excess of
liabilities--1.8%...... 6,772,818
------------
Net Assets--100%......... $373,589,012
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
(dag) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-156
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February 28,
Assets 1994
----------------
<S> <C>
Investments, at value (cost $339,109,862).............................................. $366,816,194
Cash................................................................................... 92,483
Interest receivable.................................................................... 4,203,371
Receivable for investments sold........................................................ 3,603,387
Receivable for Fund shares sold........................................................ 678,755
Deferred expenses and other assets..................................................... 7,464
--------------
Total assets....................................................................... 375,401,654
--------------
Liabilities
Payable for Fund shares reacquired..................................................... 1,334,103
Management fee payable................................................................. 145,744
Distribution fee payable............................................................... 141,139
Accrued expenses....................................................................... 126,920
Dividends payable...................................................................... 64,022
Deferred trustees' fees................................................................ 714
--------------
Total liabilities...................................................................... 1,812,642
--------------
Net Assets............................................................................. $373,589,012
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 304,107
Paid-in capital in excess of par..................................................... 342,258,778
--------------
342,562,885
Accumulated net realized gain on investments......................................... 3,319,795
Net unrealized appreciation on investments........................................... 27,706,332
--------------
Net assets, February 28, 1994........................................................ $373,589,012
--------------
--------------
Class A:
Net asset value and redemption price per share
($15,104,959 (div) 1,230,027 shares of beneficial interest issued and
outstanding)....................................................................... $12.28
Maximum sales charge (4.5% of offering price)........................................ .58
--------------
Maximum offering price to public..................................................... $12.86
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($358,484,053 (div) 29,180,678 shares of beneficial interest issued and
outstanding)....................................................................... $12.28
--------------
--------------
</TABLE>
See Notes to Financial Statements.
B-157
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................ $ 11,499,475
------------
Expenses
Management fee...................... 933,416
Distribution fee--Class A........... 6,485
Distribution fee--Class B........... 900,989
Transfer agent's fees and
expenses............................ 99,000
Custodian's fees and expenses....... 79,600
Reports to shareholders............. 27,000
Registration fees................... 12,500
Audit fee........................... 5,300
Insurance expense................... 5,000
Legal fees.......................... 5,000
Trustees' fees...................... 1,700
Miscellaneous....................... 1,644
------------
Total expenses.................... 2,077,634
------------
Net investment income................. 9,421,841
------------
Realized and Unrealized Gain on
Investments
Net realized gain on:
Investment transactions............. 3,876,345
Net change in unrealized appreciation
on:
Investments......................... (11,723,765)
------------
Net loss on investments............... (7,847,420)
------------
Net Increase in Net Assets
Resulting from Operations............. $ 1,574,421
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) in February 28, August 31,
Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income............... $ 9,421,841 $ 18,305,266
Net realized gain on
investment
transactions......... 3,876,345 8,650,226
Net change in
unrealized
appreciation on
investments.......... (11,723,765) 13,853,347
------------ ------------
Net increase in net
assets resulting from
operations........... 1,574,421 40,808,839
------------ ------------
Dividends to shareholders
(Note 1)
Class A................ (353,456) (504,683)
Class B................ (9,068,385) (17,800,583)
------------ ------------
(9,421,841) (18,305,266)
------------ ------------
Fund share transactions
(Note 5)
Proceeds from shares
subscribed........... 26,416,431 56,310,026
Net asset value of
shares issued in
reinvestment of
dividends............ 5,779,110 10,865,791
Cost of shares
reacquired............. (21,187,307) (41,780,067)
------------ ------------
Net increase in net
assets from Fund
share transactions... 11,008,234 25,395,750
------------ ------------
Total increase........... 3,160,814 47,899,323
Net Assets
Beginning of period...... 370,428,198 322,528,875
------------ ------------
End of period............ $373,589,012 $370,428,198
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-158
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New York Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state and city income taxes with the minimum
of risk by investing in ``investment grade'' tax-exempt securities and whose
ratings are within the four highest ratings categories by a nationally
recognized statistical rating organization or, if not rated, are of comparable
quality. The ability of the issuers of the securities held by the Series to meet
their obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays
B-159
<PAGE>
the Distributors a reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
year ended August 31, 1993. PMFD pays various broker-dealers, including PSI and
Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $114,700 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the six months ended
February 28, 1994, it received approximately $112,000 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $8,909,000.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect),
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $68,900 for the services of PMFS. As of February 28, 1994,
approximately $11,600 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
folio securities of the Series, Securities
excluding short-term investments, for the six
months ended February 28, 1994 were $95,620,441 and $84,943,997, respectively.
The cost basis of investments for federal income tax purposes at February 28,
1994 was $339,138,062 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $27,678,132 (gross unrealized
appreciation--$29,993,746, gross unrealized depreciation--$2,315,614).
For federal income tax purposes, the Series had a capital loss carryforward
as of August 31, 1993 of approximately $528,400 which expires in 1999. Such
carryforward is after utilization of approximately $8,650,200 to offset the
Series' net taxable gains recognized in the year ended August 31, 1993.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
B-160
<PAGE>
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1994 and the year ended August
31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
---------- ------------
Six months ended February 28,
1994:
Shares sold.................. 355,471 $ 4,467,871
Shares issued in reinvestment
of dividends............... 17,610 220,089
Shares reacquired............ (85,751) (1,075,908)
---------- ------------
Net increase in shares
outstanding................ 287,330 $ 3,612,052
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold.................. 629,556 $ 7,599,542
Shares issued in reinvestment
of dividends............... 25,616 309,097
Shares reacquired............ (227,933) (2,765,199)
---------- ------------
Net increase in shares
outstanding................ 427,239 $ 5,143,440
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
<S> <C> <C>
---------- ------------
Six months ended February 28,
1994:
Shares sold................... 1,748,426 $ 21,948,560
Shares issued in reinvestment
of dividends................ 444,524 5,559,021
Shares reacquired............. (1,603,184) (20,111,399)
---------- ------------
Net increase in shares
outstanding................. 589,766 $ 7,396,182
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 4,042,874 $ 48,710,484
Shares issued in reinvestment
of dividends................ 877,265 10,556,694
Shares reacquired............. (3,254,011) (39,014,868)
---------- ------------
Net increase in shares
outstanding................. 1,666,128 $ 20,252,310
---------- ------------
---------- ------------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-161
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 22,
Six Months 1990 (dag) Six Months
Ended Year Ended August 31, Through Ended Year Ended August 31,
February 28, ------------------------- August 31, February 28, ----------------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------------ ------- ------ ------ ------------ ------------ -------- -------- -------- -------- --------
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $12.54 $ 11.75 $11.08 $10.62 $10.81 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $ 10.88 $ 10.59
------- ------ ------ ------ ------ ------- -------- -------- -------- -------- --------
Income
from
investment
operations
Net
investment
income... .34 .70 .71 .72 .42 .31 .65 .66 .67 .65 .65
Net
realized
and
unrealized
gain (loss)
on investment
transactions...(.26) .79 .67 .46 (.19) (.26) .79 .67 .46 (.26) .29
------ ----- ----- ------ ------ ------- -------- -------- -------- -------- --------
Total
from
investment
operations... .08 1.49 1.38 1.18 .23 .05 1.44 1.33 1.13 .39 .94
Less
distributions
Dividends
from
net
investment
income... (.34) (.70) (.71) (.72) (.42) (.31) (.65) (.66) (.67) (.65) (.65)
------- ------ ------ ------ ------ ------- -------- -------- -------- -------- --------
Net asset
value, end
of
period.. $ 12.28 $ 12.54 $11.75 $11.08 $10.62 $ 12.28 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $ 10.88
------- ------ ------ ------ ------ ------- -------- -------- -------- -------- --------
------- ------ ------ ------ ------ ------- -------- -------- -------- -------- --------
TOTAL
RETURN#:... .68% 13.06% 12.73% 11.49% 2.03% .47% 12.61% 12.32% 10.96% 3.73% 9.33%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)... $ 15,105 $11,821 $6,057 $2,729 $1,174 $358,484 $358,607 $316,472 $293,942 $313,606 $340,728
Average
net
assets
(000)... $ 13,078 $ 8,755 $4,024 $1,579 $ 588 $363,382 $330,823 $303,016 $295,285 $332,580 $353,225
Ratios to
average
net assets:
Expenses,
including
distri-
bution
fees... .73%* .74% .74% .71% .78%* 1.13%* 1.14% 1.14% 1.11% 1.17% 1.05%
Expenses,
excluding
distri-
bution
fees... .63%* .64% .64% .61% .68%* .63%* .64% .64% .61% .67% .64%
Net
investment
income... 5.43%* 5.78% 6.19% 6.61% 6.41%* 5.03%* 5.38% 5.79% 6.21% 6.10% 5.77%
Portfolio
turnover... 23% 44% 45% 78% 127% 23% 44% 45% 78% 127% 96%
- ---------------
* Annualized.
(dag) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total returns
for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
M.B.I.A.--Municipal Bond Insurance Association.
R.A.N.--Revenue Anticipation Note.
S.E.M.M.T.--Semi-Annual Mandatory Tender.
S.E.M.O.T.--Semi-Annual Optional Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-162
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PORTFOLIO OF INVESTMENTS
NEW YORK MONEY MARKET SERIES FEBRUARY 28, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
Amherst Ind. Dev. Agcy. Rev.,
Gen. Accident Ins.
2.75%, 5/1/94, Ser. 85,
A-1+* $ 3,100 S.E.M.O.T . . . . . . . . . . . . . .$ 3,100,000
Guilderland Ind. Dev. Agcy. Rev.,
Northeastern Ind'l Park,
2.35%, 3/2/94, Ser. 93A,
P-1 1,500 F.R.W.D.. . . . . . . . . . . . . . . 1,500,000
Hempstead Town, B.A.N.,
NR 5,000 2.50%, 3/11/94, Ser. A. . . . . . . . 5,000,401
Monroe Cnty. Ind. Dev. Agcy. Rev.,
Gen'l Accident Ins. Co.,
2.75%, 9/1/94, Ser. 84,
A-1+* 7,000 S.E.M.O.T.. . . . . . . . . . . . . . . 7,000,000
Granite Building,
2.25%, 3/2/94, Ser. 92,
P-1 2,550 F.R.W.D . . . . . . . . . . . . . . . . 2,550,000
Monroe Cnty., Pub. Impvt.,
2.35%, 3/3/94, Ser. BT-92
VMIG1 3,675 F.R.W.D., M.B.I.A.. . . . . . . . . . 3,675,000
Mt. Pleasant Ind. Dev. Agcy.,
Poll. Ctrl. Rev.,
Gen. Motors Corp. Proj.,
VMIG2 6,095 2.55%, 3/1/94, F.R.W.D. . . . . . . . 6,095,000
New York City, Gen. Oblig.,
2.35%, 3/3/94, Ser. 94A,
MIG1 9,000 T.A.N.. . . . . . . . . . . . . . . . 9,000,000
3.25%, 4/15/94, Ser. 94A,
MIG1 8,000 R.A.N.. . . . . . . . . . . . . . . . 8,004,175
3.50%, 4/15/94, Ser. 94A,
MIG1 5,000 R.A.N.. . . . . . . . . . . . . . . . 5,004,237
Bankers Trust Tender Option,
2.60%, 3/3/94, Ser. BT-79,
VMIG1 10,000 F.R.W.D., M.B.I.A.. . . . . . . . . . 10,000,000
New York City Hsg. Dev.
Corp. Mtge. Rev.,
E. 17th St. Property,
2.30%, 3/1/94, Ser. 93 A,
A-1* 400 F.R.D.D.. . . . . . . . . . . . . . . 400,000
Related E. 96th St. Proj.,
2.25%, 3/3/94, Ser. 90A,
VMIG1 13,500 F.R.W.D.. . . . . . . . . . . . . . . 13,500,000
</TABLE>
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
New York City Ind. Dev. Agcy. Rev.,
Japan Airlines,
2.40%, 3/1/94, Ser. 91,
A-1+* $17,600 F.R.D.D.. . . . . . . . . . . . . . .$17,600,000
Viola bakeries,
2.30%, 3/2/94, Ser. 90,
VMIG1 2,750 F.R.W.D.. . . . . . . . . . . . . . . 2,750,000
New York St., Gen. Oblig.,
2.30%, 4/28/94, Ser. N,
P-1 3,800 T.E.C.P.. . . . . . . . . . . . . . . 3,800,000
New York St. Dorm, Auth. Rev.,
Mem. Sloan Kettering,
T.E.C.P.,
VMIG1 8,200 2.45%, 4/26/94, Ser. 89C. . . . . . . 8,200,000
VMIG1 5,400 2.35%, 4/27/94, Ser. 89A. . . . . . . 5,400,000
Rockefeller Univ.,
2.40%, 3/2/94, Ser. 91A,
Aaa 12,000 F.R.W.D.. . . . . . . . . . . . . . . 12,000,000
Soc. of New York Hosp.,
2.50%, 5/13/94, Ser. 91,
VMIG1 10,930 T.E.C.P.. . . . . . . . . . . . . . . 10,930,000
New York St. Energy Res. &
Dev. Auth.,
Long Island Ltg. Co. Proj.,
A.N.N.M.T.,
VMIG1 4,000 2.85%, 11/1/94, Ser. 93B. . . . . . . 4,000,000
VMIG1 4,000 3.00%, 3/1/94, Ser. 85B . . . . . . . 4,000,000
New York St. Elec. & Gas Co.,
2.60%, 7/15/94, Ser. 85C,
VMIG1 8,000 A.N.N.O.T.. . . . . . . . . . . . . . 8,000,000
2.80%, 12/1/94, Ser. 84A,
A-1+* 4,500 A.N.N.M.T.. . . . . . . . . . . . . . 4,500,000
Niagara Mohawk Pwr.
Corp., F.R.D.D.,
P-1 600 3.25%, 3/1/94, Ser. 85B . . . . . . . 600,000
P-1 2,600 2.25%, 3/1/94, Ser. 85C . . . . . . . 2,600,000
P-1 11,200 2.35%, 3/1/94, Ser. 86A . . . . . . . 11,200,000
</TABLE>
See Notes to Financial Statements.
B-163
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal Description (a) Value
Rating Amount (Note 1)
(000)
<S> <C> <C> <C>
New York St. Enviro. Facs. Corp.,
Gen, Elec. Co. Proj., T.E.C.P.,
P-1 $ 2,600 2.30%, 4/4/94, Ser. 87A . . . . $ 2,600,000
P-1 3,000 2.30%, 5/13/94 Ser. 92A . . . 3,000,000
P-1 3,900 2.30% 5/20/94 . . . . . . . . 3,900,000
New York St. Hsg. Fin. Auth, Rev.,
Liberty View Apts.,
2.30%, 3/9/94, Ser. 85A,
VMIG1 5,400 F.R.W.D. . . . . . . . . . . . 5,400,000
New York St. Job Dev. Auth.,
F.R.M.D.,
VMIG1 1,810 2.30%, 3/1/94, Ser. 84D . . . . 1,810,000
VMIG1 1,145 2.30%, 3/1/94, Ser. 84E . . . . 1,145,000
VMIG1 1,665 2.30%, 3/1/94, Ser. 84F . . . . 1,885,000
VMIG1 1,265 2.45%, 3/1/94, Ser. 86C . . . . 1,265,000
New York St. Mgte. Agcy. Rev.,
Homeowner Mtg. Rev.,
3.00%, 4/1/94, Ser. MM2
Aa 9,000 S.E.M.O.T. . . . . . . . . . . 9,000,000
2.80%, 6/1/94, Ser. 31 C,
VMIG1 4,190 S.E.M.M.T. . . . . . . . . . . 4,188,910
Niagers Cnty. Ind. Dev. Agcy.
Rev., Gen. Abrasive Trelbacher,
2.60%, 3/2/94, Ser. 91
P-1 2,300 F.R.W.D. . . . . . . . . . . . 2,300,000
Oswego Cnty. Ind. Dev. Agcy.
Rev., Phillip Morris Co.,
2.35%, 3/2/94, Ser. 92,
P-1 6,300 F.R.W.D. . . . . . . . . . . . 6,300,000
Port Auth. of New York &
New Jersey,
Klac. Partners, F.R.W.D.,
2.25%, 3/1/94, Ser. 1,
VMIG1 3,400 F.R.D.D. . . . . . . . . . . . 3,400,000
2.375%, 3/1/94, Ser. 93-1,
VMIG1 12,000 F.R.W.D . . . . . . . . . . . . 12,000,000
VMIG1 6,200 2.30%, 3/2/94, Ser, 3-2 . . . . 6,200,000
VMIG1 4,500 2.30%, 3/2/94, Ser. 3-3 . . . . 4,500,000
Puerto Rico Commonwealth,
Gen Obig.,
3.00% 7/29/94, Ser. 94A,
MIG1 5,000 T.R.A.N. . . . . . . . . . . . . 5,014,914
Puerto Rico Commonwealth,
Gov't Dev. Bank.,
2.25%, 3/2/94, Ser. 85,
VMIG1 $ 2,800 F.R.W.D. . . . . . . . . . . . $ 2,800,000
Sachem Central Sch. Dist.,
MIG1 7,000 3.25%, 6/29/94, T.A.N. . . . . 7,006,736
St. Lawrence Cnty. Ind. Dev
Agcy. Rev.,
Clarkson Univ. Proj.,
2.40%, 3/3/94, Ser. 90,
VMIG1 3,000 F.R.W.D. . . . . . . . . . . . 3,000,000
West Babylon Union
Free Sch. Dist.,
3.25%, 6/24/94
MIG1 11,500 Ser. 93-94, T.A.N . . . . . . . 11,509,876
West Islip Union
Free Sch. Dist.,
MIG1 8,000 2.90%, 6/29/94 T.A.N. . . . . . 8,003,066
Yakee Cnty. Ind. Dev. Agcy. Rev.,
Clearplace Containers Inc.,
2.55%, 3/3/94, Ser. 92A,
A-1* 1,670 F.R.W.D . . . . . . . . . . . . 1,670,000
------------
Total Investments--96.6%
(amortized cost--
$278,087.315**) . . . . . . . . 278,087,315
Other assets in excess of
liabilities--3.4% . . . . . . . 9,919,405
------------
NET ASSETS--100% . . . . . . . . $288,006,720
------------
------------
</TABLE>
B-164
See notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
(a) The following abbreviations are used in portfolio
descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
M.B.I.A.--Municipal Bond Insurance Association.
R.A.N.--Revenue Anticipation Note.
S.E.M.M.T.--Semi-Annual Mandatory Tender.
S.E.M.O.T.Semi-Annual Optional Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of
Floating Rate Demand Notes is considered to be the late of
the next date on which the security can be redeemed at par or
the next date on which the rate of interest is adjusted.
# Standard & Poor's rating.
## The cost of securities for federal income tax purposes is sub-
stantially the same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a
description of Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-165
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February 28,
Assets 1994
---------------
<S> <C>
Investments, at amortized cost which approximates market value........................... $ 278,087,315
Cash..................................................................................... 11,746
Receivable for investments sold.......................................................... 20,345,471
Receivable for Fund shares sold.......................................................... 6,584,395
Accrued interest receivable.............................................................. 1,942,402
Other assets............................................................................. 3,771
---------------
Total assets......................................................................... 306,975,100
---------------
Liabilities
Payable for investments purchased........................................................ 16,400,311
Payable for Fund shares reacquired....................................................... 2,336,825
Management fee payable................................................................... 108,643
Accrued expenses and other liabilities................................................... 90,234
Dividends payable........................................................................ 17,977
Distribution fee payable................................................................. 13,676
Deferred trustees' fees.................................................................. 714
---------------
Total liabilities.................................................................... 18,968,380
---------------
Net Assets............................................................................... $ 288,006,720
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................... $ 2,880,067
Paid-in capital in excess of par....................................................... 285,126,653
---------------
Net assets, February 28, 1994.......................................................... $ 288,006,720
---------------
---------------
Net asset value, offering price and redemption price per share ($288,006,720 (div)
288,006,720 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized)..................................................................... $1.00
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-166
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
---------------
<S> <C>
Income
Interest............................. $ 3,419,355
---------------
Expenses
Management fee....................... 688,493
Distribution fee..................... 172,123
Transfer agent's fees and expenses... 74,400
Custodian's fees and expenses........ 62,000
Registration fees.................... 15,900
Reports to shareholders.............. 12,400
Audit fee............................ 5,000
Legal fees........................... 5,000
Insurance expense.................... 4,200
Trustees' fees....................... 1,700
Miscellaneous........................ 1,781
---------------
Total expenses..................... 1,042,997
---------------
Net investment income.................. 2,376,358
---------------
Net Increase in Net Assets Resulting
from Operations........................ $ 2,376,358
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Increase (Decrease)
in Net Assets
<S> <C> <C>
Six Months
Ended Year Ended
February 28, August 31,
1994 1993
------------ -------------
Operations
Net investment
income................. $ 2,376,358 $ 4,821,146
Net increase in net
assets resulting from
operations........... 2,376,358 4,821,146
------------ -------------
Dividends to shareholders
(Note 1)............... (2,376,358) (4,821,146)
------------ -------------
Fund share transactions
(at $1 per share)
Net proceeds from
shares subscribed.... 465,914,720 1,012,741,172
Net asset value of
shares issued in
reinvestment of
dividends............ 2,364,874 4,672,839
Cost of shares
reacquired............. (466,576,624) (980,895,234)
------------ -------------
Net increase in net
assets
from Fund share
transactions......... 1,702,970 36,518,777
------------ -------------
Total increase........... 1,702,970 36,518,777
Net Assets
Beginning of period...... 286,303,750 249,784,973
------------ -------------
End of period............ $288,006,720 $ 286,303,750
------------ -------------
------------ -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-167
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New York Money Market Series (the
``Series'') commenced investment operations in April, 1985. The Series is
diversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New York State, New York City and
federal income taxes with a minimum of risk by investing in ``investment grade''
tax-exempt securities having a maturity of thirteen months or less whose ratings
are within the two highest ratings categories by two nationally recognized
statistical rating organizations, or if not rated, are of comparable quality.
The ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting
Policies The following is a summary of significant
accounting policies followed by the Fund,
and the Series, in the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series'
gross income consists of tax-exempt interest, no federal income tax provision
is required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management agreement with
Prudential Mutual Fund Management, Inc. (``PMF'').
Pursuant to this agreement, PMF has responsibility for all investment advisory
services and supervises the subadviser's performance of such services. PMF has
entered into a subadvisory agreement with The Prudential Investment Corporation
(``PIC''); PIC furnishes investment advisory services in connection with the
management of the Fund. PMF pays for the cost of the subadviser's services, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including
Prudential Securities Incorporated (``PSI'') and Pruco Securities Corporation,
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other
Transactions Prudential Mutual Fund Services, Inc. (``PMFS''),
with Affiliates a wholly-owned subsidiary of PMF, serves as
the Fund's transfer agent. During the six months ended February 28, 1994,
the Series incurred fees of approximately $65,700 for the services of PMFS.
As of February 28, 1994, approximately $11,200 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-168
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended August 31,
February 28, ------------------------------------------------
1994 1993 1992 1991 1990 1989
------------- ------ ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income
and net realized gains ......... .01 .02 .03 .04 .05 .05
Dividends and distributions
to shareholders................. (.01) (.02) (.03) (.04) (.05) (.05)
------ ------- ------- -------- -------- -------
Net asset value, end of period.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------- ------- -------- -------- -------
------ ------- ------- -------- -------- -------
TOTAL RETURN#:.................... 0.86% 1.80% 2.93% 4.37% 5.14% 5.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $288,007 $286,304 $249,785 $236,361 $226,758 $184,615
Average net assets (000).......... $277,680 $275,640 $248,557 $245,494 $218,423 $173,661
Ratios to average net assets:
Expenses, including distribution
fee .......................... .76%* .75% .76% .79% .75% .79%
Expenses, excluding distribution
fee .......................... .63% .63% .63% .66% .62% .67%
Net investment income........... 1.73%* 1.75% 2.83% 4.23% 4.99% 5.01%
<FN>
- ---------------
# Total return includes reinvestment of dividends and distributions.
Total return for periods of less than one full year are not annualized.
* Annualized.
</TABLE>
See Notes to Financial Statements.
B-169
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Ivestments
NORTH CAROLINA SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--95.2%
Buncombe Cnty.,
Pub. Impvt. Bonds,
Aa $ 1,000 6.90%, 3/1/09............. $ 1,123,030
Charlotte Cert. of Part.,
Conv. Fac. Proj.,
A.M.B.A.C.,
Aaa 3,000 Zero Coupon, 12/1/09...... 1,237,320
Charlotte Wtr. & Swr.,
Aaa 1,500 6.20%, 6/1/17............. 1,582,800
Cleveland Cnty., F.G.I.C.,
Aaa 2,500 5.10%, 6/1/07, Ser.
1993.................... 2,506,975
Coastal Regl. Mgmt. Auth.,
Solid Waste Sys.,
A 2,000 6.50%, 6/1/08............. 2,121,140
Craven No. Carolina,
Hlth. Care Facs. Rev.,
M.B.I.A.,
Aaa 750 5.625%, 10/1/17........... 754,080
Durham Cert. of Part.,
Morgan St. Garage Proj.,
AAA* 500(dag) 8.00%, 7/1/06............. 569,345
Durham Cnty. Pub. Impvt.,
Aaa 2,000 4.60%, 5/1/04............. 1,969,540
Fayetteville Cert. of
Part.,
San. Swr. & Pub. Impvt.,
A-1 250 7.10%, 5/1/07............. 283,288
Aaa 1,750 6.875%, 12/1/08,
A.M.B.A.C............... 1,933,942
Gastonia, Gen. Oblig.,
Wtr. Sys. & St. Impvt.,
Aaa 1,625 5.25%, 4/1/09, F.G.I.C.... 1,596,676
Guilford Cnty. Pub.
Impvt.,
Aa1 1,500 5.40%, 4/1/09............. 1,509,165
Martin Cnty. Ind. Facs. &
Poll.
Ctrl. Fin. Auth. Rev.,
Weyerhaueser Co. Proj.,
A-2 550 8.50%, 6/15/99............ 637,989
Mecklenberg Cnty., Pub.
Impvt.,
Aaa 1,000 5.00%, 4/1/08............. 975,270
Aaa 1,250(dag) 6.25%, 1/1/09............. 1,388,763
New Hanover Cnty. Hosp.
Rev.,
Regl. Med. Ctr. Proj.,
Aaa 1,600 4.75%, 10/1/23,
A.M.B.A.C............... 1,398,176
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev.,
Aaa 1,995 6.50%, 1/1/18, E.T.M...... 2,263,866
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev.,
A $ 1,005 6.50%, 1/1/18............. $ 1,086,948
Aaa 1,000(dag) 7.625%, 1/1/22, Ser. A,
A.M.B.A.C............... 1,134,620
Aaa 650(dag) 6.00%, 1/1/26............. 708,760
A 400 6.00%, 1/1/26, M.B.I.A.... 397,708
No. Carolina Edl. Facs.
Fin.
Agcy. Rev., Davidson
Coll. Proj.,
AAA* 1,000(dag) 8.10%, 12/1/12, Ser. A.... 1,129,250
No. Carolina Hsg. Fin.
Agcy.,
Multi-family Mtge. Rev.,
F.H.A.,
Aa 90 8.875%, 7/1/08, Ser. C.... 96,475
Aa 245 9.75%, 7/1/20, Ser. A..... 252,970
Sngl. Fam. Mtge. Rev.,
Aa 1,000 7.80%, 3/1/21, Ser. G..... 1,082,160
No. Carolina Med. Care
Comn.,
Hlth. Care Facs. Rev.,
Stanley Mem. Hosp.
Proj.,
Baa1 650 7.80%, 10/1/19............ 729,001
No. Carolina Med. Care
Comn., Hosp. Rev.,
Annie Pen Mem. Hosp.
Proj.,
Baa 1,000 7.50%, 8/15/21............ 1,119,170
Baptist Hosp. Proj.,
Aa 1,000 6.00%, 6/1/22............. 1,026,860
Carolina Medicorp Proj.,
Aa 1,000 5.50%, 5/1/15............. 984,550
Aaa 750(dag) 7.875%, 5/1/15, Ser. A.... 847,080
Duke Univ. Hosp. Proj.,
Aa 595(dag) 8.625%, 6/1/10, Ser.
85A..................... 642,850
Mem. Mission Hosp. Inc.
Proj.,
A-1 800 9.10%, 10/1/08............ 873,488
Aaa 1,250 6.00%, 10/1/22, F.S.A..... 1,295,512
Mercy Hosp. Proj.,
AAA* 670(dag) 9.625%, 8/1/15, Ser. 85... 738,869
Presbyterian Hlth. Svcs.
Proj.,
Aa 2,500 5.50%, 10/1/20............ 2,425,125
Rex Hosp. Proj.,
A-1 1,750 6.25%, 6/1/17............. 1,826,003
Scotland Mem. Hosp.,
Baa 1,000(dag) 8.625%, 10/1/11, Ser.
88...................... 1,193,470
</TABLE>
See Notes to Financial Statements.
B-170
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
No. Carolina Mun. Pwr.
Agcy.,
No. 1 Catawba Elec.
Rev.,
A $ 1,000 5.25%, 1/1/09............. $ 970,830
Aaa 2,500 6.00%, 1/1/10, M.B.I.A.... 2,671,900
Aaa 2,000 8.03%, 1/1/12, M.B.I.A.... 1,927,500
Aaa 615(dag) 7.625%, 1/1/14,
A.M.B.A.C............... 697,791
Aaa 135 7.625%, 1/1/14,
A.M.B.A.C............... 151,180
Aaa 760(dag) 8.50%, 1/1/17, Ser. B..... 837,641
Aaa 920(dag) 7.00%, 1/1/18............. 980,398
A 80 7.00%, 1/1/18............. 84,358
Northern Hosp. Dist. Surry
Cnty.
Hlth. Care Facs. Rev.,
No. Carolina Hosp.,
Aaa 700(dag) 9.75%, 10/1/12............ 779,898
Baa 1,500 7.875%, 10/1/21........... 1,707,255
Piedmont Triad Arpt.
Auth.,
Aaa 1,000 5.00%, 7/1/16, M.B.I.A.... 936,060
Puerto Rico Aqueduct &
Swr.
Auth. Rev.,
Baa 2,000 7.875%, 7/1/17, Ser. A.... 2,276,700
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 1,300 8.932%, 7/1/20, F.S.A..... 1,366,625
Pub. Impvt. Ref.,
Baa1 1,250 5.40%, 7/1/07............. 1,260,537
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
Baa 1,000 5.125%, 12/1/05........... 961,890
Aaa 170 7.80%, 10/15/21, Ser. A,
G.N.M.A................. 176,710
Aaa 845 7.65%, 10/15/22, Ser. 1-B,
G.N.M.A................. 892,193
Puerto Rico Ind. Med. &
Environ.
Poll. Ctrl. Facs.,
Upjohn Co. Proj.,
Aa3 500 7.50%, 12/1/23............ 574,755
Puerto Rico Tel. Auth.
Rev.,
Ser. I, M.B.I.A.,
Aaa 1,000 7.813%, 1/25/07........... 1,016,250
Robeson Cnty.,
Aaa 500(dag) 7.80%, 6/1/09............. 575,305
Union Cnty. Gen. Oblig.,
A-1 1,500 5.90%, 3/1/10............. 1,562,820
Union Cnty. Wtr. & Swr.,
Solid Waste Rev.,
A-1 850 6.50%, 4/1/07............. 928,719
Univ. of No. Carolina at
Chapel
Hill, Pkg. Sys. Rev.,
Ser. B,
A-1 $ 850 6.80%, 6/1/06............. $ 924,758
A-1 500 6.00%, 6/1/08............. 522,010
Virgin Islands Pub. Fin.
Auth. Rev.,
Hwy. Trans. Trust Fund,
BBB* 1,050 7.50%, 10/1/96............ 1,128,918
Ref. Matching Loan Notes,
NR 700 7.25%, 10/1/18, Ser. A.... 787,094
Virgin Islands Territory,
Hugo Ins. Claims Fund
Proj.,
NR 460 7.75%, 10/1/06, Ser. 91... 529,897
Virgin Islands Wtr. & Pwr.
Auth.,
Elec. Sys.,
NR 600 8.50%, 1/1/10, Ser. A..... 676,488
Wtr. Sys. Rev.,
NR 400 7.20%, 1/1/02, Ser. B..... 437,208
Wake Cnty. Hosp. Rev.,
Aaa 1,500 5.125%, 10/1/26,
M.B.I.A................. 1,388,445
Winston Salem,
Sngl. Fam. Mtge. Rev.,
A-1 500 8.00%, 9/1/07............. 536,805
-----------
Total long-term
investments
(cost $68,581,895)...... 73,711,172
-----------
SHORT-TERM INVESTMENTS--3.1%
Halifax Cnty. Ind. Facs. &
Poll. Ctrl., Fin. Auth.
Rev., F.R.D.D.,
Aa2 615 2.20%, 3/1/94, Ser. 91.... 615,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 1,800 2.25%, 3/1/94, Ser. 85.... 1,800,000
-----------
Total short-term
investments
(cost $2,415,000)....... 2,415,000
-----------
Total Investments--98.3%
(cost $70,996,895; Note
4)...................... $76,126,172
Other assets in excess of
liabilities--1.7%....... 1,288,320
-----------
Net Assets--100%.......... $77,414,492
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-171
<PAGE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
E.T.M..--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floalting Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par, or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's Rating.
(dag) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-172
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $70,996,895)............................................... $76,126,172
Interest receivable.................................................................... 1,281,544
Receivable for Fund shares sold........................................................ 178,024
Deferred expenses and other assets..................................................... 2,183
--------------
Total assets......................................................................... 77,587,923
--------------
Liabilities
Payable for Fund shares reacquired..................................................... 74,015
Management fee payable................................................................. 30,191
Distribution fee payable............................................................... 29,485
Accrued expenses....................................................................... 28,698
Dividends payable...................................................................... 10,328
Deferred Trustees' fees................................................................ 714
--------------
Total liabilities.................................................................... 173,431
--------------
Net Assets............................................................................. $77,414,492
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 66,866
Paid-in capital in excess of par..................................................... 72,286,004
--------------
72,352,870
Distributions in excess of net realized gains........................................ (67,655)
Net unrealized appreciation on investments........................................... 5,129,277
--------------
Net assets, February 28, 1994........................................................ $77,414,492
--------------
--------------
Class A:
Net asset value and redemption price per share ($2,270,377 (div) 196,165 shares of
beneficial interest issued and outstanding)........................................ $11.57
Maximum sales charge (4.5% of offering price)........................................ .55
--------------
Maximum offering price to public..................................................... $12.12
--------------
Class B:
Net asset value, offering price and redemption price per share ($75,144,115 (div)
6,490,403 shares of
beneficial interest issued and outstanding)........................................ $11.58
--------------
--------------
</TABLE>
See Notes to Financial Statements.
B-173
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
Net Investment Income 28, 1994
-----------
<S> <C>
Income
Interest............................ $ 2,332,965
-----------
Expenses
Management fee...................... 194,014
Distribution fee--Class A........... 970
Distribution fee--Class B........... 189,165
Custodian's fees and expenses....... 43,000
Transfer agent's fees and
expenses............................ 17,500
Registration fees................... 8,900
Reports to shareholders............. 7,500
Audit fee........................... 5,300
Legal fees.......................... 5,000
Trustees' fees...................... 1,700
Miscellaneous....................... 709
-----------
Total expenses........................ 473,758
-----------
Net investment income............... 1,859,207
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on
investment transactions............. 393,223
-----------
Net change in unrealized
appreciation/depreciation of
investments......................... (2,089,416)
-----------
Net loss on investments............... (1,696,193)
-----------
Net Increase in Net Assets
Resulting from Operations............. $ 163,014
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February Year Ended
Increase (Decrease) in 28, August 31,
Net Assets 1994 1993
----------- -----------
<S> <C> <C>
Operations
Net investment income... $ 1,859,207 $ 3,592,693
Net realized gain on
investment
transactions.......... 393,223 1,658,002
Net change in unrealized
appreciation/depreciation
of investments (2,089,416) 2,485,116
----------- -----------
Net increase in net
assets
resulting from
operations............ 163,014 7,735,811
----------- -----------
Dividends and
distributions (Note 1):
Dividends to
shareholders from net
investment income
Class A............... (50,446) (73,032)
Class B............... (1,808,761) (3,519,661)
----------- -----------
(1,859,207) (3,592,693)
----------- -----------
Distributions to
shareholders from net
realized gains on
investment
transactions
Class A............... (33,124) --
Class B............... (1,379,190) --
----------- -----------
(1,412,314) --
----------- -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............ 6,204,203 15,956,884
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 1,730,026 1,678,716
Cost of shares
reacquired............ (4,702,782) (8,977,505)
----------- -----------
Net increase in net
assets from Fund share
transactions.......... 3,231,447 8,658,095
----------- -----------
Total increase............ 122,940 12,801,213
Net Assets
Beginning of period....... 77,291,552 64,490,339
----------- -----------
End of period............. $77,414,492 $77,291,552
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-174
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The North Carolina Series (the ``Series'')
commenced investment operations in February, 1985. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for short-term capital gains and market discount.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''), PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Series, and with
B-175
<PAGE>
Prudential Securities Incorporated (``PSI''), which acts as distributor of the
Class B shares of the Series (collectively the ``Distributors''). To reimburse
the Distributors for their expenses incurred in distributing and servicing the
Series' Class A and B shares, the Series, pursuant to plans of distribution,
pays the Distributors a reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Series reimburses PMFD for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net asset value of the Class A shares. Such expenses under the
Class A Plan were .10 of 1% of the average daily net assets of the Class A
shares for the six months ended February 28, 1994. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
Pursuant to the Class B Plan, the Series reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $19,900 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the six months
ended February 28, 1994, it received approximately $23,700 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $2,104,700.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions with vices, Inc. (``PMFS''), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the six months ended February 28, 1994, the Series incurred fees of
approximately $14,400 for the services of PMFS. As of February 28, 1994,
approximately $2,400 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $5,900,185 and $4,467,055, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, as
of February 28, 1994 net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes is $5,129,277 (gross
unrealized appreciation--$5,325,627; gross unrealized depreciation--$196,350).
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. The Fund has authorized an unlimited number of shares of
beneficial interest of each class at $.01 par value per share.
B-176
<PAGE>
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------- --------- -----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold................... 57,600 $ 686,352
Shares issued in reinvestment
of dividends and
distributions............... 5,041 59,343
Shares reacquired............. (13,994) (169,088)
--------- -----------
Net increase in shares
outstanding................. 48,647 $ 576,607
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold................... 84,457 $ 975,980
Shares issued in reinvestment
of dividends................ 4,050 47,104
Shares reacquired............. (21,713) (250,645)
--------- -----------
Net increase in shares
outstanding................. 66,794 $ 772,439
--------- -----------
--------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- -------- --------- -----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold...................... 461,846 $ 5,517,851
Shares issued in reinvestment of
dividends and distributions.... 141,806 1,670,683
Shares reacquired................ (380,486) (4,533,694)
--------- -----------
Net increase in shares
outstanding.................... 223,166 $ 2,654,840
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold...................... 1,288,829 $14,980,904
Shares issued in reinvestment of
dividends...................... 140,597 1,631,612
Shares reacquired................ (753,654) (8,726,860)
--------- -----------
Net increase in shares
outstanding.................... 675,772 $ 7,885,656
--------- -----------
--------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-177
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------------- ----------------------------------
January 22,
Six Months 1990 (dag) Six Months Year Ended August
Ended Year Ended August 31, through Ended 31,
February 28, -------------------------- August 31, February 28, ------------------
1994 1993 1992 1991 1990 1994 1993 1992
------------ ------ ------ ------ ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $12.04 $11.37 $10.86 $10.45 $10.63 $ 12.05 $ 11.37 $ 10.86
------ ------ ------ ------ ------- ------- ------- ------
Income from investment
- ----------------------
operations
-----------
Net investment income... .31 .65 .67 .67 .41 .29 .60 .62
Net realized and
unrealized gain (loss)
on investment
transactions.......... (.25) .67 .51 .41 (.18) (.25) .68 .51
------ ------ ------ ------ ------ ------- ------- ------
Total from investment
operations.......... .06 1.32 1.18 1.08 .23 .04 1.28 1.13
------ ------ ------ ------ ------- ------- ------- ------
Less distributions
- ------------------
Dividends from net
investment income..... (.31) (.65) (.67) (.67) (.41) (.29) (.60) (.62)
Distributions paid to
shareholders from net
realized gains on
investment
transactions.......... (.22) -- -- -- -- (.22) -- --
------ ------ ------ ------ -------- ------- ------- ------
Total distributions... (.53) (.65) (.67) (.67) (.41) (.51) (.60) (.62)
------ ------ ------ ------ -------- ------- ------- ------
Net asset value, end of
period................ $11.57 $12.04 $11.37 $10.86 $10.45 $ 11.58 $ 12.05 $ 11.37
------ ------ ------ ------ ------ ------- ------- -------
------ ------ ------ ------ ------ ------- ------- -------
TOTAL RETURN#........... .50% 11.99% 11.12% 10.63% 2.09% .30% 11.62% 10.64%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000).......... $2,270 $1,777 $917 $362 $58 $75,144 $75,515 $63,573
Average net assets
(000)................. $1,956 $1,316 $612 $246 $32 $76,293 $67,997 $60,751
Ratios to average net
assets:
Expenses, including
distribution fees... .83%* .87% .91% .99% 1.00%* 1.23%* 1.27% 1.31%
Expenses, excluding
distribution fees... .73%* .77% .81% .89% .90%* .73%* .77% .81%
Net investment
income.............. 5.20%* 5.55% 5.90% 6.24% 6.24%* 4.78%* 5.18% 5.58%
Portfolio turnover...... 6% 38% 36% 27% 24% 6% 38% 36%
<CAPTION>
1991 1990 1989
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $ 10.45 $ 10.65 $ 10.35
------- ------- -------
Income from investment
- ----------------------
operations
----------
Net investment income... .63 .64 .65
Net realized and
unrealized gain (loss)
on investment
transactions.......... .41 (.20) .30
------- ------- -------
Total from investment
operations.......... 1.04 .44 .95
------- ------- -------
Less distributions
- ------------------
Dividends from net
investment income..... (.63) (.64) (.65)
Distributions paid to
shareholders from net
realized gains on
investment
transactions.......... -- -- --
------- ------- -------
Total distributions... (.63) (.64) (.65)
------- ------- -------
Net asset value, end of
period................ $ 10.86 $ 10.45 $ 10.65
------- ------- -------
------- ------- -------
TOTAL RETURN#........... 10.17% 4.28% 9.39%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000).......... $59,875 $57,429 $34,222
Average net assets
(000)................. $59,071 $56,745 $49,868
Ratios to average net
assets:
Expenses, including
distribution fees... 1.39% 1.38% 1.39%
Expenses, excluding
distribution fees... .89% .89% .89%
Net investment
income.............. 5.88% 5.96% 6.06%
Portfolio turnover...... 27% 24% 47%
<FN>
- ---------------
* Annualized.
(dag) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a
purchase of shares on the first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
See Notes to Financial Statements.
B-178
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
OHIO SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.7%
Akron, Bath & Copley
Twnshps., Hosp.
Dist. Rev.,
Akron Gen. Med.
Ctr.,
Aaa $ 1,000 5.50%, 1/1/08,
A.M.B.A.C........... $ 1,011,320
Childrens Hosp. Med.
Ctr.,
Aaa 2,500 5.25%, 11/15/20,
A.M.B.A.C........... 2,359,450
Akron, Gen. Oblig.,
A 200 10.50%, 12/1/04....... 286,884
Aaa 645 4.50%, 12/1/12,
F.S.A............... 569,367
Allen Cnty. Wtr. &
Swr. Dist.,
Aaa 1,000(dag) 7.80%, 12/1/08,
A.M.B.A.C........... 1,165,700
Bellefontaine City Sch. Dist.,
A.M.B.A.C.,
Aaa 495 Zero Coupon,
12/1/06............. 256,984
Aaa 485 Zero Coupon,
12/1/07............. 236,006
Aaa 485 Zero Coupon,
12/1/08............. 222,373
Aaa 390 Zero Coupon,
12/1/09............. 168,320
Aaa 390 Zero Coupon,
12/1/10............. 158,289
Aaa 465 Zero Coupon,
12/1/11............. 177,309
Berea City Sch. Dist.,
Aaa 4,375 5.00%, 12/15/17,
A.M.B.A.C........... 4,053,394
Broadview Heights Ind. Dev. Rev.,
Royalview Manor Dev.,
10.625%, 7/15/14, Ser.
A,
NR 220 F.H.A............... 231,574
Carroll Cnty. Econ.
Dev. Rev.,
Great Trail Lake
Ctr.,
NR 695 11.75%, 8/1/14,
F.H.A............... 815,972
Cincinnati City Sch.
Dist. Rev.,
A+* 1,400 6.15%, 6/15/02........ 1,497,314
Cleveland City Sch.
Dist.,
Gen. Oblig.,
Sch. Impvt., Ser. B,
F.G.I.C.,
Aaa 490 Zero Coupon, 6/1/05... 271,911
Aaa 400 Zero Coupon, 6/1/06... 210,656
Aaa 315 Zero Coupon, 6/1/07... 155,418
Cleveland City Sch.
Dist.,
Gen. Oblig.,
Sch. Impvt., Ser. B,
F.G.I.C.,
Aaa $ 550 Zero Coupon,
12/1/08............. $ 246,944
Cleveland Waterworks Mtge. Rev.,
6.25%, 1/1/16, Ser.
Aaa 1,500 F-92B, A.M.B.A.C.... 1,582,155
Columbus, Gen. Oblig.,
Aa1 1,000(dag) 6.00%, 9/15/10, Ser.
1................... 1,085,070
Aa1 1,000(dag) 6.00%, 9/15/11, Ser.
1................... 1,085,070
Mun. Arpt. No. 32,
Aa1 435 7.15%, 7/15/06........ 482,193
Swr. Impvt. No. 26,
Aa1 2,000 6.00%, 9/15/09........ 2,074,760
Columbus Citation Hsg. Dev. Corp.,
Mtge. Rev.,
NR 1,885(dag) 7.625%, 1/1/22,
F.H.A............... 2,380,887
Columbus St. Cmnty.
Coll.,
Gen. Receipts,
Aaa 350 5.00%, 6/1/10,
A.M.B.A.C........... 335,860
Cuyahoga Cnty.,
Bldg. Impvt. Bond,
NR 1,500(dag) 7.40%, 10/1/09, Ser.
83.................. 1,715,130
Cuyahoga Cnty. Hosp. Auth. Rev.,
Brentwood Hosp.,
Baa1 1,600 9.625%, 11/1/14....... 1,759,280
Dayton, Gen. Oblig.,
Aaa 480 7.00%, 12/1/07,
M.B.I.A............. 569,856
Dayton Arpt. Rev.,
James M. Cox Int'l.
Arpt.,
Aaa 3,500 8.25%, 1/1/16,
A.M.B.A.C........... 3,826,795
Dayton Wtr. Sys. Rev.,
Mtge. Ref.,
Aaa 600@(dag)10.25%, 12/1/10....... 679,152
Dublin City Sch.
Dist.,
Franklin, Delaware &
Union Co.,
A.M.B.A.C.,
Aaa 1,000 Zero Coupon,
12/1/05............. 546,820
East Cleveland Rev.,
Local Gov't. Fund
Notes,
NR 1,110 7.90%, 12/1/97........ 1,223,298
</TABLE>
See Notes to Financial Statements.
B-179
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Franklin Cnty. Hosp.
Rev.,
Holy Cross Hlth.
Sys.,
7.65%, 6/1/10, Ser. B,
Aaa $ 2,500(dag) A.M.B.A.C........... $ 2,946,425
Gahanna Jefferson City Sch. Dist.,
Gen. Oblig., A.M.B.A.C.,
Aaa 445 Zero Coupon,
12/1/09............. 186,366
Garfield Heights Hosp.
Rev.,
Marymount Hosp.,
A 1,000 6.70%, 11/15/15....... 1,071,770
Greene Cnty. Swr. Sys.
Rev.,
Zero Coupon, 12/1/08,
Aaa 450 A.M.B.A.C........... 202,046
Hamilton Cnty. Elec.
Sys. Mtge. Rev.,
F.G.I.C.,
Aaa 3,000@(dag)8.00%, 10/15/22, Ser.
B................... 3,507,840
Aaa 1,500 6.00%, 10/15/23, Ser.
A................... 1,552,320
Hamilton Cnty. Gas
Sys. Rev., M.B.I.A.,
Aaa 2,500 4.75%, 10/15/23, Ser.
A................... 2,204,050
Hamilton Cnty. Swr.
Sys. Rev.,
Met. Swr. Dist. of
Greater Cincinnati,
Aaa 500(dag) 9.50%, 12/1/05, Ser.
A................... 564,420
Kettering Cnty., Gen.
Oblig.,
Aa 1,155(dag) 7.30%, 12/1/06........ 1,349,052
Logan Hocking Local Sch. Dist.,
Hocking, Perry & Vinton Co.,
Gen. Oblig.,
Zero Coupon, 12/1/09,
Aaa 650 A.M.B.A.C........... 272,220
Loveland City Sch.
Dist.,
Gen. Oblig.,
A1 3,000 7.10%, 12/1/09........ 3,476,340
Lucas Cnty. Hosp.
Rev.,
Toledo Hosp., Impvt.
& Ref., M.B.I.A.,
Aaa 2,000 5.00%, 11/15/13....... 1,857,640
Aaa 6,000 5.00%, 11/15/22....... 5,448,540
Miami Cnty. Hosp.
Facs. Rev.,
Upper Valley Med. Ctr.
Proj., M.B.I.A.,
Aaa $ 500 6.50%, 5/1/21, Ser.
A................... $ 538,820
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek,
F.G.I.C.,
Aaa 1,000 Zero Coupon, 9/1/05... 553,890
Aaa 500 Zero Coupon, 9/1/07... 245,035
Montgomery Cnty. Wtr. Rev.,
Greater Moraine, Beaver Creek,
Aaa 500 6.25%, 11/15/17,
F.G.I.C............. 527,515
Newark Gen. Oblig.,
Wtr. Impvt.,
A.M.B.A.C.,
Aaa 805 Zero Coupon,
12/1/06............. 418,165
Ohio St. Air Quality
Dev. Auth. Rev.,
Poll. Ctrl.,
Cincinnati Gas Elec.
Ser.,
5.45%, 1/1/24, Ser. B,
Aaa 2,400 M.B.I.A............. 2,317,512
Cleveland Co. Proj.,
Aaa 2,500@ 8.00%, 12/1/13,
F.G.I.C............. 2,995,100
Edison Proj.,
7.45%, 3/1/16, Ser. A,
Aaa 3,750 F.G.I.C............. 4,237,762
Ohio St. Bldg. Auth.,
Columbus St. Bldg.
Proj.,
A 750(dag) 7.75%, 10/1/07, Ser.
A................... 866,010
Das Data Ctr. Proj.,
A 615 6.00%, 10/1/08........ 658,966
St. Correctional
Facs.,
Aaa 600(dag) 8.00%, 8/1/06, Ser.
A................... 690,222
A 2,450 5.90%, 10/1/07........ 2,581,247
Aaa 500(dag) 8.00%, 8/1/08, Ser.
A................... 575,185
Ohio St. Higher Edl.
Fac.
Comn. Rev.,
Case Western Resv.
Univ.,
Aa 1,410(dag)(dag)6.25%, 10/1/16.. 1,541,863
Aa 1,000 7.70%, 10/1/18, Ser.
A................... 1,124,850
Aa 750 6.50%, 10/1/20, Ser.
B................... 842,723
Oberlin Coll.,
Aaa 1,000(dag) 7.375%, 10/1/14....... 1,154,660
Aaa 500(dag) 9.25%, 10/1/15........ 551,995
</TABLE>
See Notes to Financial Statements.
B-180
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Ohio St. Mtge. Rev.,
AAA* $ 3,500 8.15%, 8/1/17, Ser. A,
F.H.A............... $ 3,980,445
Ohio St. Poll. Ctrl.
Rev.,
Standard Oil Co.,
A1 1,350 6.75%, 12/1/15........ 1,536,300
Ohio St. Univ., Gen.
Receipts,
A1 1,500 5.75%, 12/1/09, Ser.
A2.................. 1,528,755
A1 750 5.875%, 12/1/12, Ser.
A1.................. 764,588
Ohio St. Wtr. Dev.
Auth. Rev.,
Aaa 1,200(dag) 7.50%, 12/1/08, Ser.
I................... 1,366,872
Ottawa Cnty. San. Sew. Sys. Rev.,
Danbury Proj.,
Aaa 1,000(dag) 7.375%, 10/1/14,
A.M.B.A.C........... 1,157,350
Oxford Hosp. Facs. Rev., 1st Mtge.,
McCullough Hyde Mem.,
NR 1,445 8.00%, 5/1/17......... 1,535,948
Pickerington Local
Sch. Dist., Gen.
Oblig., A.M.B.A.C.,
Aaa 890 Zero Coupon,
12/1/08............. 399,601
Aaa 935 Zero Coupon,
12/1/09............. 391,578
Aaa 525 Zero Coupon,
12/1/13............. 169,643
Puerto Rico Comnwlth.,
Gen. Oblig.,
M.B.I.A.,
Aaa 1,000 8.915%, 7/1/08, Ser.
A,.................. 1,091,250
Puerto Rico Commwlth.
Aqueduct & Swr.
Auth. Rev.,
Baa 1,000 7.875%, 7/1/17, Ser.
A................... 1,138,350
Puerto Rico Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge. Rev.,
Baa 1,000 5.125%, 12/1/05....... 961,890
Puerto Rico Pub.
Bldgs. Auth.,
Pub. Ed. & Hlth.
Facs.,
Baa1 3,000 Zero Coupon, 7/1/06,
Ser. J.............. 1,530,150
Rural Lorain Cnty.
Wtr. Auth.
Res. Rev.,
A.M.B.A.C.,
Aaa 2,000(dag) 7.70%, 10/1/08........ 2,311,580
Rural Lorain Cnty.
Wtr. Auth.
Res. Rev.,
A.M.B.A.C.,
Wtr. Res. Refunding & Impvt.,
Aaa $ 820 5.25%, 10/1/07........ $ 821,369
Scioto Cnty. Hosp.
Fac. Rev.,
Portsmouth Proj.,
M.B.I.A.,
Aaa 2,290 7.625%, 5/15/08, Ser.
B................... 2,584,517
Solon Sch. Dist., Gen. Oblig.,
Graphic Laminating Inc. Proj.,
Aa 2,000(dag) 7.15%, 12/1/13........ 2,337,460
Student Loan Funding
Corp.,
Cincinnati Rev.,
Ser. A,
A 1,400 7.20%, 8/1/03......... 1,547,882
A 2,000 7.25%, 2/1/08......... 2,145,400
Sugarcreek Local Sch.
Dist.,
Aaa 500 Zero Coupon,
12/1/08............. 219,395
Summit Cnty. Ind. Dev. Rev.,
Century Products Gerber Foods,
A2 3,250 7.75%, 11/1/05........ 3,607,532
Summit Cnty. Refunding & Impvt.,
6.90%, 8/1/12, Ser. A,
A.M.B.A.C........... 2,215,042
Aaa 1,985
Tuscarawas Cnty. Hosp. Facs Rev.,
Union Hosp. Proj.,
Baa 450 6.375%, 10/1/11, Ser.
A................... 444,582
Baa 1,250 6.50%, 10/1/21, Ser.
A................... 1,232,550
Univ. of Cincinnati, Gen. Receipts,
Aaa 1,000(dag) 7.30%, 6/1/09, Ser.
E1.................. 1,129,220
A1 1,000 7.00%, 6/1/11, Ser.
L................... 1,128,480
Univ. of Toledo, Gen.
Receipts,
Aaa 1,000 7.70%, 6/1/18,
M.B.I.A............. 1,146,760
Virgin Islands Pub. Fin. Auth. Rev.,
NR 1,000 7.25%, 10/1/18, Ser.
A................... 1,124,420
Virgin Islands Terr.,
Hugo Ins. Claims
Fund Prog.,
NR 460 7.75%, 10/1/06, Ser.
91.................. 529,897
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys.,
NR 1,000 7.40%, 7/1/11, Ser.
A................... 1,139,210
</TABLE>
See Notes to Financial Statements.
B-181
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Virgin Islands Wtr. & Pwr. Auth.,
Wtr. Sys. Rev.,
NR $ 1,000 8.50%, 1/1/10, Ser.
A................... $ 1,127,480
NR 400 7.60%, 1/1/12, Ser.
B................... 446,916
Woodmore Indpt. Sch.
Dist., Gen. Oblig.,
A.M.B.A.C.,
Aaa 490 Zero Coupon,
12/1/05............. 269,486
Aaa 480 Zero Coupon,
12/1/06............. 246,259
------------
Total long-term
investments
(cost
$115,580,072)....... 125,810,217
------------
SHORT-TERM INVESTMENTS--0.6%
Cuyahoga Cnty.,
Univ. Hosp. of
Cleveland,
VMIG1 300 2.30%, 3/1/94,
F.R.D.D............. 300,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 500 2.25%, 3/1/94, Ser.
85.................. 500,000
------------
Total short-term
investments
(cost $800,000)..... 800,000
------------
Total Investments--98.3%
(cost $116,380,072;
Note 4)............. 126,610,217
Other assets in excess
of
liabilities--1.7%... 2,147,132
------------
Net Assets--100%...... $128,757,349
------------
------------
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par, or the
next date on which the rate of interest is
adjusted.
@ Pledged as initial margin on financial futures
contracts.
* Standard & Poor's rating.
(dag) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(dag)(dag) Indicates a when-issued security.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-182
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $116,380,072).............................................. $ 126,610,217
Cash................................................................................... 1,710,387
Interest receivable.................................................................... 2,088,024
Receivable for investments sold........................................................ 1,043,169
Receivable for Fund shares sold........................................................ 231,205
Other assets........................................................................... 2,176
-----------------
Total assets......................................................................... 131,685,178
-----------------
Liabilities
Payable for investments purchased...................................................... 2,503,721
Payable for Fund shares reacquired..................................................... 230,354
Accrued expenses....................................................................... 51,872
Management fee payable................................................................. 50,184
Distribution fee payable............................................................... 48,752
Due to broker-variation margin......................................................... 21,947
Dividends payable...................................................................... 20,285
Deferred trustees' fees................................................................ 714
-----------------
Total liabilities.................................................................... 2,927,829
-----------------
Net Assets............................................................................. $ 128,757,349
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 105,863
Paid-in capital in excess of par..................................................... 118,787,032
-----------------
118,892,895
Accumulated net realized loss on investments......................................... (461,972)
Net unrealized appreciation on investments........................................... 10,326,426
-----------------
Net assets, February 28, 1994........................................................ $ 128,757,349
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($4,649,456 (div) 382,409 shares of beneficial interest issued and outstanding).... $12.16
Maximum sales charge (4.5% of offering price)........................................ .57
-----------------
Maximum offering price to public..................................................... $12.73
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($124,107,893 (div) 10,203,927 shares of beneficial interest issued and outstanding) $12.16
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-183
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February 28,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................ $ 3,976,192
------------
Expenses
Management fee...................... 320,949
Distribution fee--Class A........... 2,411
Distribution fee--Class B........... 308,893
Custodian's fees and expenses....... 52,200
Transfer agent's fees and
expenses............................ 39,700
Registration fees................... 10,900
Reports to shareholders............. 9,900
Audit fee........................... 5,300
Legal fees.......................... 5,000
Trustees' fees...................... 1,700
Miscellaneous....................... 4,748
------------
Total expenses.................... 761,701
------------
Net investment income................. 3,214,491
------------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions............. 862,754
Financial futures transactions...... (46,481)
------------
816,273
------------
Net change in unrealized appreciation/depreciation
on:
Investments......................... (3,225,129)
Financial futures contracts......... 98,468
------------
(3,126,661)
------------
Net loss on investments............... (2,310,388)
------------
Net Increase in Net Assets Resulting
from Operations....................... $ 904,103
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income................. $ 3,214,491 $ 6,034,400
Net realized gain on
investment
transactions......... 816,273 1,222,277
Net change in
unrealized
appreciation/depreciation
of investments....... (3,126,661) 5,311,037
------------ ------------
Net increase in net
assets resulting from
operations........... 904,103 12,567,714
------------ ------------
Dividends to shareholders
(Note 1)
Class A.............. (130,009) (165,299)
Class B.............. (3,084,482) (5,869,101)
------------ ------------
(3,214,491) (6,034,400)
------------ ------------
Fund share transactions
(Note 5)
Proceeds from shares
subscribed........... 9,287,200 21,565,565
Net asset value of
shares
issued in
reinvestment of
dividends............ 1,905,668 3,491,240
Cost of shares
reacquired............. (6,708,858) (9,300,053)
------------ ------------
Net increase in net
assets
from Fund share
transactions......... 4,484,010 15,756,752
------------ ------------
Total increase........... 2,173,622 22,290,066
Net Assets
Beginning of period...... 126,583,727 104,293,661
------------ ------------
End of period............ $128,757,349 $126,583,727
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
B-184
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Ohio Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting pol-
icies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations
B-185
<PAGE>
which may differ from generally accepted accounting principles.
Note 2. Agreements The Fund has a manage-
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A shares
of the Fund, and Prudential Securities Incorporated (``PSI''), who acts as
distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges and the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $51,500 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the six months ended
February 28, 1994, it received approximately $25,400 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
Distributor, has also advised the Series that at February 28, 1994, the amount
of distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $3,124,500.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994 the Series incurred fees of approximately
$26,500 for the services of PMFS. As of February 28, 1994, approximately $4,500
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
B-186
<PAGE>
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $16,757,967 and $12,013,531, respectively.
The cost basis of investments for federal income tax purposes at February 28,
1994 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized appreciation of investments, including short-term
investments, for federal income tax purposes was $10,230,145 (gross unrealized
appreciation-- $10,757,947; gross unrealized depreciation--$527,802).
For federal income tax purposes, the Series has a capital loss carryforward
as of August 31, 1993 of approximately $1,051,400 which expires in 1996.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
At February 28, 1994 the Series sold 33 financial futures contracts on the
Municipal Bond Index which expire in March 1994 and sold 10 financial futures
contracts on U.S. Treasury Bonds which expire in June 1994. The value at
disposition of such contracts was $4,494,250. The value of such contracts on
February 28, 1994 was $4,397,969, thereby resulting in an unrealized gain of
$96,281. The Series has pledged $3,000,000 principal amount of Hamilton County
Electric System Mortgage Revenue bonds, $2,500,000 principal amount of Ohio
State Air Quality Development Authority Revenue bonds, and $600,000 principal
amount of Dayton Water Systems Revenue bonds as initial margin on such
contracts.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1994 and the fiscal year ended
August 31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- -----------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold................... 103,334 $ 1,283,111
Shares issued in reinvestment
of dividends................ 6,188 76,560
Shares reacquired............. (102,613) (1,274,266)
---------- -----------
Net increase in shares
outstanding................. 6,909 $ 85,405
---------- -----------
---------- -----------
Year ended August 31, 1993:
Shares sold................... 237,725 $ 2,875,262
Shares issued in reinvestment
of dividends................ 9,080 108,980
Shares reacquired............. (50,464) (609,662)
---------- -----------
Net increase in shares
outstanding................. 196,341 $ 2,374,580
---------- -----------
---------- -----------
Class B
- ------------------------------
Six months ended February 28,
1994:
Shares sold................... 643,494 $ 8,004,089
Shares issued in reinvestment
of dividends................ 147,831 1,829,108
Shares reacquired............. (437,755) (5,434,592)
---------- -----------
Net increase in shares
outstanding................. 353,570 $ 4,398,605
---------- -----------
---------- -----------
Year ended August 31, 1993:
Shares sold................... 1,561,093 $18,690,303
Shares issued in reinvestment
of dividends................ 282,692 3,382,260
Shares reacquired............. (731,090) (8,690,391)
---------- -----------
Net increase in shares
outstanding................. 1,112,695 $13,382,172
---------- -----------
---------- -----------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-187
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------ ----------------------------------------------------------------
January 22,
Six Months 1990+ Six Months
Ended Year Ended August 31, Through Ended Year Ended August 31,
February 28, ------------------------ August 31, February 28, -------------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989
------ ------ ------ ------ ----------- ------------ -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset
value,
beginning of
period... $12.38 $11.69 $11.17 $10.71 $10.85 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 10.85 $ 10.53
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- -------
Income from investment operations
- ---------------------------------
Net investment
income... .33 .69 .70 .70 .47 .31 .65 .65 .65 .66 .67
Net realized
and unrealized
gain (loss)
on investment
transactions.(.22) .69 .52 .46 (.14) (.22) .68 .52 .47 (.14) .32
------ ------ ------ ------ ------ ------------ -------- -------- ------- ------- -------
Total from
investment
operations.. .11 1.38 1.22 1.16 .33 .09 1.33 1.17 1.12 .52 .99
Less dividends
- --------------
Dividends
from net
investment
income... (.33) (.69) (.70) (.70) (.47) (.31) (.65) (.65) (.65) (.66) (.67)
------ ------ ------ ------ ------ ---------- -------- -------- ------- ------- -------
Net asset
value, end
of period. $12.16 $12.38 $11.69 $11.17 $10.71 $ 12.16 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 10.85
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- -------
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- -------
TOTAL
RETURN#:.. .96% 12.12% 11.26% 11.06% 2.58% .75% 11.58% 10.79% 10.74% 4.87% 9.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets,
end of period
(000).. $4,649 $4,647 $2,095 $923 $462 $124,108 $121,937 $102,199 $92,572 $89,183 $87,426
Average
net assets
(000)... $4,863 $2,904 $1,289 $615 $289 $124,581 $110,053 $96,178 $90,437 $89,302 $81,613
Ratios to average
net assets:
Expenses, including
distribution
fees... .80%* .84% .81% .93% .96%* 1.20%* 1.24% 1.21% 1.33% 1.32% 1.32%
Expenses, excluding
distribution
fees... .70%* .74% .71% .83% .86%* .70%* .74% .71% .83% .84% .84%
Net investment
income... 5.39%* 5.73% 6.34% 6.34% 6.51%* 4.99%* 5.33% 5.73% 5.94% 6.08% 6.17%
Portfolio
turnover... 9% 28% 37% 37% 24% 9% 28% 37% 37% 24% 41%
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total return for periods of less than one full year are not annualized.
See Notes to Financial Statements.
</TABLE>
B-188
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
PENNSYLVANIA SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.8%
Allegheny Cnty. Arpt.
Rev.,
Greater Pittsburgh Int'l.
Arpt., F.S.A.,
Aaa $ 1,000 6.60%, 1/1/04, Ser. A,... $1,107,280
Aaa 1,230 5.625%, 1/1/23........... 1,193,211
Allegheny Cnty. Higher
Ed. Bldg.
Auth. Rev., Robert
Morris Coll.,
Aaa 1,000 7.00%, 6/15/08,
M.B.I.A................ 1,124,600
Allegheny Cnty. Hosp. Dev. Auth. Rev.,
Magee Womens Hosp., F.G.I.C.,
Aaa 2,000 Zero Coupon, 10/1/14..... 592,020
Aaa 2,000 Zero Coupon, 10/1/16..... 527,160
Aaa 2,000 Zero Coupon, 10/1/18..... 468,460
Aaa 4,000 Zero Coupon, 10/1/19..... 883,240
Presbyterian Univ. Hosp.,
Aaa 1,100 7.625%, 7/1/15, Ser. C,
M.B.I.A................ 1,243,836
West Penn. Hosp. Hlth. Ctr. Proj.,
NR 2,000 8.50%, 1/1/20............ 2,274,880
Allegheny Cnty. Residential Fin. Auth.,
Mtge. Rev., G.N.M.A.,
Aaa 575 9.00%, 6/1/17, Ser. F.... 636,393
Aaa 970 7.40%, 12/1/22, Ser. Q... 1,047,813
Allegheny Cnty. San.
Auth. Swr. Rev.,
F.G.I.C.,
Aaa 2,620 Zero Coupon, 12/1/05..... 1,408,276
Aaa 1,640 Zero Coupon, 6/1/06, Ser.
A...................... 848,356
Allegheny Cnty., Gen.
Oblig., M.B.I.A.,
Aaa 1,500(dag) 7.30%, 12/1/10, Ser.
C-37................... 1,734,705
Beaver Cnty. Ind. Dev.
Auth. Poll. Ctrl. Rev.,
Ohio Edison Proj.,
Aaa 1,150 7.75%, 9/1/24, Ser. A,
F.G.I.C................ 1,320,545
Berks Cnty. Ind. Dev. Auth. Rev.,
Lutheran Home Proj.,
NR 1,500 6.875%, 1/1/23........... 1,531,140
Bethlehem Auth. Wtr.
Rev.,
Aaa 3,000## 5.20%, 11/15/21,
M.B.I.A................ 2,791,950
Bristol Twnshp. Sch.
Dist.,
Gen Oblig., M.B.I.A.
Aaa $ 1,500 6.625%, 2/15/12, Ser.
A...................... $1,697,805
Bucks Cnty. Wtr. & Swr. Auth. Rev.,
Neshaminy Interceptor Sys.,
Aaa 2,000(dag) 7.50%, 12/1/13,
F.G.I.C................ 2,278,100
Butler Cnty. Hosp. Auth.
Rev.,
North Hills, Passavant
Hosp.,
AAA* 1,000 7.00%, 6/1/22,
C.G.I.C................ 1,121,990
Chartiers Valley
Jt. Sch. Dist. Auth.
Rev.,
AAA* 4,430 6.15%, 3/1/07............ 4,717,950
Chester Upland Sch.
Auth.,
A* 1,000 6.375%, 9/1/21, Ser. A... 1,032,760
Dauphin Cnty. Gen. Auth.
Rev.,
Aaa 1,000 7.40%, 1/1/06, B.I.G..... 1,097,070
Delaware Cnty. Auth.
Rev.,
Crozer Chester Med.
Ctr., M.B.I.A.,
Aaa 2,550 7.15%, 12/15/05, Ser.
ABC.................... 2,955,450
Aaa 3,500 5.30%, 12/15/20.......... 3,294,760
Villanova Univ.,
NR 1,000(dag) 7.75%, 8/1/18............ 1,153,310
Delaware Cnty. Ind. Dev. Auth. Rev.,
Res. Recovery Proj.,
A1 2,000 8.10%, 12/1/13, Ser. A... 2,197,420
Delaware River Jt. Toll
Bridge Comm. Rev.,
Aaa 5,500 6.00%, 7/1/18,
F.G.I.C................ 5,651,855
Doylestown Hosp. Auth.
Rev.,
Aaa 4,000 5.00%, 7/1/23,
A.M.B.A.C.............. 3,576,760
Pine Run Retirement,
NR 1,180 7.20%, 7/1/23, Ser. A.... 1,240,558
Emmaus Gen. Auth. Rev.,
Local Gov't. Bond,
B.I.G.
Aaa 1,000 8.00%, 5/15/18, Ser. B... 1,121,210
Aaa 1,250 7.90%, 5/15/18, Ser. C... 1,408,112
Aaa 2,000 7.90%, 5/15/18, Ser. E... 2,245,400
Aaa 1,600 7.90%, 5/15/18, Ser. F... 1,796,320
Erie Higher Ed. Bldg.
Auth.
Coll. Rev.,
Mercyhurst Coll. Proj.,
BBB* 1,000(dag) 7.85%, 9/15/19........... 1,161,210
BBB* 3,250 5.75%, 3/15/23, Ser. B... 3,041,577
</TABLE>
See Notes to Financial Statements.
B-189
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Falls Twnshp. Hosp. Auth.
Rev.,
Delaware Valley Med.,
AAA* $ 2,700 7.00%, 8/1/22, F.H.A..... $2,996,433
Franklin Cnty. Ind. Dev.
Auth. Hosp. Rev.,
Chambersburg Hosp.
Proj.,
Aaa 1,500 6.25%, 7/1/22,
F.G.I.C................ 1,562,460
Guam Arpt. Auth. Rev.,
BBB* 3,500 6.70%, 10/1/23, Ser. B... 3,735,445
Harrisburg Auth. Rev.,
Green Cnty. Prison
Proj.,
Aaa 1,500 6.625%, 6/1/13,
F.G.I.C................ 1,670,925
Harrisburg Redev. Auth.
Rev.,
Cap. Impvt.,
Aaa 900 7.875%, 11/2/16, Ser. A,
F.G.I.C................ 1,011,285
Lancaster Cnty. Hosp.
Auth.,
Rev. Hlth Ctr.,
Aaa 2,000## 5.00%, 11/15/20,
A.M.B.A.C.............. 1,793,760
Lancaster Cnty. Solid
Waste Mgmt. Auth. Rev.,
Res. Rec. Sys.
Landfill,
A 750 7.75%, 12/15/04.......... 829,838
Langhorne Manor Boro.
Higher Ed. & Hlth. Auth
Rev.,
Lower Bucks Hosp.,
Baa 3,275 7.35%, 7/1/22............ 3,576,562
Lehigh Cnty. Gen. Purpose Auth.
Revs., Horizon Hlth. Sys. Inc.,
NR 500 8.25%, 7/1/13, Ser. A.... 646,145
A+* 750(dag) 8.25%, 7/1/13, Ser. B.... 850,747
St. Lukes Hosp. of
Bethlehem Proj.,
Aaa 750 5.30%, 11/15/06,
A.M.B.A.C.............. 756,840
Aaa 1,000 5.30%, 11/15/07,
A.M.B.A.C.............. 999,900
Lehigh Cnty. Ind. Dev.
Auth. Poll. Ctrl. Rev.,
Pa. Pwr. & Lt. Co.,
A2 1,300 9.375%, 7/1/15, Ser. A... 1,419,587
Luzerne Cnty. Ind. Dev. Auth.
Exmpt. Facs. Rev., Gas & Water,
Baa3 4,000 7.20%, 10/1/17........... 4,338,280
Baa3 2,000 7.125%, 12/1/22, Ser.
B...................... 2,166,300
Montgomery Cnty. Ed. &
Hlth. Auth Rev.,
Aaa $ 3,000 5.125%, 6/1/24,
A.M.B.A.C.............. $2,740,290
Montgomery Cnty. Higher
Ed. & Hlth. Auth. Hosp.
Rev.,
Jeanes Hlth. Sys. Proj.,
BBB* 4,000 (dag) 8.625%, 7/1/07.......... 4,931,440
Montgomery Cnty. Ind.
Dev. Auth. Rev., Poll.
Ctrl.,
Philadelphia Elec.,
Baa2 1,000 7.60%, 4/1/21............ 1,108,670
Res. Recovery,
AA-* 2,000 7.50%, 1/1/12............ 2,242,640
Montgomery Cnty. Redev.
Auth.,
Multi-family Hsg.,
NR 3,000 6.50%, 7/1/25, Ser. A.... 3,009,210
No. Huntingdon Twnshp. Mun. Auth.,
Gtd. Swr. Rev.,
Aaa 1,070 6.70%, 4/1/06,
M.B.I.A................ 1,173,405
Northampton Cnty. Higher
Ed. Auth. Rev., Lehigh
Univ.,
Aaa 1,500 7.10%, 11/15/09,
M.B.I.A................ 1,681,335
Moravian Coll.,
BBB-* 2,095 8.20%, 6/1/11............ 2,449,495
Northampton Cnty. Ind.
Dev.
Auth. Rev., Citizens
Util. Co.,
AAA* 1,000 6.95%, 8/1/15............ 1,101,340
Northeastern Hosp. & Ed.
Auth. Coll. Rev.,
BBB* 1,500 6.00%, 7/15/18........... 1,467,915
Northumberland Cnty. Ind.
Dev.
Auth. Rev., Roaring
Creek Wtr.,
NR 1,500 6.375%, 10/15/23......... 1,456,170
Pennsylvania Hsg. Fin.
Agcy.,
Sngl. Fam. Mtge. Rev.,
Aa 1,050 9.175%, 4/1/25, Ser.
27..................... 1,063,125
Sngl. Fam. Mtge.,
Aa 780 8.10%, 10/1/10, Ser. X... 831,597
Aa 1,750 8.25%, 4/1/14, Ser. N.... 1,898,050
Aa 1,000 7.60%, 4/1/16, Ser. S.... 1,091,450
Aa 2,930@ 7.80%, 10/1/20........... 3,178,171
Aa 1,810 8.15%, 4/1/24, Ser. X.... 1,962,384
</TABLE>
See Notes to Financial Statements.
B-190
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Pennsylvania Ind. Auth.
Econ. Dev. Rev.,
A $ 3,000 7.00%, 1/1/11, Ser. A.... $3,301,110
Pennsylvania
Infrastructure
Investment Auth. Rev.,
AA* 750 6.80%, 9/1/10............ 829,853
Pennsylvania
Intergovernmental
Cooperation Auth.,
Spec.Tax Rev.,
Aaa 500 5.60%, 6/15/15,
M.B.I.A................ 492,610
Baa 1,000(dag) 6.80%, 6/15/22........... 1,133,270
Pennsylvania St. Gen. Oblig., F.S.A.,
Aaa 4,000 6.25%, 11/1/06, Ser.
A...................... 4,348,400
Pennsylvania St. Higher
Edl. Facs. Auth. Rev.,
Coll. & Univ. Rev.,
BBB+* 2,000 6.00%, 11/1/22, Ser. B... 1,966,180
Drexel Univ.,
BBB* 2,500 6.375%, 5/1/17........... 2,560,950
Hahnemann Univ. Proj.,
Aaa 1,500 7.20%, 7/1/09,
M.B.I.A................ 1,682,685
La Salle Univ.,
Aaa 1,100 7.70%, 5/1/10,
M.B.I.A................ 1,243,572
Med. Coll. of
Pennsylvania,
Baa1 355 8.375%, 3/1/11, Ser. A... 399,567
Baa1 2,350 7.50%, 3/1/14, Ser. A.... 2,542,888
Thomas Jefferson Univ.,
Aa 1,000 6.625%, 8/15/09, Ser.
A...................... 1,097,920
AAA* 1,250(dag) 8.00%, 1/1/18, Ser. A,... 1,434,712
Pennsylvania St. Tpke. Comn. Rev.,
Aaa 1,375(dag)@ 7.625%, 12/1/17, Ser. D,
F.G.I.C................ 1,590,875
Aaa 4,650(dag) 7.50%, 12/1/19, Ser. K,
F.G.I.C.,.............. 5,427,387
Aaa 1,500 5.50%, 12/1/19, Ser. N... 1,451,715
Pennsylvania St. Univ., Gen. Oblig.,
A1 3,000 5.55%, 8/15/07........... 3,049,920
NR 1,000(dag) 6.75%, 7/1/09............ 1,123,500
Philadelphia Arpt. Rev.,
Baa 2,000 9.00%, 6/15/15........... 2,164,840
Philadelphia Gas Wks.
Rev.,
Baa1 500 7.20%, 6/15/98, Ser.
13..................... 556,500
Baa1 625 7.30%, 6/15/99, Ser.
13..................... 688,056
Baa1 215 7.70%, 6/15/11, Ser.
13..................... 256,463
Philadelphia Gas Wks.
Rev.,
Baa1 $ 1,000 6.375%, 7/1/14........... $1,027,940
Aaa 3,430 (dag) 7.70%, 6/15/21, Ser.
13..................... 4,098,541
Aaa 4,000 5.25%, 8/1/24, Ser. 15,
F.S.A.................. 3,687,080
Baa1 2,900 6.375%, 7/1/26........... 2,973,834
Philadelphia Hosps. &
Higher Ed. Fac. Auth.
Rev.,
Children's Seashore
House,
BBB+* 1,000 7.00%, 8/15/12........... 1,075,220
BBB+* 1,000 7.00%, 8/15/17, Ser. A... 1,064,040
Childrens Hosp. Proj.,
Aa 2,000 5.00%, 2/15/21, Ser. A... 1,778,120
Grad. Hlth. Systems,
Baa1 1,000 6.25%, 7/1/18, Ser. A.... 986,360
Baa1 2,750 7.25%, 7/1/18............ 2,991,120
Pennsylvania Univ. Hosp.,
Aa 845 5.875%, 7/1/08........... 826,917
Philadelphia Ind. Dev. Auth. Rev.,
Inst. For Cancer Research,
AA-* 5,770 7.25%, 7/1/10, Ser. B.... 6,484,788
Nat'l. Brd. Of Med.
Examiners Proj.,
A+* 5,000 6.75%, 5/1/12............ 5,453,350
Philadelphia Mun. Auth.
Rev.,
Aaa 2,000 5.625%, 11/15/14,
F.G.I.C................ 1,984,100
Aaa 2,000 5.625%, 11/15/18,
F.G.I.C................ 1,969,620
Philadelphia Pkg. Auth.
Rev.,
Arpt. Pkg.,
Aaa 2,200 7.375%, 9/1/18,
A.M.B.A.C.............. 2,467,476
Philadelphia Redev. Auth.
Rev.,
Home Impvt. Loan,
A 500 7.375%, 6/1/03, Ser. A... 524,035
A 825 7.40%, 6/1/08, Ser. A.... 874,756
Philadelphia Wtr. & Swr.
Rev.,
Aaa 7,900 Zero Coupon, 10/1/02,
Ser. 15, M.B.I.A....... 5,146,771
Aaa 700 6.875%, 10/1/06, Ser. 15,
M.B.I.A................ 774,998
Aaa 4,375 5.25%, 6/15/23,
M.B.I.A................ 4,078,112
Pittsburgh Pub. Pkg.
Auth.
Pkg. Rev.,
Aaa 1,000 5.875%, 12/1/12,
F.G.I.C................ 1,021,080
</TABLE>
See Notes to Financial Statements.
B-191
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Pittsburgh Stadium Auth.
Rev.,
Aaa $ 500 7.50%, 10/15/01,
F.G.I.C................ $554,655
Pittsburgh Urban Redev.
Auth.,
Mtge. Rev.,
A1 795 8.30%, 4/1/17, Ser. B.... 851,715
Pottstown Boro. Swr. Auth. Rev.,
Aaa 1,200 Zero Coupon, 11/1/03,
F.G.I.C................ 733,704
Puerto Rico Comnwlth., Gen. Oblig.,
Baa1 3,340 5.50%, 7/1/08............ 3,476,639
Aaa 3,030 7.00%, 7/1/10,
A.M.B.A.C.............. 3,706,084
Aaa 4,250 8.932%, 7/1/20, Ser. A,
F.S.A.................. 4,467,813
Pub. Impvt. Ref.,
Baa1 2,500 5.40%, 7/1/07............ 2,521,075
Baa1 720 7.00%, 7/1/10............ 863,309
Puerto Rico Hsg. Fin. Auth. Rev.,
Baa 1,750 5.125%, 12/1/05.......... 1,683,308
Multifamily Mtge.,
AA* 995 7.50%, 4/1/22............ 1,051,038
Sngl. Fam.,
Baa 1,000 5.25%, 12/1/06........... 960,370
Puerto Rico Hwy. & Trans.
Auth. Rev.,
A* 1,540 6.625%, 7/1/18, Ser. T... 1,698,589
Puerto Rico Pub. Impvt.,
AAA* 5,250(dag) 7.70%, 7/1/20............ 6,231,960
Baa1 1,100(dag) 6.80%, 7/1/21............ 1,265,044
Sayre Hlth. Care Facs. Auth. Rev.,
Cap. Asset Fin. Prog.,
Aaa 500 7.70%, 12/1/13,
A.M.B.A.C.............. 575,025
Aaa 1,000 7.625%, 12/1/15, Ser.
H-2, A.M.B.A.C......... 1,157,310
Scranton Pkg. Auth. Rev.,
A+* 1,600 8.125%, 9/15/14.......... 1,824,048
Scranton-Lackawanna Hlth.
&
Welfare Auth. Rev.,
University of Scranton,
Proj. Ser. C.,
A-* 2,250 6.50%, 3/1/15............ 2,377,012
A-* 1,000(dag) 7.50%, 6/15/06, Ser. C... 1,170,110
Shaler Twnshp., Gen
Oblig., F.G.I.C.,
Aaa $ 1,000 5.00%, 8/15/17, Ser. B... $912,420
So. Fork Mun. Auth. Hosp. Rev.,
Lee Hosp. Proj.,
A-* 2,500 5.50%, 7/1/23, Ser. A.... 2,351,100
Swarthmore Boro. Gen. Auth. Rev.,
Pennsylvania Coll.,
A-* 600(dag) 7.25%, 9/15/10........... 691,242
Venango Cnty. Gen.
Oblig.,
Aaa 2,265 5.25%, 7/15/18, Ser. B... 2,137,118
Virgin Islands Pub. Fin.
Auth.
Hwy. Trans. Gas Tax,
BBB* 1,000 7.70%, 10/1/04........... 1,115,260
Virgin Islands Pub. Fin. Auth. Rev.,
Ref. Matching Loan Notes,
NR 1,950 7.25%, 10/1/18, Ser. A... 2,192,619
Virgin Islands Territory,
Hugo Ins. Claims Fund
Prog.,
NR 1,105 7.75%, 10/1/06........... 1,272,905
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys. Rev.,
NR 1,400 8.50%, 1/1/10, Ser. A.... 1,578,472
Wtr. Sys. Rev.,
NR 250 7.20%, 1/1/02, Ser. B.... 273,255
NR 800 7.60%, 1/1/12, Ser. B.... 893,832
Washington Cnty. Auth. Lease Rev.,
Aaa 2,230 Zero Coupon, 6/1/14,
F.G.I.C................ 673,259
Aaa 2,335 Zero Coupon, 6/1/15,
F.G.I.C................ 665,849
Mun. Fac., Shadyside
Hosp.,
Aaa 2,900(dag) 7.45%, 12/15/18, Ser.
C-1D, A.M.B.A.C........ 3,410,719
Washington Cnty. Hosp. Auth. Rev.,
Monongahela Valley Hosp.,
A 2,750 6.75%, 12/1/08........... 2,995,135
</TABLE>
See Notes to Financial Statements.
B-192
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Washington Cnty. Ind.
Dev. Auth.
Rev., Presbyterian Med.
Ctr.,
AAA* $ 1,000 6.70%, 1/15/12, F.H.A.... $1,079,900
York Cnty. Solid Waste &
Refuse Auth. Ind. Dev.
Rev.,
Res. Rec. Proj.,
AA-* 1,000 8.20%, 12/1/14, Ser. C... 1,136,170
------------
Total long-term
investments
(cost $254,746,115).... 276,443,970
------------
SHORT-TERM INVESTMENTS--3.4%
Allegheny Cnty. Hosp.
Dev. Auth. Rev.,
VMIG1 1,200 2.35%, 3/3/94, Ser. B,
F.R.W.D................ 1,200,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
VMIG1 1,800 2.25%, 3/2/94, Ser. 85,
F.R.W.D.,.............. 1,800,000
Schuylkill Cnty. Ind.
Dev. Auth., F.R.D.D.,
P1 1,700 2.35%, 3/1/94, Ser. 85... 1,700,000
P1 5,000 2.40%, 3/1/94, Ser. 85... 5,000,000
------------
Total short-term
investments
(cost $9,700,000)...... 9,700,000
------------
Total Investments--100.2%
(cost $264,446,115;
Note 4)................ 286,143,970
Liabilities in excess of
other
assets--(0.2%)......... (630,716)
------------
Net Assets--100%......... $285,513,254
------------
------------
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.R.W.D.--Floating Rate (Weekly) Demand Note#.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
## When-issued security.
* Standard & Poor's rating.
(dag) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
@ Pledged as collateral for when-issued securities.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements.
B-193
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $264,446,115).............................................. $ 286,143,970
Cash................................................................................... 310,177
Accrued interest receivable............................................................ 4,273,434
Receivable for Fund shares sold........................................................ 539,342
Receivable for investments sold........................................................ 10,000
Deferred expenses and other assets..................................................... 3,507
-----------------
Total assets....................................................................... 291,280,430
-----------------
Liabilities
Payable for investments purchased...................................................... 4,807,067
Payable for Fund shares reacquired..................................................... 643,479
Due to Manager......................................................................... 110,847
Due to Distributors.................................................................... 107,513
Accrued expenses....................................................................... 52,710
Dividends payable...................................................................... 45,560
-----------------
Total liabilities.................................................................. 5,767,176
-----------------
Net Assets............................................................................. $ 285,513,254
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 262,226
Paid-in capital in excess of par..................................................... 262,624,584
-----------------
262,886,810
Accumulated net realized gains....................................................... 928,589
Net unrealized appreciation.......................................................... 21,697,855
-----------------
Net assets, February 28, 1994........................................................ $ 285,513,254
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($10,795,307 (div) 991,393 shares of beneficial interest issued and outstanding)... $10.89
Maximum sales charge (4.5% of offering price)........................................ .51
-----------------
Maximum offering price to public..................................................... $11.40
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($274,717,947 (div) 25,231,160 shares of beneficial interest issued and
outstanding)....................................................................... $10.89
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-194
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
Net Investment Income 28, 1994
-----------
<S> <C>
Income
Interest............................. $ 8,668,648
-----------
Expenses
Management fee....................... 700,452
Distribution fee--Class A............ 5,057
Distribution fee--Class B............ 675,169
Transfer agent's fees and expenses... 86,000
Custodian's fees and expenses........ 65,000
Registration fees.................... 15,000
Reports to shareholders.............. 7,500
Audit fee............................ 5,300
Legal fees........................... 5,000
Trustees' fees....................... 1,700
Miscellaneous........................ 4,824
-----------
Total expenses......................... 1,571,002
-----------
Net investment income.................. 7,097,646
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain on investment
transactions......................... 2,220,378
Net change in unrealized appreciation
on investments....................... (7,789,183)
-----------
Net loss on investments................ (5,568,805)
-----------
Net Increase in Net Assets Resulting
from Operations........................ $ 1,528,841
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 7,097,646 $ 12,582,197
Net realized gain on
investment
transactions.......... 2,220,378 2,222,982
Net change in unrealized
appreciation on
investments........... (7,789,183) 13,704,514
------------ ------------
Net increase in net
assets
resulting from
operations............ 1,528,841 28,509,693
------------ ------------
Dividends and
distributions (Note 1):
Dividends to
shareholders from net
investment income
Class A............... (276,007) (417,688)
Class B............... (6,821,639) (12,164,509)
------------ ------------
(7,097,646) (12,582,197)
------------ ------------
Distributions to
shareholders from net
realized gains on
investment
transactions
Class A............... (97,328) (23,310)
Class B............... (2,598,465) (813,755)
------------ ------------
(2,695,793) (837,065)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............ 30,200,579 65,604,598
Net asset value of
shares
issued in reinvestment
of dividends and
distributions......... 5,930,000 7,674,719
Cost of shares
reacquired............ (15,447,116) (27,211,612)
------------ ------------
Net increase in net
assets
from Fund share
transactions.......... 20,683,463 46,067,705
------------ ------------
Total increase............ 12,418,865 61,158,136
Net Assets
Beginning of period....... 273,094,389 211,936,253
------------ ------------
End of period............. $285,513,254 $273,094,389
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-195
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Notes to Financial Statements
(Unaudited)
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Pennsylvania Series (the ``Series'')
commenced investment operations in April, 1987. The Series is diversified and
seeks to achieve it's investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum
of risk by investing in ``investment grade'' tax-exempt securities whose
ratings are within the four highest ratings categories by a nationally
recognized statistical rating organization or, if not rated, are of comparable
quality. The ability of the issuers of the securities held by the Series to
meet their obligations may be affected by economic developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the
basis of prices provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining values. If market quotations are not readily
available from such pricing service, a security is valued at its fair value
as determined under procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities
are calculated on the identified cost basis. Interest income is recorded on
the accrual basis. The Series amortizes premiums and original issue discount
paid on purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series'
gross income consists of tax-exempt interest, no federal income tax provision
is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of
such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost
of the subadviser's services, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''),
which acts as distributor of the Class B shares of the Fund (collectively
the ``Distributors''). To reimburse the Distributors for their expenses
incurred in distributing and servicing the Fund's Class A and B shares, the
Fund, pursuant to plans of distribution, pays the Distributors a
reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were
B-196
<PAGE>
.10 of 1% of the average daily net assets of the Class A shares for the six
months ended February 28, 1994. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $57,000 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges
to dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through
the imposition of contingent deferred sales charges in connection with
certain redemptions of shares may exceed the total payments made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the six
months ended February 28, 1994, it received approximately $124,000 in
contingent deferred sales charges imposed upon certain redemptions by
investors. PSI, as distributor, has also advised the Series that at February
28, 1994, the amount of distribution expenses incurred by PSI and not yet
reimbursed by the Series or recovered through contingent deferred sales
charges approximated $1,230,600. This amount may be recovered through future
payments under the Class B Plan or contingent deferred sales charges.
In the event of termination or non-continuation of the Class B Plan, the
Fund would not be contractually obligated to pay PSI as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $64,800 for the services of PMFS. As of February 28, 1994,
approximately $11,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations includes certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of
Securities portfolio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $41,957,207 and $23,339,114, respectively.
The cost basis of investments for federal income tax purposes was
$264,478,696 and, accordingly, as of February 28, 1994 net unrealized
appreciation of investments, including short-term investments, for federal
income tax purposes is $21,665,274 (gross unrealized
appreciation--$22,839,655; gross unrealized depreciation--$1,174,381).
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold
with a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Both classes of shares have equal
rights as to earnings, assets and voting privileges except that each class
bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the six months ended February 28, 1994 and the year ended August
31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Period ended February 28, 1994:
Shares sold................... 202,317 $ 2,263,089
Shares issued in reinvestment
of dividends and
distributions............... 20,916 231,657
Shares reacquired............. (65,325) (727,784)
---------- ------------
Net increase in shares
outstanding................. 157,908 $ 1,766,962
---------- ------------
---------- ------------
</TABLE>
B-197
<PAGE>
<TABLE>
<CAPTION>
Shares Amount
---------- ------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 398,287 $ 4,306,639
Shares issued in reinvestment
of dividends and
distributions............... 22,903 247,493
Shares reacquired............. (147,976) (1,607,135)
---------- ------------
Net increase in shares
outstanding................. 273,214 $ 2,946,997
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
Period ended February 28, 1994:
Shares sold................... 2,499,503 $ 27,937,490
Shares issued in reinvestment
of dividends and
distributions............... 514,510 5,698,343
Shares reacquired............. (1,319,202) (14,719,332)
---------- ------------
Net increase in shares
outstanding................. 1,694,811 $ 18,916,501
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 5,687,242 $ 61,297,959
Shares issued in reinvestment
of dividends and
distributions............... 689,051 7,427,226
Shares reacquired............. (2,382,063) (25,604,477)
---------- ------------
Net increase in shares
outstanding................. 3,994,230 $ 43,120,708
---------- ------------
---------- ------------
</TABLE>
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for
the interim period presented.
B-198
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------ ----------------------------------
January 22,
Six Months 1990(dag)(dag) Six Months Year Ended August
Ended Year Ended August 31, Through Ended 31,
February 28, ------------------------ August 31, February 28, -------------------
1994 1993 1992 1991 1990 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------ ------ ------ ------------ ------------ -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 11.21 $10.55 $ 9.96 $ 9.60 $ 9.83 $ 11.21 $ 10.54 $ 9.96
------------ ------ ------ ------ ------ ------------ -------- --------
Income from investment
- ----------------------
operations:
-----------
Net investment income......... .30 .62 .62 .62+ .38+ .28 .57 .58
Net realized and unrealized
gain
(loss) on investment
transactions................ (.21) .70 .59 .39 (.23) (.21) .71 .58
------------ ------ ------ ------ ------ ------------ -------- --------
Total from investment
operations................ .09 1.32 1.21 1.01 .15 .07 1.28 1.16
------------ ------ ------ ------ ------ ------------ -------- --------
Less distributions:
- -------------------
Dividends from net investment
income...................... (.30) (.62) (.62) (.62) (.38) (.28) (.57) (.58)
Distributions from net
realized gains.............. (.11) (.04) -- (.03) -- (.11) (.04) --
------------ ------ ------ ------ ------ ------------ -------- --------
Total distributions......... (.41) (.66) (.62) (.65) (.38) (.39) (.61) (.58)
------------ ------ ------ ------ ------ ------------ -------- --------
Net asset value, end of
period...................... $ 10.89 $11.21 $10.55 $ 9.96 $ 9.60 $ 10.89 $ 11.21 $ 10.54
------------ ------ ------ ------ ------ ------------ -------- --------
------------ ------ ------ ------ ------ ------------ -------- --------
TOTAL RETURN#:................ .85% 12.86% 12.44% 10.82% 1.43% .65% 12.54% 11.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $ 10,795 $9,342 $5,908 $3,521 $1,823 $274,718 $263,752 $206,028
Average net assets (000)...... $ 10,197 $7,354 $4,439 $2,366 $ 977 $272,306 $229,955 $186,113
Ratios to average net assets:
Expenses, including
distribution fees......... .74%* .78% .81% .83(dag) .78%*(dag) 1.14% 1.18% 1.21%
Expenses, excluding
distribution fees......... .64%* .68% .71% .74(dag) .68%*(dag) .64% .68% .71%
Net investment income....... 5.45%* 5.69% 5.99% 6.32(dag) 6.51%*(dag) 5.05% 5.29% 5.59%
Portfolio turnover............ 8% 13% 25% 62% 37% 8% 13% 25%
<CAPTION>
1991 1990 1989
<S> <C> <C> <C>
-------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 9.60 $ 9.81 $ 9.47
-------- -------- --------
Income from investment
- ----------------------
operations:
-----------
Net investment income......... .58(dag) .61(dag) .65(dag)
Net realized and unrealized
gain
(loss) on investment
transactions................ .39 (.21) .34
-------- -------- --------
Total from investment
operations................ .97 .40 .99
-------- -------- --------
Less distributions:
- -------------------
Dividends from net investment
income...................... (.58) (.61) (.65)
Distributions from net
realized gains.............. (.03) -- --
-------- -------- --------
Total distributions......... (.61) (.61) (.65)
-------- -------- --------
Net asset value, end of
period...................... $ 9.96 $ 9.60 $ 9.81
-------- -------- --------
-------- -------- --------
TOTAL RETURN#:................ 10.39% 4.08% 10.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $170,162 $150,824 $118,280
Average net assets (000)...... $146,591 $141,183 $ 86,496
Ratios to average net assets:
Expenses, including
distribution fees......... 1.23(dag) 1.02(dag) .77(dag)
Expenses, excluding
distribution fees......... .74(dag) .53(dag) .29(dag)
Net investment income....... 5.94(dag) 6.05(dag) 6.27(dag)
Portfolio turnover............ 62% 37% 11%
</TABLE>
- ---------------
* Annualized.
(dag) Net of expense subsidy/management fee waiver.
(dag)(dag) Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment dividends
and distributions. Total returns for periods of less than a full year are
not annualized.
See Notes to Financial Statements.
B-199
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
ARIZONA SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--99.2%
Arizona St. Edl. Loan Mkt.
Corp.,
A $ 1,375 7.00%, 3/1/05, Ser. B..... $ 1,526,168
Arizona St. Hsg. Fin.
Review Brd.,
Sngl. Fam. Mtge. Rev.,
AA-* 25 10.625%, 12/1/02, Ser.
82...................... 25,968
Arizona St. Mun. Fin.
Prog.,
Cert. of Part.,
Aaa 700 8.75%, 8/1/06, Ser. 15,
B.I.G................... 809,501
Aaa 2,250 7.875%, 8/1/14, Ser. 25,
A.M.B.A.C............... 2,970,068
Arizona St. Trans. Brd.
Hwy. Rev.,
Aaa 2,000+ 7.00%, 7/1/09............. 2,322,560
Aaa 1,500 6.00%, 7/1/10............. 1,583,190
Arizona St. Univ. Sys.
Rev.,
A1 1,000+ 7.00%, 7/1/10, Ser. A..... 1,185,620
A1 1,000 5.50%, 7/1/19, Ser. A..... 1,007,460
Bullhead City Spec.
Assmt.,
Pkwy. Impvt. Dist.,
Baa 500 6.10%, 1/1/12............. 499,400
Baa 500 6.10%, 1/1/13............. 496,025
Central Arizona Wtr.
Consv. Dist.,
Contract Rev.,
A1 1,500+ 7.50%, 11/1/05............ 1,805,115
Chandler, Cap. Apprec.
Ref.,
Aaa 2,000 Zero Coupon, 7/1/02,
F.G.I.C................. 1,305,240
City of Tolleson, Gen.
Oblig.,
Aaa 315 4.75%, 7/1/07,
A.M.B.A.C............... 305,043
Aaa 335 4.00%, 7/1/08,
A.M.B.A.C............... 297,922
Goodyear, Gen. Oblig.,
Baa1 100 10.00%, 7/1/95............ 110,326
Guam Arpt. Auth. Rev.,
BBB* 500 6.70%, 10/1/23, Ser. B.... 543,205
La Paz Cnty., Unified Sch.
Dist.,
No. 27, Parker Impvt.
Proj.,
Baa 450 9.40%, 7/1/96............. 506,844
Maricopa Cnty. Hlth. Facs.
Rev.,
Catholic Hlthcr. West,
Aaa 500 5.625%, 7/1/23, Ser. A,
M.B.I.A................. 507,080
Maricopa Cnty. Hosp. Dist.
No. 1
Facs. Rev., East Valley
Behavioral Hlth. Fac.
Proj.,
Aaa 725+ 7.80%, 6/1/13, F.G.I.C.... 835,787
Maricopa Cnty. Ind. Dev.
Auth.
Hlth. Facs. Rev., Mercy
Hlth.,
Aaa $ 1,000 9.00%, 7/1/99, Ser. D,
M.B.I.A................. $ 1,115,910
A1 1,000 9.25%, 7/1/11, Ser. D..... 1,104,940
Maricopa Cnty. Ind. Dev.
Auth. Hosp. Fac. Rev.
John C. Lincoln Hosp.,
Aaa 2,000 7.00%, 12/1/00, F.S.A..... 2,337,160
Samaritan Hlth. Svcs.,
Aaa 300 12.00%, 1/1/08............ 383,967
A 1,000 9.25%, 12/1/15, Ser.
85A..................... 1,132,870
Maricopa Cnty. Sch. Dist.,
No. 41 Gilbert Proj.,
Aaa 2,000+ 6.50%, 7/1/08, Ser. E,
F.G.I.C................. 2,280,920
No. 11 Peoria Unified Sch.
Dist.,
Aaa 1,500 Zero Coupon, 7/1/04,
M.B.I.A................. 861,030
No. 92 Pendergast Elem.
Sch.,
Aaa 1,140 Zero Coupon, 7/1/04,
F.G.I.C................. 654,383
Mohave Cnty. Ind. Dev.
Auth.,
Multifamily Rev.,
AAA* 1,500 7.375%, 4/1/32, F.H.A..... 1,723,140
Navajo Cnty. Poll. Ctrl.
Rev.,
Aaa 400 5.50%, 8/15/28, Ser. A,
A.M.B.A.C............... 400,400
Navajo Cnty. Unified Sch.
Dist.,
No. 006 Herber
Overgaard,
Aaa 250 7.25%, 7/1/00,
A,M.B.A.C............... 287,945
Aaa 300 7.35%, 7/1/03,
A.M.B.A.C............... 345,390
Nogales Mun. Dev. Auth.
Rev.,
Aaa 500+@ 8.00%, 6/1/08, M.B.I.A.... 589,120
Peoria Bell Road Impvt.
District,
BBB* 465 7.20%, 1/1/11............. 506,362
Phoenix Civic Impvt.
Corp.,
Wastewater Sys.,
A1 1,500 6.125%, 7/1/23............ 1,573,935
Phoenix St. & Hwy. Rev.,
A1 1,480 6.25%, 7/1/06, Ser. 92.... 1,610,921
Aaa 1,000 Zero Coupon, 7/1/12,
F.G.I.C................. 358,610
Pima Cnty. Ind. Dev. Auth.
Hlth.
Care, Carondelet
St. Josephs & Marys,
Aaa 1,000 7.90%, 7/1/05, B.I.G...... 1,166,520
Aaa 1,000 8.00%, 7/1/13, B.I.G...... 1,170,350
</TABLE>
B-200 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Pima Cnty. Ind. Dev. Auth.
Rev.,
Multifamily Broadway
Proper Conglomerate
Apts.,
A-* $ 500 8.15%, 12/1/25, F.H.A..... $ 556,050
Tucson Elec. Pwr. Co.,
Aaa 2,700 7.25%, 7/15/10, F.S.A..... 3,086,451
Puerto Rico Comnwlth. Hwy.
&
Trans. Rev.,
Baa1 1,000 5.00%, 7/1/22............. 922,610
Puerto Rico, Gen. Oblig.,
Aaa 1,000 8.79%, 7/1/08, Ser. A,
M.B.I.A................. 1,138,750
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 995 7.50%, 4/1/22............. 1,078,490
Puerto Rico Hwy. Auth.
Rev.,
AAA* 490+ 7.70%, 7/1/03, Ser. Q..... 594,150
Puerto Rico Port Auth.
Rev.,
American Airlines,
Baa3 1,150 6.30%, 6/1/23, Ser. A..... 1,186,490
Salt River Proj. Agric.
Impvt. &
Pwr. Dist., Elec. Sys.
Rev.,
Aa 500 5.75%, 1/1/20, Ser. C..... 504,725
Scottsdale Ind. Dev. Auth.
Rev.,
Aa1 1,000 6.00%, 7/1/10............. 1,055,270
Cert. of Part.,
Aaa 1,500+ 7.875%, 11/1/14,
F.G.I.C................. 1,715,025
Mem. Hosp.,
Aaa 2,100 8.50%, 9/1/07, Ser. A,
A.M.B.A.C............... 2,472,540
Scottsdale, Gen. Oblig.,
Aa1 500 5.50%, 7/1/09............. 519,300
Tempe Impvt. Dist. Auth.
Rev.,
Papago Park Ctr., Dist.
No. 166,
A1 500 7.10%, 1/1/06............. 533,935
Tolleson Mun. Fin. Corp.
Rev.,
Citizen Util. Co.,
AAA* 400 9.20%, 9/1/05............. 449,216
Tucson Arpt. Auth. Inc.
Rev.,
Aaa 1,000 5.50%, 6/1/07, M.B.I.A.... 1,037,630
Tucson Wtr. Rev.,
Aaa $ 1,000+ 8.60%, 7/1/00............. $ 1,236,800
A1 1,000 5.50%, 7/1/09............. 1,020,090
Aaa 500 7.00%, 7/1/10, Ser. C,
M.B.I.A................. 559,700
Univ. Arizona Med. Ctr.
Corp.
Hosp. Rev., M.B.I.A.,
Aaa 1,000 5.00%, 7/1/13............. 968,130
Univ. Arizona Revs. Sys.,
A1 1,750 6.25%, 6/1/11, Ser. B..... 1,902,600
Virgin Islands Pub. Fin.
Auth. Rev.,
Ref. Matching Loan
Notes,
NR 600 7.25%, 10/1/18, Ser. A.... 680,178
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
NR 480 7.75%, 10/1/06, Ser. 91... 554,164
Virgin Islands Wtr. & Pwr.
Auth.,
NR 500 8.50%, 1/1/10, Ser. A..... 574,570
NR 200 7.60%, 1/1/12, Ser. B..... 225,367
Elec. Sys.,
NR 500 7.40%, 7/1/11, Ser. A..... 551,790
-----------
Total Investments--99.2%
(cost $55,574,040; Note
4)...................... 63,370,416
Other assets in excess of
liabilities--0.8%....... 536,780
-----------
Net Assets--100%.......... $63,907,196
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
* Standard & Poor's rating.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
@ Pledged as initial margin on financial futures contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-201 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
-----------
<S> <C>
Investments, at value (cost $55,574,040)................................................... $63,370,416
Cash....................................................................................... 1,547
Accrued interest receivable................................................................ 917,495
Receivable for investments sold............................................................ 495,737
Receivable for Fund shares sold............................................................ 363,248
Other assets............................................................................... 1,764
-----------
Total assets............................................................................. 65,150,207
-----------
Liabilities
Payable for investments purchased.......................................................... 987,032
Accrued expenses........................................................................... 95,128
Dividends payable.......................................................................... 54,508
Payable for Fund shares reacquired......................................................... 53,143
Due to Manager............................................................................. 26,758
Due to Distributors........................................................................ 24,567
Due to broker-variation margin............................................................. 1,875
-----------
Total liabilities........................................................................ 1,243,011
-----------
Net Assets................................................................................. $63,907,196
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 51,381
Paid-in capital in excess of par......................................................... 56,150,609
-----------
56,201,990
Distributions in excess of net realized gains............................................ (90,233)
Net unrealized appreciation.............................................................. 7,795,439
-----------
Net assets, August 31, 1993.............................................................. $63,907,196
-----------
-----------
Class A:
Net asset value and redemption price per share ($6,621,570 / 532,343 shares of beneficial
interest issued and outstanding)....................................................... $12.44
Maximum sales charge (4.5% of offering price)............................................ .59
-----------
Maximum offering price to public......................................................... $13.03
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share ($57,285,626 / 4,605,800
shares of beneficial interest issued and outstanding).................................. $12.44
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-202
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1993
---------------
<S> <C>
Income
Interest............................. $ 3,719,650
---------------
Expenses
Management fee....................... 286,344
Distribution fee--Class A............ 3,613
Distribution fee--Class B............ 268,279
Custodian's fees and expenses........ 91,800
Transfer agent's fees and expenses... 33,000
Registration fees.................... 20,000
Audit fee............................ 10,500
Reports to shareholders.............. 10,000
Legal fees........................... 9,500
Trustees' fees....................... 3,375
Miscellaneous........................ 3,438
---------------
Total expenses..................... 739,849
---------------
Net investment income.................. 2,979,801
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.............. 389,235
Financial futures transactions....... (213,414)
---------------
175,821
---------------
Net change in unrealized appreciation
of:
Investments.......................... 3,102,496
Financial futures contracts.......... 10,063
---------------
3,112,559
---------------
Net gain on investments................ 3,288,380
---------------
Net Increase in Net Assets
Resulting from Operations.............. $ 6,268,181
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1993 1992
------------ -----------
<S> <C> <C>
Operations
Net investment income..... $ 2,979,801 $ 3,000,059
Net realized gain on
investment
transactions............ 175,821 1,302,256
Net change in unrealized
appreciation of
investments............. 3,112,559 1,323,453
------------ -----------
Net increase in net assets
resulting from
operations.............. 6,268,181 5,625,768
------------ -----------
Dividends and distributions
(Note 1):
Dividends to shareholders
from net investment
income
Class A................... (201,649) (102,142)
Class B................... (2,778,152) (2,897,917)
------------ -----------
(2,979,801) (3,000,059)
------------ -----------
Distributions to
shareholders from net
realized gains on
investment transactions
Class A................... (21,305) --
Class B................... (500,545) --
------------ -----------
(521,850) --
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 12,302,375 6,256,948
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 1,717,602 1,355,766
Cost of shares
reacquired................ (6,722,273) (15,112,553)
------------ -----------
Net increase (decrease) in
net assets from Fund
share transactions...... 7,297,704 (7,499,839)
------------ -----------
Total increase (decrease)... 10,064,234 (4,874,130)
Net Assets
Beginning of year........... 53,842,962 58,717,092
------------ -----------
End of year................. $ 63,907,196 $53,842,962
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-203
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Arizona Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
B-204
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the
services of PIC, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
year ended August 31, 1993. PMFD pays various broker-dealers, including PSI and
Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Series under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $74,900 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons and incurred
other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the year ended
August 31, 1993, it received approximately $42,500 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $1,479,300. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$22,800 for the services of PMFS. As of August 31, 1993, approximately $1,900 of
such fees were due to PMFS. Transfer agent
B-205
<PAGE>
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
folio securities of the Series, Securities
excluding short-term investments, for the year
ended August 31, 1993 were $14,362,401 and $7,929,281, respectively.
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of August 31, 1993, net and gross unrealized appreciation of investments,
including short-term investments, for federal income tax purposes is $7,796,376.
At August 31, 1993, the Series sold 15 financial futures contracts on the
Municipal Bond Index expiring December 1993. The value at disposition of such
contracts is $1,775,156. The value of such contracts on August 31, 1993 was
$1,776,093, thereby resulting in an unrealized loss of $937. The Series has
pledged $500,000 principal amount of Nogales Municipal Development Authority
Revenue Bonds as initial margin on such contracts.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 379,867 $ 4,588,716
Shares issued in
reinvestment of dividends
and distributions......... 10,501 127,266
Shares reacquired........... (38,736) (459,132)
---------- ------------
Net increase in shares
outstanding............... 351,632 $ 4,256,850
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 113,040 $ 1,310,331
Shares issued in
reinvestment of
dividends................. 3,898 45,322
Shares reacquired........... (69,392) (796,962)
---------- ------------
Net increase in shares
outstanding............... 47,546 $ 558,691
---------- ------------
---------- ------------
<CAPTION>
Class B
- ----------------------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 639,982 $ 7,713,659
Shares issued in
reinvestment of dividends
and distributions......... 132,586 1,590,336
Shares reacquired........... (520,539) (6,263,141)
---------- ------------
Net increase in shares
outstanding............... 252,029 $ 3,040,854
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 425,511 $ 4,946,617
Shares issued in
reinvestment of
dividends................. 113,008 1,310,444
Shares reacquired........... (1,237,813) (14,315,591)
---------- ------------
Net decrease in shares
outstanding............... (699,294) $ (8,058,530)
---------- ------------
---------- ------------
</TABLE>
B-206
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
------------------------------------------
January
22, Class B
1990+ ------------------------------------------------
through
Year Ended August 31, August Year Ended August 31,
------------------------------- 31, ------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------- ------ ------ -------- -------- ------- ------- ------- -------
<CAPTION>
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period.......................... $ 11.88 $11.32 $10.80 $10.97 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $ 10.73
------ ------ ------ -------- -------- ------- ------- ------- -------
Income from investment operations
Net investment income............. .67 .68 .69 .42 .62 .63 .64 .65 .67
Net realized and unrealized gain
(loss) on investment
transactions.................... .68 .56 .52 (.17) .69 .55 .52 (.17) .24
------ ------ ------ -------- -------- ------- ------- ------- -------
Total from investment
operations.................... 1.35 1.24 1.21 .25 1.31 1.18 1.16 .48 .91
------ ------ ------ -------- -------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income.......................... (.67) (.68) (.69) (.42) (.62) (.63) (.64) (.65) (.67)
Distributions from net realized
gains........................... (.12) -- -- -- (.12) -- -- -- --
------ ------ ------ -------- -------- ------- ------- ------- -------
Total distributions............. (.79) (.68) (.69) (.42) (.74) (.63) (.64) (.65) (.67)
------ ------ ------ -------- -------- ------- ------- ------- -------
Net asset value, end of period.... $ 12.44 $11.88 $11.32 $10.80 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97
------ ------ ------ ------ -------- -------- ------- ------- -------
------ ------ ------ ------ -------- -------- ------- ------- -------
TOTAL RETURN#:.................... 11.79% 11.23% 11.45% 2.19% 11.42 % 10.68% 11.02% 4.49% 8.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $6,622 $2,146 $1,508 $436 $57,286 $51,697 $57,209 $59,216 $59,266
Average net assets (000).......... $3,613 $1,758 $ 937 $260 $53,656 $53,477 $58,973 $60,359 $55,479
Ratios to average net assets:
Expenses, including distribution
fees.......................... .92% 1.02% 1.02% .96%* 1.32 % 1.42% 1.41% 1.30% 1.30%
Expenses, excluding distribution
fees.......................... .82% .92% .92% .86%* .82 % .92% .91% .82% .83%
Net investment income........... 5.58% 5.81% 6.13% 6.36%* 5.18 % 5.42% 5.77% 5.99% 6.26%
Portfolio turnover................ 14% 42% 25% 49% 14 % 42% 25% 49% 62%
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
See Notes to Financial Statements.
B-207
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Arizona Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Arizona Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Arizona Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-208
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
CONNECTICUT MONEY MARKET SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--97.0%
Brooklyn, Gen. Oblig.,
NR $ 475 2.65%, 4/14/94, B.A.N..... $ 475,443
Connecticut St. Dev. Auth,
Jewish Cmnty. Ctr. of
New Haven,
A1+* 900 2.35%, 9/1/93, Ser. 92,
F.R.M.D................. 900,000
Lt. & Pwr. Co. Proj.,
VMIG2 10,900 2.85%, 9/2/93, Ser. 86A,
F.R.W.D................. 10,900,000
P2 950 2.65%, 10/18/93, Ser. 87A,
T.E.C.P................. 950,000
RK Bradley Assoc. Proj.,
A1+* 1,500 2.45%, 9/1/93, Ser. 85,
F.R.W.D................. 1,500,000
Rand Whitney Container
Bd.,
P1 1,000 2.20%, 9/1/93, Ser. 93,
F.R.W.D................. 1,000,000
SHW Inc. Proj.,
NR 3,000 2.60%, 9/1/93, Ser. 90,
F.R.W.D................. 3,000,000
Connecticut St., Gen.
Oblig.,
Aa 1,400 7.00%, 3/15/94, Ser.
93B..................... 1,431,215
Connecticut St. Hsg. Fin.
Auth.,
Mtg. Fin. Prog.,
VMIG1 1,400 2.45%, 12/10/93, Ser. 89D,
T.E.C.P................. 1,400,000
Connecticut St. Spec.
Assmt.,
Unemployment Comp.,
VMIG1 2,500 2.45%, 9/1/93, Ser. 93B,
F.R.W.D................. 2,500,000
Connecticut St. Spec. Tax
Oblig.,
Trans. Infrastructure
Rev.,
VMIG1 3,600 2.50%, 9/1/93, Ser. 90 I,
F.R.W.D................. 3,600,000
Connecticut St., Hlth. &
Edl. Facs. Auth. Rev.,
Charlotte-Hungerford,
VMIG1 $ 1,000 2.35%, 9/2/93, Ser. B,
F.R.W.D................. $ 1,000,000
Yale Univ., T.E.C.P.,
VMIG1 1,400 2.30%, 9/10/93, Ser. L.... 1,400,000
VMIG1 1,500 2.30%, 9/10/93, Ser. N.... 1,500,000
East Windsor, Gen. Oblig.,
B.A.N.,
NR 500 2.85%, 2/10/94............ 501,295
NR 500 3.00%, 2/10/94............ 500,975
Killingly, Gen. Oblig.,
NR 2,500 2.36%, 5/18/94, B.A.N..... 2,500,519
Meriden, Gen. Oblig.,
Unltd. Tax,
Aaa 1,925 6.625%, 11/15/93, Ser. 92,
B.A.N................... 1,939,418
N. Branford, Gen. Oblig.,
NR 1,925 2.42%, 2/9/94, Ser. 93,
B.A.N................... 1,925,171
Puerto Rico Comnwlth. Hwy.
& Trans.,
VMIG1 2,500 2.35%, 9/1/93, Ser. 85,
F.R.W.D................. 2,500,000
Puerto Rico Gov't. Dev.
Bank.,
VMIG1 4,500 2.15%, 9/1/93, Ser. 85,
F.R.W.D................. 4,500,000
Puerto Rico Ind. Med. &
Environ.
Facs., Inter. Amer.
Proj.,
VMIG1 800 2.35%, 10/7/93, Ser. 88,
T.E.C.P................. 800,000
Puerto Rico Maritime
Shipping Auth.,
P1 2,600 2.15%, 10/7/93, Ser. 90,
T.E.C.P................. 2,600,000
Reynolds Metal Co. Proj.,
P1 1,900 2.90%, 9/1/94, Ser. 83 A,
A.N.N.O.T............... 1,900,000
</TABLE>
B-209 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Schering-Plough Corp.,
AAA* $ 700 3.00%, 12/1/93, Ser. 83,
A.N.N.M.T............... $ 700,048
Sprague, Gen. Oblig.,
NR 625 2.85%, 7/1/94, B.A.N...... 627,279
Stamford, Gen. Oblig.,
NR 3,000 2.11%, 7/19/94, B.A.N..... 2,979,610
Winchester, Gen. Oblig.,
NR 500 2.70%, 11/9/93, B.A.N..... 500,370
-----------
Total Investments--97.0%
(amortized
cost--$56,031,343**).... 56,031,343
Other assets in excess of
liabilities--3.0%....... 1,762,189
-----------
Net Assets--100%.......... $57,793,532
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
T.E.C.P.--Tax Exempt Commercial Paper.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-210 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
---------------
<S> <C>
Investments, at amortized cost which approximates market value.......................... $56,031,343
Cash.................................................................................... 1,143,872
Receivable for Fund shares sold......................................................... 1,642,334
Interest receivable..................................................................... 322,213
Deferred organization expenses and other assets......................................... 41,467
Receivable for investments sold......................................................... 20,193
---------------
Total assets........................................................................ 59,201,422
---------------
Liabilities
Payable for Fund shares reacquired...................................................... 1,323,045
Accrued expenses and other liabilities.................................................. 65,503
Dividend payable........................................................................ 19,342
---------------
Total liabilities................................................................... 1,407,890
---------------
Net Assets.............................................................................. $57,793,532
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value...................................... $ 577,935
Paid-in capital in excess of par...................................................... 57,215,597
---------------
Net assets, August 31, 1993........................................................... $57,793,532
---------------
---------------
Net asset value, offering price and redemption price per share ($57,793,532 /
57,793,532 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized).................................................................. $1.00
</TABLE>
See Notes to Financial Statements.
B-211
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest........................... $1,356,621
----------
Expenses
Management fee, net of waiver of
$265,760......................... --
Distribution fee................... 66,440
Custodian's fees and expenses...... 65,000
Registration fee................... 28,000
Transfer agent's fees and
expenses......................... 27,000
Reports to shareholders............ 22,000
Amortization of organization
expenses......................... 12,651
Audit fee.......................... 10,000
Legal fees......................... 9,500
Trustees' fees..................... 3,375
Miscellaneous...................... 2,140
----------
Total expenses................... 246,106
Less: expense subsidy (Note 4)..... (40,352)
----------
Net expenses......................... 205,754
----------
Net investment income................ 1,150,867
Realized Gain on Investments
Net realized gain on investment
transactions......................... 371
----------
Net Increase in Net Assets
Resulting from Operations............ $1,151,238
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ------------------------------
in Net Assets 1993 1992
----------- -----------
<S> <C> <C>
Operations
Net investment income... $ 1,150,867 $ 1,088,315
Net realized gain (loss)
on investment
transactions.......... 371 (600)
------------- -------------
Net increase in net
assets resulting from
operations............ 1,151,238 1,087,715
------------- -------------
Dividends and
distributions to
shareholders (Note 1)... (1,151,238) (1,087,715)
------------- -------------
Fund share transactions
(at $1 per share)
Net proceeds from shares
subscribed............ 197,325,014 122,248,790
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 1,096,823 1,016,597
Cost of shares
reacquired............ (181,107,990) (93,690,060)
------------- -------------
Net increase in net
assets from Fund share
transactions.......... 17,313,847 29,575,327
------------- -------------
Total increase............ 17,313,847 29,575,327
Net Assets
Beginning of year......... 40,479,685 10,904,358
------------- -------------
End of year............... $ 57,793,532 $ 40,479,685
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-212
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Connecticut Money Market Series (the
``Series'') commenced investment operations on August 5, 1991. The Series is
non-diversified and seeks to provide the highest level of income that is exempt
from Connecticut State, local and federal income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities having a maturity of
thirteen months or less and whose ratings are within the two highest ratings
categories by a nationally recognized statistical rating organization, or if not
rated, are of comparable quality. The ability of the issuers of the securities
held by the Series to meet their obligations may be affected by economic
developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $52,600 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses except as set forth in Note 4.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. PMF
voluntarily agreed to waive its management fee until further notice. The amount
of fees waived for the year ended August 31, 1993 amounted to $265,760 ($.005
per share; .50% of average net assets).
PMF has agreed that, in any fiscal year, it will reimburse the Fund for each
of the series' expenses (including the fees of PMF but excluding interest,
taxes, brokerage commissions, distribution fees, litigation and indemnification
expenses and other extraordinary expenses) in excess of the most restrictive
expense limitation imposed by state securities commissions. The most restrictive
expense limitation is presently believed to be 2.5% of the Series' average daily
net assets up to $30 million, 2.0% of the next $70 million of average daily net
assets and 1.5% of the Series' average daily net assets in excess of
B-213
<PAGE>
$100 million. Such expense reimbursement, if any, will be estimated and accrued
daily and payable monthly. No reimbursement was required due to such limitation
for the year ended August 31, 1993.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$24,300 for the services of PMFS. As of August 31, 1993, approximately $2,300 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations also include certain out-of-pocket expenses paid to non-affiliates
Note 4. Expense PMF voluntarily agreed to
subsidize 50% of the operSubsidy
ating expenses of the Series (other than
management and distribution fees) through February 28, 1993. Effective March 1,
1993, PMF no longer subsidized the Series' operating expenses. For the year
ended August 31, 1993, PMF subsidized $40,352 ($.001 per share; .08% of average
net assets) of the Series' expenses. The Series is not required to reimburse PMF
for such expense subsidy.
B-214
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
August 5,
Year ended August 1991*
31, through
------------------- August 31,
1993 1992 1991
<S> <C> <C> <C>
------- ------- ----------
<CAPTION>
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C>
Net asset value, beginning of period........................................... $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains+...................................... .022 .034 .003
Dividends and distributions to shareholders.................................... (.022) (.034) (.003)
------- ------- ----------
Net asset value, end of period................................................. $ 1.00 $ 1.00 $ 1.00
------- ------- ----------
------- ------- ----------
TOTAL RETURN#:................................................................. 2.20% 3.42% .30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................................ $57,794 $40,480 $ 10,904
Average net assets (000)....................................................... $53,152 $33,964 $ 6,730
Ratios to average net assets+:
Expenses, including distribution fee......................................... .387% .125% .125%**
Expenses, excluding distribution fee......................................... .262% .00% .00%**
Net investment income........................................................ 2.17% 3.20% 4.42%**
<FN>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management fee waiver and expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total return for periods less than a full year
are not annualized.
</TABLE>
See Notes to Financial Statements.
B-215
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Connecticut Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Connecticut Money Market Series, including the
portfolio of investments, as of August 31, 1993, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
two years in the period then ended and for the period August 5, 1991
(commencement of investment operations) through August 31, 1991. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatment. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Connecticut Money Market Series, as of August 31, 1993, the results
of its operations, the changes in net assets and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-216
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
FLORIDA SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--92.4%
Alachua Cnty. Hlth.
Facs. Auth.
Rev., Santa Fe
Healthcare
Facs. Proj.,
Baa $ 1,750 7.60%, 11/15/13......... $ 1,942,098
Alachua Cnty. Ind. Dev.
Rev.,
HB Fuller Co. Proj.,
NR 3,000 7.75%, 11/1/16.......... 3,277,200
Brevard Cnty. Edl. Facs.
Auth.
Rev., Florida Inst. of
Techn.,
BBB+* 1,500 6.875%, 11/1/22......... 1,635,465
Wuesthoff Mem. Hosp.,
Aaa 1,000 6.625%, 4/1/13, Ser. A,
M.B.I.A............... 1,124,570
Broward Cnty. Edl. Facs.
Auth.
Rev., Nova Univ. Dorm.
Proj.,
BBB* 1,500 7.50%, 4/1/17, Ser. A... 1,682,850
Broward Cnty. Res.
Recovery Rev.,
Ltd. Partnership So.
Proj.,
A 2,105 7.95%, 12/1/08.......... 2,432,749
Broward Cnty., Wtr. &
Swr. Rev.,
Aaa 1,750 5.125%, 10/1/15,
A.M.B.A.C............. 1,703,660
Cape Coral Hlth. Facs.
Auth.,
Hosp. Rev., Cape Coral
Med. Ctr. Inc. Proj.,
Baa 2,000 7.50%, 11/15/21......... 2,257,940
Charlotte Cnty. Util.
Sys. Rev., F.G.I.C.,
Aaa 1,070 5.25%, 10/1/11.......... 1,071,830
Aaa 1,000 5.25%, 10/1/13.......... 997,480
City of Atlantis,
Wtr. & Swr. Rev.,
BBB* 1,750 6.50%, 9/1/22........... 1,836,975
City of Cocoa,
Wtr. & Swr. Rev.,
Aaa 1,100 5.125%, 10/1/13, Ser. B,
A.M.B.A.C............. 1,077,648
City of Deerfield Beach
Wtr. & Swr. Rev.,
Aaa $ 550 6.125%, 10/1/06,
F.G.I.C............... $ 609,422
City of Miami Beach
Hlth. Facs. Auth.
Hosp.,
Mt. Sinai Med. Ctr.,
Aaa 750 6.125%, 11/15/14,
C.G.I.C............... 805,643
Clay Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge.,
Aaa 375 7.45%, 9/1/23, Ser. A,
G.N.M.A............... 404,726
Clearwater Wtr. & Swr.
Rev.,
Aaa 1,000 5.00%, 12/1/03,
A.M.B.A.C............. 1,022,470
Coral Springs Impvt.
Dist.,
Wtr. & Swr. Rev.,
Aaa 1,000 6.00%, 6/1/10,
M.B.I.A............... 1,097,480
Dade Cnty. Hlth. Facs.
Auth.
Hosp. Rev., Baptist
Hosp.
of Miami Proj.,
Aaa 500 6.75%, 5/1/08, Ser. A,
M.B.I.A............... 573,265
No. Shore Med. Ctr.
Proj.,
Aaa 750 6.50%, 8/15/15,
A.M.B.A.C............. 839,453
Dade Cnty. Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.,
G.N.M.A.,
Aaa 1,025 7.75%, 9/1/22, Ser. C... 1,125,737
Aaa 360 7.25%, 9/1/23, Ser. B... 390,136
Dade Cnty. Ind. Dev.
Auth.,
Solid Waste Disp.
Rev., Florida Pwr. &
Lt. Co. Proj.,
A2 1,000 7.15%, 2/1/23........... 1,120,500
Dade Cnty. Pub. Facs.
Rev.,
Jackson Mem. Hosp.,
Aaa 750 5.25%, 6/1/23,
M.B.I.A............... 730,110
Dunedin Hosp. Rev.,
Mease Healthcare,
Aaa 2,500 5.375%, 11/15/13,
M.B.I.A............... 2,492,150
Duval Cnty. Hsg. Fin.
Auth. Rev.,
Sngl. Fam. Mtge.,
AAA* 890 8.375%, 12/1/14,
G.N.M.A............... 931,127
</TABLE>
B-217 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Escambia Cnty. Hlth.
Facs. Auth. Rev.,
Baptist Hosp. Inc.,
BBB* $ 1,830 8.70%, 10/1/14, Ser.
A..................... $ 2,180,829
Escambia Cnty. Hsg. Fin.
Auth.
Rev., Sngl. Fam.
Mtge.,
Aaa 845 7.40%, 10/1/23, Ser. A,
G.N.M.A............... 927,024
Florida Keys Aqueduct
Auth. Wtr. Rev.,
Aaa 1,400 5.25%, 9/1/13,
A.M.B.A.C............. 1,388,002
Florida St. Brd. of Ed.
Cap. Outlay,
Pub. Ed.,
Aa 500 7.25%, 6/1/23, Ser. A... 574,775
Florida St. Brd. of
Regents,
Univ. Impvt. Rev.
Cert.,
Aaa 2,390+ 7.70%, 7/1/04, B.I.G.... 2,807,485
Florida St. Broward
Cnty.,
Expwy. Auth.,
Aa 2,100@ 9.875%, 7/1/09.......... 3,150,147
Florida St. Dept. of
Trans.,
Ser. A,
Aaa 1,000+ 7.20%, 7/1/11,
A.M.B.A.C............. 1,192,810
Tpke. Auth. Rev.,
Aaa 3,200 5.00%, 7/1/19,
F.G.I.C............... 3,039,616
Florida St. Div. Bond
Fin. Dept.,
Gen. Svcs. Rev.,
Aaa 1,500 6.75%, 7/1/13,
A.M.B.A.C............. 1,695,975
Gen. Svcs. Rev., Dept.
of Natural Res.
Preservation,
Aaa 1,650 6.25%, 7/1/09, Ser. A,
M.B.I.A............... 1,803,879
Aaa 2,490 5.50%, 7/1/11, F.S.A.... 2,526,304
Florida St. Hillsborough
Cnty. Expwy.,
Aa 500 5.50%, 10/1/08.......... 510,335
Florida St. Mun. Pwr.
Agcy. Rev.,
St. Lucie Proj.,
Aaa 2,500 5.25%, 10/1/21,
F.G.I.C............... 2,454,800
Florida St., Right of
Way
Acquis. & Bridge,
Aa $ 1,500 5.50%, 7/1/23........... $ 1,504,725
Ft. Lauderdale,
Wtr. & Swr. Rev.,
Aa 1,500 5.60%, 9/1/07, Ser. B... 1,565,115
Hillsborough Cnty. Hosp.
Auth. Rev., Tampa Gen.
Hosp. Proj.,
Aaa 1,500 6.375%, 10/1/13,
F.S.A................. 1,658,865
Hollywood Wtr. & Swr.
Rev.,
Refunding Bonds,
Aaa 3,000 5.50%, 10/1/15,
F.G.I.C............... 3,023,550
Homestead Special
Insurance
Assmt. Rev.,
Aaa 1,750 5.25%, 3/1/03,
M.B.I.A............... 1,804,110
Indian River Cnty. Wtr.
& Swr. Rev.,
Aaa 2,000 5.50%, 9/1/11, Ser. A,
F.G.I.C............... 2,041,000
Jacksonville Elec. Auth.
Rev.,
Bulk Power Supply
Scherer,
Aa1 1,000 6.75%, 10/1/21.......... 1,120,180
St. Johns River Pwr.
Park,
Aa1 3,000 Zero Coupon, 10/1/10.... 1,201,230
St. Johns River,
Aa1 1,000 5.40%, 10/1/10, Ser.
8..................... 1,010,010
Jacksonville Gtd.
Entitlement Rev.,
Aaa 1,000 5.50%, 10/1/12,
A.M.B.A.C............. 1,014,860
Jacksonville Hlth. Facs.
Auth. Hosp. Rev.,
Aaa 1,500 6.00%, 5/1/22,
M.B.I.A............... 1,585,830
Baptist Med. Ctr. Proj.,
Aaa 450 7.30%, 6/1/19, Ser. A,
M.B.I.A............... 518,153
National Ben. Assoc.,
Baa1 1,825 7.00%, 12/1/22.......... 1,969,394
St. Lukes Hosp. Assoc.
Proj.,
AA+* 1,000 7.125%, 11/15/20........ 1,123,090
</TABLE>
B-218 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Jacksonville Wtr. & Swr.
Dev.
Rev., Suburban Utils.,
A2 $ 1,000 6.75%, 6/1/22........... $ 1,107,440
Kissimmee Util. Auth.
Elec. Sys. Rev.,
Aaa 2,500 5.375%, 10/1/12,
F.G.I.C............... 2,505,350
Lakeland Elec. & Wtr.
Rev.,
Aa 1,500 5.75%, 10/1/19.......... 1,515,210
Leon Cnty. Hsg. Fin.
Auth.
Rev., Sngl. Fam.
Mtge.,
Aaa 490 7.30%, 4/1/21, Ser. A,
G.N.M.A............... 531,483
Marion Cnty. Hosp. Dist.
Rev.,
Munroe Regl. Med.
Ctr.,
Aaa 500 6.25%, 10/1/12,
F.G.I.C............... 544,215
Miami Hlth. Facs. Auth.
Hosp. Rev., Mercy
Hosp.,
A 1,000 8.125%, 8/1/11.......... 1,142,810
Naples Hosp. Rev.,
Naples Cmnty. Hosp.,
Aaa 1,200 5.375%, 10/1/11,
M.B.I.A............... 1,202,568
Okaloosa Cnty. Cap.
Impvt. Rev.,
Aaa 450 Zero Coupon, 12/1/06,
M.B.I.A............... 227,345
Orange Cnty. Hlth Facs.,
Orlando,
Aaa 2,000 6.00%, 11/1/14,
M.B.I.A............... 2,123,600
Orange Cnty. Hsg. Fin.
Auth.,
Mtge. Rev.,
AAA* 420 7.375%, 9/1/24, Ser. A,
G.N.M.A............... 451,639
Orlando & Orange Cnty.
Expwy. Auth. Rev.,
Baa1 1,000+ 7.125%, 7/1/06.......... 1,109,280
Aaa 3,000 5.25%, 7/1/14,
A.M.B.A.C............. 2,969,760
Baa1 1,000+ 7.25%, 7/1/14........... 1,112,610
Aaa 2,000 5.50%, 7/1/18,
F.G.I.C............... 2,003,280
Orlando Utils. Comm.,
Wtr. & Elec. Rev.,
Aa 1,500 5.00%, 10/1/23, Ser.
D..................... 1,411,170
Palm Beach Cnty. Arpt.
Sys. Rev.,
Aaa $ 1,000 7.75%, 10/1/10,
M.B.I.A............... $ 1,207,030
Palm Beach Cnty. Hlth.
Facs Auth. Rev., JFK
Med. Ctr. Inc. Proj.,
Aaa 2,255 5.75%, 12/1/14,
F.S.A................. 2,316,674
Pinellas Cnty. Hlth.
Fac. Auth.,
Morton Plant Hosp.,
Aaa 1,500 5.50%, 11/15/11,
M.B.I.A............... 1,513,140
Puerto Rico, Gen.
Oblig.,
Aaa 3,000 8.882%, 7/1/20,
F.S.A................. 3,371,250
Pub. Impvt.,
Baa1 2,000 5.10%, 7/1/02........... 2,023,960
Baa1 2,000 5.40%, 7/1/07........... 2,038,940
Puerto Rico Hsg. Fin. Corp. Rev.,
Sngl. Fam. Mtge. Rev.,
Aaa 750 4.60%, 8/1/25........... 759,893
Puerto Rico Hwy. Auth.
Rev.,
Baa1 500+ 7.75%, 7/1/16, Ser. Q... 610,335
Puerto Rico Hwy. &
Trans. Auth., Hwy.
Rev.,
Baa1 500 5.25%, 7/1/21, Ser. X... 479,505
Puerto Rico Port Auth.
Rev.,
American Airlines,
Baa3 525 6.30%, 6/1/23, Ser. A... 541,658
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth.
Facs.,
Baa1 1,000+ 7.875%, 7/1/16, Ser.
H..................... 1,165,330
Puerto Rico Tel. Auth.
Rev.,
Aaa 2,250 7.878%, 1/16/15, Ser. I,
M.B.I.A............... 2,379,375
St. Lucie Cnty. Solid
Waste Disp. Rev., Pwr.
& Lt. Co. Proj.,
A2 1,000 6.70%, 5/1/27........... 1,094,960
St. Lucie Cnty. Util.
Sys. Rev.,
Aaa 2,035 5.375%, 10/1/11,
F.G.I.C............... 2,057,426
</TABLE>
B-219 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
St. of Florida, Gen.
Oblig.,
Jacksonville Trans.,
Aa $ 1,750 6.375%, 7/1/12.......... $ 1,919,435
St. Petersburg Hlth.
Facs. Auth. Rev.,
Allegheny Hlth. Prog.,
Aaa 1,000 7.00%, 12/1/15,
M.B.I.A............... 1,155,890
St. Petersburg Pub.
Impvt. Rev., M.B.I.A.,
Aaa 1,350 Zero Coupon, 2/1/05..... 754,623
Aaa 750 6.375%, 2/1/12.......... 822,383
Tallahassee Mun. Elec.
Rev.,
Aa 1,500 6.20%, 10/1/12.......... 1,623,750
Tampa Allegheny Hlth. Sys. Rev.,
St. Joseph Hosp.,
Aaa 2,535 6.70%, 12/1/07,
M.B.I.A............... 2,886,478
Tampa Gtd. Entitlement
Rev.,
Aaa 2,000 7.05%, 10/1/07,
A.M.B.A.C............. 2,322,780
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund,
BBB* 260 7.65%, 10/1/99.......... 293,920
Ref. Matching Loan
Notes,
NR 900 7.25%, 10/1/18, Ser.
A..................... 1,020,263
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
NR 1,465 7.75%, 10/1/06, Ser.
91.................... 1,691,357
Virgin Islands Wtr. &
Pwr. Auth.,
Wtr. Sys. Rev.,
NR 680 7.60%, 1/1/12, Ser. B... 766,251
Volusia Cnty. Edl. Fac.
Auth. Rev.,
AAA* 1,000 6.625%, 10/15/22........ 1,124,250
Volusia Cnty. Hlth.
Facs.
Auth. Rev.,
BBB+* 2,000 8.25%, 6/1/20........... 2,301,000
Volusia Cnty. Tourist Dev. Tax Rev.,
Aaa $ 500 5.25%, 12/1/13,
M.B.I.A............... $ 495,640
Winter Springs Impvt.
Rev.,
Aaa 1,310 5.25%, 10/1/12,
A.M.B.A.C............. 1,306,791
------------
Total long-term
investments
(cost $129,945,156)..... 140,576,824
------------
SHORT-TERM INVESTMENTS--4.1%
Broward Cnty. Hsg. Fin.
Auth.,
Welleby Apts., F.R.W.D.,
VMIG1 800 2.60%, 9/1/93, Ser.
84.................... 800,000
Dade Cnty. Hlth. Facs.
Auth. Rev.,
Miami Children's Hosp. Proj.,
2.85%, 9/1/93, Ser. 90,
F.R.D.D............... 700,000
VMIG1 700
Hillsborough Cnty.
Poll.,
Ctrl. Rev. Bds., Tampa
Elec. Co.,
2.50%, 9/1/93, Ser. 93,
F.R.D.D............... 700,000
VMIG1 700
Jacksonville Hlth. Facs.
Auth.
Rev., F.R.D.D.,
A1* 500 2.50%, 9/1/93, Ser.
90.................... 500,000
Pinellas Cnty. Hlth.
Facs.
Auth. Rev., F.R.D.D.,
Pooled Hosp. Loan Prog.,
VMIG1 3,485 2.50%, 9/1/93, Ser.
85.................... 3,485,000
------------
Total short-term
investments
(cost $6,185,000)....... 6,185,000
------------
Total Investments--96.5%
(cost $136,130,156; Note
5).................... 146,761,824
Other assets in excess
of
liabilities--3.5%..... 5,269,530
------------
Net Assets--100%........ $152,031,354
------------
------------
</TABLE>
B-220 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
<S> <C>
<FN>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C--Capital Guaranteed Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note.#
F.R.W.D.--Floating Rate (Weekly) Demand Note.#
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
@ Pledged as initial margin on financial futures contracts.
* Standard & Poor's rating.
N.R.--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-221 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
---------------
<S> <C>
Investments, at value (cost $136,130,156)............................................... $ 146,761,824
Cash.................................................................................... 55,797
Receivable for investments sold......................................................... 7,914,908
Accrued interest receivable............................................................. 2,457,997
Receivable for Fund shares sold......................................................... 1,513,111
Due from Manager........................................................................ 57,689
Due from broker-variation margin........................................................ 9,375
Deferred expenses and other assets...................................................... 8,871
---------------
Total assets.......................................................................... 158,779,572
---------------
Liabilities
Payable for investments purchased....................................................... 6,097,354
Payable for Fund shares reacquired...................................................... 447,873
Dividends payable....................................................................... 136,925
Accrued expenses........................................................................ 65,299
Due to Distributors..................................................................... 767
---------------
Total liabilities..................................................................... 6,748,218
---------------
Net Assets.............................................................................. $ 152,031,354
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 139,815
Paid-in capital in excess of par...................................................... 139,019,645
---------------
139,159,460
Accumulated net realized gain......................................................... 2,309,539
Net unrealized appreciation........................................................... 10,562,355
---------------
Net assets, August 31, 1993........................................................... $ 152,031,354
---------------
---------------
Class A:
Net asset value and redemption price per share
($148,899,842 / 13,693,491 shares of beneficial interest issued and outstanding).... $10.87
Maximum sales charge (4.5% of offering price)......................................... .51
---------------
Maximum offering price to public...................................................... $11.38
---------------
---------------
Class D:
Net asset value, offering price and redemption price per share
($3,131,512 / 287,994 shares of beneficial interest issued and outstanding)......... $10.87
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-222
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................ $ 7,602,907
-----------
Expenses
Management fee, net waiver of
$371,767............................ 247,845
Distribution fee--Class A, net
waiver of $123,820.................. --
Distribution fee--Class D........... 767
Custodian's fees and expenses....... 109,000
Reports to shareholders............. 45,000
Transfer agent's fees and
expenses............................ 43,000
Registration fees................... 27,000
Audit fee........................... 10,500
Legal fees.......................... 9,500
Amortization of deferred
organization expense................ 6,400
Trustees' fees...................... 3,375
Miscellaneous....................... 7,180
-----------
Total expenses.................... 509,567
Less: expense subsidy (Note 4)........ (260,955)
-----------
Net expenses...................... 248,612
-----------
Net investment income................. 7,354,295
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions............. 2,883,609
Financial futures transactions...... (311,700)
-----------
2,571,909
-----------
Net change in unrealized
appreciation/depreciation on:
Investments......................... 6,464,601
Financial futures contracts......... (44,625)
-----------
6,419,976
-----------
Net gain on investments............... 8,991,885
-----------
Net Increase in Net Assets Resulting
from Operations....................... $16,346,180
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) -----------------------------
in Net Assets 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income.... $ 7,354,295 $ 5,315,967
Net realized gain on
investment
transactions........... 2,571,909 1,121,945
Net change in unrealized
appreciation of
investments............ 6,419,976 3,107,314
------------- -------------
Net increase in net
assets resulting from
operations............. 16,346,180 9,545,226
------------- -------------
Dividends and distributions
(Note 1):
Dividends to shareholders
from investment income
Class A.................. (7,348,931) (5,315,967)
Class D.................. (5,364) --
------------- -------------
(7,354,295) (5,315,967)
------------- -------------
Distributions to
shareholders from net
realized gains
Class A.................. (1,396,748) --
Class D.................. -- --
------------- -------------
(1,396,748) --
------------- -------------
Fund share transactions
(Note 6)
Proceeds from shares
subscribed............. 52,329,243 48,522,577
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 3,739,870 2,133,064
Cost of shares
reacquired............... (15,967,441) (14,479,502)
------------- -------------
Net increase in net
assets from Fund share
transactions........... 40,101,672 36,176,139
------------- -------------
Total increase............. 47,696,809 40,405,398
Net Assets
Beginning of year.......... 104,334,545 63,929,147
------------- -------------
End of year................ $ 152,031,354 $ 104,334,545
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-223
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Florida Series (the ``Series'') commenced
investment operations on December 28, 1990. The Series is non-diversified and
seeks to achieve its investment objective of providing the maximum amount of
income that is exempt from federal income taxes with the minimum of risk, and
investing in securities which will enable its shares to be exempt from the
Florida intangibles tax by investing in ``investment grade'' tax-exempt
securities whose ratings are within the four highest ratings categories by a
nationally recognized statistical rating organization or, if not rated, are of
comparable quality. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic developments in a
specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason and because substantially all of the Series' gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of divi-
B-224
<PAGE>
dends is made monthly. Distributions of net capital gains, if any, are made
annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Deferred Organization Expenses: The Series incurred approximately $32,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending December, 1995.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the year ended August 31, 1993, PMF waived 60% of its management fee, which
amounted to $371,767 ($.03 per share; .30% of average net assets). The Series is
not required to reimburse PMF for such waiver.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as distributor of the Class A shares
of the Fund, and with Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class D shares of the Fund, (collectively, the
``Distributors'').
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. PMFD has voluntarily agreed to waive its
distribution fee, currently limited to .10 of 1% of average net assets, until
further notice. The amount of distribution fees waived by PMFD was $123,820
($.01 per share; .10% of average net assets) for the year ended August 31, 1993.
Pursuant to the Class D Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class D shares at an annual rate
of up to .75 of 1% of the average daily net assets of the Class D shares.
The Class D distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, the cost of printing and
mailing prospectuses to potential investors and of advertising incurred in
connection with the distribution of shares.
PMFD recovers the distribution expenses and service fees incurred through the
receipt of reimbursement payments from the Series under the plan and the receipt
of initial sales charges (Class A only). PSI is compensated for its distribution
expenses and service fees incurred through receipt of the distribution fee.
PMFD has advised the Series that it has received approximately $1,760,000 in
front-end sales charges resulting from sales of the Series' Class A shares
during the year ended August 31, 1993. From these fees, PMFD paid such sales
charges to dealers (PSI and Prusec) which in turn paid commissions to
salespersons.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$38,000 for the services of PMFS. As of August 31, 1993, approximately $3,500 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Expense PMF has voluntarily agreed
Subsidy to subsidize all operating
expenses (except management and distribution fees)
of the Class A and Class D shares of the Series until further notice. For the
year ended August 31, 1993, PMF subsidized $260,955 ($.02 per share; .21% of
average net assets) of the Series' expenses. The Series is not required to
reimburse PMF for such subsidy.
Note 5. Portfolio Purchases and sales of port
Securities folio securities, excluding
short-term investments, for
B-225
<PAGE>
the year ended August 31, 1993 were $113,164,852 and $80,709,019, respectively.
The cost basis of investments for federal income tax purposes as of August
31, 1993 was $136,131,406 and, accordingly, net and gross unrealized
appreciation of investments was $10,630,418.
At August 31, 1993 the Series sold 60 financial futures contracts on the
Municipal Bond Index expiring in September 1993. The value at disposition of
such contracts was $6,180,062. The value of such contracts on August 31, 1993
was $6,249,375, thereby resulting in an unrealized loss of $69,313. The Series
has pledged $2,100,000 principal amount of Florida State Broward County
Expressway Authority bonds as initial margin on such contracts.
Note 6. Capital The Series offers both Class
A and Class D shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class D shares are sold with a deferred
sales load of 1% during the first year and 0% thereafter. Offering of Class D
shares commenced on July 26, 1993. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value per share. Transactions in shares of beneficial interest for
the years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 4,710,788 $ 49,235,380
Shares issued in
reinvestment of dividends
and distributions......... 358,775 3,737,322
Shares reacquired........... (1,530,543) (15,961,401)
---------- ------------
Net increase in shares
outstanding............... 3,539,020 $ 37,011,301
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 4,836,299 $ 48,522,577
Shares issued in
reinvestment of
dividends................. 212,865 2,133,064
Shares reacquired........... (1,443,463) (14,479,503)
---------- ------------
Net increase in shares
outstanding............... 3,605,701 $ 36,176,138
---------- ------------
---------- ------------
Class D
- ----------------------------
July 26, 1993* through
August 31, 1993:
Shares sold................. 288,326 $ 3,093,863
Shares issued in
reinvestment of
dividends................. 235 2,548
Shares reacquired........... (567) (6,040)
---------- ------------
Net increase in shares
outstanding............... 287,994 $ 3,090,371
---------- ------------
---------- ------------
<FN>
- ------------------
* Commencement of offering of Class D shares.
</TABLE>
B-226
<PAGE>
PUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class D
--------------------------------------------- -----------
December 28, July 26,
1990* 1993++
Years Ended August 31, Through Through
-------------------------- August 31, August 31,
1993 1992 1991 1993
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......................... $ 10.27 $ 9.76 $ 9.55 $ 10.58
---------- ---------- ------------- -----------
Income from investment operations
Net investment income+........................................ .57 .65 .44 .03
Net realized and unrealized gain on investment
transactions................................................ .73 .51 .21 .29
---------- ---------- ------------- -----------
Total from investment operations............................ 1.30 1.16 .65 .32
---------- ---------- ------------- -----------
Less distributions
Dividends from net investment income.......................... (.57) (.65) (.44) (.03)
Distributions from net realized gains......................... (.13) -- -- --
---------- ---------- ------------- -----------
Total distributions......................................... (.70) (.65) (.44) (.03)
---------- ---------- ------------- -----------
Net asset value, end of period................................ $ 10.87 $ 10.27 $ 9.76 $ 10.87
---------- ---------- ------------- -----------
---------- ---------- ------------- -----------
TOTAL RETURN#:................................................ 13.78% 12.26% 6.90% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................... $ 148,900 $ 104,335 $63,929 $ 3,132
Average net assets (000)...................................... $ 123,820 $ 82,893 $41,528 $ 1,038
Ratios to average net assets+:
Expenses, including distribution fees....................... .20% 0.09% 0 .95%**
Expenses, excluding distribution fees....................... .20% 0.09% 0 .20%**
Net investment income....................................... 5.94% 6.41% 6.68%** 5.19%**
Portfolio turnover............................................ 68% 56% 39% 68%
<FN>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of expense subsidy and fee waiver.
++ Commencement of offering of Class D shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-227
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Florida Series
We have audited the statement of assets and liabilities of Prudential
Municipal Series Fund, Florida Series, including the portfolio of investments,
as of August 31, 1993, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the two years in the period then
ended and for the period December 28, 1990 (commencement of investment
operations) through August 31, 1991. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Florida Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-228
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
GEORGIA SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--98.5%
Atlanta Urban Res. Fin.
Auth.,
Dorm. Fac. Rev.,
Atlanta, Gen. Oblig.,
Aa $ 585 7.10%, 12/1/10............. $ 666,905
Atlanta, Sch. Rev.,
Aa 600 5.60%, 12/1/18............. 619,410
Clark Atlanta Univ. Proj.,
NR 955+ 9.25%, 6/1/10.............. 1,240,784
Clark Cnty. Sch. Dist.,
Aaa 425 5.50%, 7/1/08, F.G.I.C..... 443,275
Clayton Cnty. Solid Waste
Mgmt.
Auth. Rev.,
Aa 500+ 6.50%, 2/1/12, Ser. A...... 540,035
Clayton Cnty. Wtr. Auth.,
Wtr. & Sewage Rev.,
A1 500 6.65%, 5/1/12.............. 580,065
Cobb Cnty. Kennestone
Hosp.,
Auth. Rev.,
Aaa 750 5.00%, 4/1/24, Ser. A,
M.B.I.A.................. 707,430
Cobb-Marietta Coliseum &
Exhibit Hall Auth. Rev.,
Aaa 500 5.50%, 10/1/18, M.B.I.A.... 515,165
Columbus Hosp. Auth. Rev.,
Antic.,
Cert., St. Francis Hosp.,
Aaa 500 8.25%, 1/1/07, B.I.G....... 577,480
DeKalb Cnty. Hlth. Facs.,
Gen. Oblig.,
Aa1 750 5.50%, 1/1/20.............. 761,093
DeKalb Private Hosp. Auth.
Rev.,
Wesley Svcs. Inc. Proj.,
Aa3 500 8.25%, 9/1/15.............. 527,210
Douglasville-Douglas Cnty.,
Wtr. & Swr. Auth. Rev.,
Aaa 750 5.625%, 6/1/15,
A.M.B.A.C................ 786,143
Downtown Savannah Auth.
Rev.,
Chatham Co. Proj.,
Aa $ 250 5.00%, 1/1/11.............. $ 240,448
Forsyth Cnty. Sch. Dist.
Dev. Rev.,
A1 500 6.75%, 7/1/16, Ser. A...... 588,655
Fulco Hosp. Auth. Rev.,
Antic. Cert.,
Baptist Hlth.,
A 750 6.375%, 9/1/22, Ser. B..... 780,068
Shepherd Spinal Ctr. Proj.,
Aa3 750 7.75%, 10/1/08, Ser. A..... 835,350
Fulton Cnty. Bldg. Auth.
Rev.,
Human Res. & Gov't. Facs.
Proj.,
Aa 250 7.00%, 1/1/10.............. 284,333
Judicial Ctr. Proj.,
Aa 1,625 Zero Coupon, 1/1/11........ 628,565
Fulton Cnty. Sch. Dist.
Rev.,
Lindbrook Square Fndtn.,
Aa 750@ 6.375%, 5/1/17............. 856,830
Fulton-DeKalb Hosp. Auth.
Rev.,
Grady Hosp.,
Aaa 500 5.50%, 1/1/12, M.B.I.A..... 502,985
Georgia Mun. Elec. Auth.
Pwr.
Rev. Ref.,
A1 250 5.30%, 1/1/07, Ser. Z...... 253,325
A1 250 6.00%, 1/1/14, Ser. A...... 255,223
A1 475 6.25%, 1/1/17, Ser. B...... 528,153
Georgia St. Res. Fin.
Auth.,
Sngl. Fam. Insured Mtge.,
Aa 285 10.00%, 12/1/14, Ser.
83A...................... 297,790
Green Cnty. Dev. Auth.,
Ind. Park Rev.,
NR 720 6.875%, 2/1/04............. 783,950
Guam Power Auth. Rev.,
BBB* 250 6.30%, 10/1/22, Ser. A..... 264,715
Henry Cnty. Sch. Dist. Dev.
Rev.,
A 750 6.45%, 8/1/11, Ser. A...... 848,003
</TABLE>
B-229 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Marietta Dev. Auth. Rev.,
Life Coll. Inc. Proj.,
AAA* $ 500 7.20%, 12/1/09, C.G.I.C.... $ 575,325
Monroe Cnty. Dev. Auth.,
Poll. Ctrl. Rev.,
Gulf Pwr. Co. Proj.,
A2 500 10.50%, 12/1/14............ 554,390
Puerto Rico, Gen. Oblig.,
Aaa 450 8.882%, 7/1/20, F.S.A...... 505,688
Hwy. & Trans. Auth. Rev.,
Baa1 610 5.50%, 7/1/15.............. 603,064
Pub. Impvt. Ref.,
Baa1 750 5.40%, 7/1/07.............. 764,603
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
G.N.M.A.,
Aaa 745 7.65%, 10/15/22, Ser.
1-B...................... 813,980
Savannah Hosp. Auth. Rev.,
Candler Hosp.,
Baa 500 7.00%, 1/1/23.............. 528,820
Toombs Cnty. Hosp.,
Dr. John Meadows Mem.
Hosp.,
NR 500 7.00%, 12/1/17............. 530,315
Virgin Islands Pub. Fin.
Auth. Rev.,
Gen. Oblig.,
NR 200 7.25%, 10/1/18, Ser. A..... 226,725
Virgin Islands Wtr. & Pwr.
Auth.,
Elec. Sys. Rev.,
NR $ 200 7.60%, 1/1/12, Ser. B...... $ 225,368
Wtr. Sys. Rev.,
NR 300 8.50%, 1/1/10, Ser. A...... 344,741
-----------
Total Investments--98.5%
(cost $19,519,147; Note
4)....................... 21,586,407
Other assets in excess of
liabilities--1.5%........ 331,343
-----------
Net Assets--100%........... $21,917,750
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
* Standard & Poor's Rating.
@ Pledged as initial margin on futures contracts.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
</TABLE>
See Notes to Financial Statements.
B-230
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
------------------
<S> <C>
Investments, at value (cost $19,519,147)................................................ $ 21,586,407
Cash.................................................................................... 251,797
Receivable for investments sold......................................................... 522,419
Accrued interest receivable............................................................. 341,658
Receivable for Fund shares sold......................................................... 172,794
Due from broker-variation margin........................................................ 1,562
Deferred expenses and other assets...................................................... 724
------------------
Total assets........................................................................ 22,877,361
------------------
Liabilities
Payable for investments purchased....................................................... 855,250
Accrued expenses and other liabilities.................................................. 71,655
Dividends payable....................................................................... 14,933
Due to manager.......................................................................... 9,051
Due to distributors..................................................................... 8,722
------------------
Total liabilities................................................................... 959,611
------------------
Net Assets.............................................................................. $ 21,917,750
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 18,088
Paid-in capital in excess of par...................................................... 19,595,384
------------------
19,613,472
Accumulated net realized gain......................................................... 248,580
Net unrealized appreciation........................................................... 2,055,698
------------------
Net assets, August 31, 1993........................................................... $ 21,917,750
------------------
------------------
Class A:
Net asset value and redemption price per share ($1,106,581 / 91,310 shares of
beneficial
interest issued and outstanding).................................................... $12.12
Maximum sales charge (4.5% of offering price)......................................... .57
------------------
Maximum offering price to public...................................................... $12.69
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share ($20,811,169 /
1,717,534 shares of beneficial
interest issued and outstanding).................................................... $12.12
------------------
------------------
</TABLE>
See Notes to Financial Statements.
B-231
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest........................... $1,240,310
----------
Expenses
Management fee..................... 94,559
Distribution fee--Class A.......... 475
Distribution fee--Class B.......... 92,185
Custodian's fees and expenses...... 61,700
Transfer agent's fees and
expenses........................... 17,500
Audit fee.......................... 10,500
Reports to shareholders............ 10,000
Legal fees......................... 9,500
Registration fees.................. 8,500
Trustees' fees..................... 3,375
Miscellaneous...................... 5,653
----------
Total expenses................... 313,947
----------
Net investment income................ 926,363
----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ 338,939
Financial futures transactions..... (26,737)
----------
312,202
----------
Net change in unrealized
appreciation/depreciation on:
Investments........................ 1,082,924
Financial futures contracts........ (11,562)
----------
1,071,362
----------
Net gain on investments.............. 1,383,564
----------
Net Increase in Net Assets
Resulting from Operations............ $2,309,927
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) --------------------------
in Net Assets 1993 1992
----------- -----------
<S> <C> <C>
Operations
Net investment income..... $ 926,363 $ 928,729
Net realized gain on
investment
transactions............ 312,202 747,426
Net change in unrealized
appreciation on
investments............. 1,071,362 75,763
----------- -----------
Net increase in net assets
resulting from
operations.............. 2,309,927 1,751,918
----------- -----------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................. (24,841) (8,841)
Class B................. (901,522) (919,888)
----------- -----------
(926,363) (928,729)
----------- -----------
Distributions to
shareholders from net
realized gain on
investment transactions
Class A................. (8,466) (3,471)
Class B................. (631,421) (350,946)
----------- -----------
(639,887) (354,417)
----------- -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed................ 4,700,499 1,902,631
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 1,006,072 792,018
Cost of shares
reacquired................ (2,411,522) (3,108,069)
----------- -----------
Net increase (decrease) in
net assets
from Fund share
transactions............ 3,295,049 (413,420)
----------- -----------
Total increase.............. 4,038,726 55,352
Net Assets
Beginning of year........... 17,879,024 17,823,672
----------- -----------
End of year................. $21,917,750 $17,879,024
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-232
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Georgia Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
B-233
<PAGE>
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. As a result of this statement, the Fund
changed the classification of distributions to shareholders to better disclose
the differences between financial statement amounts and distributions determined
in accordance with income tax regulations. The effect caused by adopting this
statement was to decrease paid-in capital and increase accumulated net realized
gains on investments by $5,177 compared to amounts previously reported through
August 31, 1992. Net investment income, net realized gains, and net assets were
not affected by this change.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended August 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $25,400 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the year ended August
31, 1993, it received approximately $4,000 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Series that at August 31, 1993, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Series or recovered through
contingent deferred sales
B-234
<PAGE>
charges approximated $841,600. This amount may be recovered through future
payments under the Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$12,700 for the services of PMFS. As of August 31, 1993, approximately $1,100 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993 were $10,567,121 and $7,621,591, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1993 was substantially the same as the basis for financial reporting purposes
and, accordingly, net and gross unrealized appreciation of investments,
including short-term investments, for federal income tax purposes is $2,067,260
(gross unrealized appreciation--$2,072,977, gross unrealized
depreciation--$5,717).
At August 31, 1993, the Fund sold 10 financial futures contracts on the
Municipal Bond Index expiring in September, 1993. The value at disposition of
such contracts was $1,030,000. The value of such contracts on August 31, 1993
was $1,041,562, thereby resulting in an unrealized loss of $11,562. The Series
has pledged $750,000 principal amount of Fulton County School District Revenue
Bonds as initial margin on such contracts.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------- -------- -----------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold.................... 76,007 $ 894,503
Shares issued in reinvestment
of
dividends and
distributions................ 1,747 20,330
Shares reacquired.............. (1,557) (18,441)
-------- -----------
Net increase in shares
outstanding.................. 76,197 $ 896,392
-------- -----------
-------- -----------
Year ended August 31, 1992:
Shares sold.................... 7,689 $ 88,299
Shares issued in reinvestment
of
dividends and
distributions................ 853 9,751
Shares reacquired.............. (2,387) (27,203)
-------- -----------
Net increase in shares
outstanding.................. 6,155 $ 70,847
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B
- -------------------------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold.................... 323,985 $ 3,805,996
Shares issued in reinvestment
of
dividends and
distributions................ 85,416 985,742
Shares reacquired.............. (206,341) (2,393,081)
-------- -----------
Net increase in shares
outstanding.................. 203,060 $ 2,398,657
-------- -----------
-------- -----------
Year ended August 31, 1992:
Shares sold.................... 158,410 $ 1,814,332
Shares issued in reinvestment
of
dividends and
distributions................ 68,426 782,267
Shares reacquired.............. (268,604) (3,080,866)
-------- -----------
Net decrease in shares
outstanding.................. (41,768) $ (484,267)
-------- -----------
-------- -----------
</TABLE>
B-235
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
----------------------------------------- Class B
January 22, ---------------------------------------------------
1990++
Year Ended August 31, through Year Ended August 31,
-------------------------- August 31, ---------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
------ ------ ------ ----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $11.69 $11.39 $11.05 $ 11.26 $ 11.69 $ 11.39 $ 11.05 $ 11.23 $ 10.97
------ ------ ------ ----------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income......... .62 .65+ .64 .41 .57 .61+ .60 .65 .68
Net realized and unrealized
gain (loss)
on investment
transactions................ .85 .54 .43 (.21) .85 .54 .43 (.18) .26
------ ------ ------ ----------- ------- ------- ------- ------- -------
Total from investment
operations................ 1.47 1.19 1.07 .20 1.42 1.15 1.03 .47 .94
------ ------ ------ ----------- ------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income...................... (.62) (.65) (.64) (.41) (.57) (.61) (.60) (.65) (.68)
Distributions from net
realized gains.............. (.42) (.24) (.09) -- (.42) (.24) (.09) -- --
------ ------ ------ ----------- ------- ------- ------- ------- -------
Total distributions......... (1.04) (.89) (.73) (.41) (.99) (.85) (.69) (.65) (.68)
------ ------ ------ ----------- ------- ------- ------- ------- -------
Net asset value, end of
period...................... $12.12 $11.69 $11.39 $ 11.05 $ 12.12 $ 11.69 $ 11.39 $ 11.05 $ 11.23
------ ------ ------ ----------- ------- ------- ------- ------- -------
------ ------ ------ ----------- ------- ------- ------- ------- -------
TOTAL RETURN#:................ 13.28% 10.84% 10.03% 1.71% 12.83% 10.40% 9.57% 4.18% 8.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $1,107 $ 177 $ 102 $ 83 $20,811 $17,702 $17,722 $20,310 $24,124
Average net assets (000)...... $ 475 $ 155 $ 98 $ 21 $18,437 $17,436 $19,008 $22,614 $25,292
Ratios to average net assets:
Expenses, including
distribution fees......... 1.27% 1.24%+ 1.70% 1.46%* 1.67% 1.64%+ 2.08% 1.67% 1.58%
Expenses, excluding
distribution fees......... 1.17% 1.14%+ 1.60% 1.36%* 1.17% 1.14%+ 1.58% 1.22% 1.20%
Net investment income....... 5.29% 5.68%+ 5.67% 5.92%* 4.89% 5.28%+ 5.36% 5.85% 6.02%
Portfolio turnover............ 41% 58% 33% 49% 41% 58% 33% 49% 83%
<FN>
- ---------------
* Annualized.
+ Net of expense subsidy.
++ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-236
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Georgia Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Georgia Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Georgia Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-237
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MARYLAND SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--95.5%
Anne Arundel Cnty.,
Cons. Gen. Impvt.,
Aa1 $ 1,000 6.00%, 7/15/11........... $ 1,064,870
Baltimore Cert. of Part.,
M.B.I.A.,
Aaa 1,000 5.25%, 4/1/16............ 992,100
Pension Funding,
Aaa 1,000 7.25%, 4/1/16, Ser. A.... 1,178,850
Baltimore City Hsg. Corp.
Rev.,
Multifamily Hsg. Mtge.
Rev., Ser. A,
AAA* 965 7.25%, 7/1/23,
F.N.M.A................ 1,028,980
Baltimore Econ. Dev.
Lease Rev., Armistead
Partnership,
BBB+* 1,000 7.00%, 8/1/11............ 1,071,860
Baltimore Gen. Oblig.,
Aaa 1,000 7.05%, 10/15/07,
Ser. B, M.B.I.A........ 1,204,660
A1 1,000 7.15%, 10/15/08, Ser.
B...................... 1,209,440
Aaa 1,000 Zero Coupon, 10/15/10,
F.G.I.C................ 399,580
Baltimore Util. Pub.
Impvt.,
Aaa 500 7.00%, 10/15/09,
Ser. A, M.B.I.A........ 606,005
Charles Cnty., Gen.
Oblig.,
A1 1,580 6.375%, 12/1/03.......... 1,747,196
Howard Cnty., Met. Dist.,
Aa1 2,115 Zero Coupon, 8/15/09,
Ser. B................. 902,407
Kent Cnty., Coll. Rev.
Proj. &
Ref., Washington Coll.
Proj.,
Baa1 1,500 7.70%, 7/1/18............ 1,739,130
Maryland St. Hlth. &
Higher Edl.
Facs. Auth. Rev.,
Anne Arundel Med. Ctr.,
Aaa 1,000 5.00%, 7/1/23,
A.M.B.A.C.............. 948,040
Baltimore Cnty., Gen.
Hosp.,
Aaa 750 7.75%, 7/1/13,
A.M.B.A.C.............. 880,155
Maryland St. Hlth. &
Higher Edl.
Facs. Auth. Rev.,
Broadmead Proj.,
NR $ 500 7.625%, 7/1/10........... $ 546,255
Church Hosp.,
A 500 8.00%, 7/1/13............ 573,615
Franklin Square Hosp.,
Aaa 1,000 7.50%, 7/1/19,
M.B.I.A................ 1,166,060
Good Samaritan Hosp.,
A 1,350 5.75%, 7/1/19............ 1,375,407
Hartford Mem. Hosp. &
Fallston,
Baa1 750 8.50%, 7/1/14............ 842,363
Howard Cnty. Gen. Hosp.,
Baa1 1,500 7.00%, 7/1/17............ 1,592,460
Johns Hopkins Univ.,
Aa1 900 7.50%, 7/1/20............ 1,033,515
Kaiser Permanente Med.
Prog.,
AA* 525 9.00%, 7/1/05............ 578,886
AA* 950 9.125%, 7/1/15........... 1,048,154
Montgomery Gen. Hosp.,
Baa1 1,500 5.00%, 7/1/23............ 1,411,425
No. Arundel Hosp.,
Aaa 1,250 7.875%, 7/1/21, B.I.G.... 1,479,063
Roland Park Proj.,
NR 1,000 7.75%, 7/1/12............ 1,111,130
Sinai Hosp. of Baltimore,
Aaa 1,000 5.25%, 7/1/19,
A.M.B.A.C.............. 982,570
Aaa 600 5.25%, 7/1/23,
A.M.B.A.C.............. 591,054
Maryland St. Hsg. &
Cmnty.
Dev. Admin.,
Sngl. Fam. Mtge. Rev.
Prog.,
Aa 1,500 7.125%, 4/1/14, Sixth
Ser.................... 1,632,255
Aa 925@ 7.70%, 4/1/15, Fifth
Ser.................... 1,022,051
Aa 750 8.00%, 4/1/18, Third
Ser.................... 815,145
</TABLE>
B-238 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Maryland St. Ind. Dev.
Fin.
Auth. Rev., Amer. Ctr.
For Physics,
BBB* $ 1,500 6.625%, 1/1/17........... $ 1,559,850
Maryland St. Trans. Facs.
Auth. Rev., Trans.
Projs.,
Aaa 1,500 6.80%, 7/1/16............ 1,773,540
Maryland Wtr. Quality
Fin.
Admin., Revolving Loan
Fund Rev.,
A1 1,000 7.25%, 9/1/12, Ser. B.... 1,159,850
Aa 500 5.40%, 9/1/13............ 502,685
Montgomery Cnty. Hsg.
Opportunities Comn.,
Multifamily Mtge. Rev.,
A 1,000 7.00%, 7/1/23............ 1,065,500
Sngl. Fam. Mtge. Rev.,
Aa 1,500 7.625%, 7/1/17, Ser. A... 1,615,290
Montgomery Cnty., Cons.
Pub. Impvt.,
Aaa 450 9.75%, 6/1/01............ 612,275
Montgomery Cnty., Solid
Waste Sys. Rev.,
Aaa 1,750 5.875%, 6/1/13,
A.M.B.A.C.............. 1,835,435
Northeast Waste Disp.
Auth.,
Baltimore City Sludge
Proj.,
NR 1,000 7.25%, 7/1/07............ 1,003,370
Montgomery Cnty.,
A 2,200 6.30%, 7/1/16............ 2,310,308
Prince Georges Cnty. Hsg.
Auth., Mtge. Rev.,
Gardens Apt. Proj.,
AAA* 1,000 7.70%, 4/20/21,
G.N.M.A................ 1,093,820
Prince Georges Cnty.,
Cons. Pub. Impvt.,
A 750 5.00%, 1/15/09........... 733,433
Prince Georges Cnty.,
Stormwater Mgmt.,
A1 $ 1,140 6.50%, 3/15/03........... $ 1,282,261
Prince Georges Cnty.,
Hosp. Rev., Dimensions
Hlth. Corp.,
Baa1 500 7.25%, 7/1/17............ 551,875
Puerto Rico Comnwlth.
Aqueduct &
Swr. Auth. Rev.,
Aaa 225 10.25%, 7/1/09........... 324,628
Aaa 100 10.125%, 7/1/99.......... 123,373
Puerto Rico Gen. Oblig.,
Aaa 1,000 8.88%, 7/1/20, F.S.A..... 1,123,750
Puerto Rico Hwy. & Trans.
Auth., Hwy. Rev.,
Baa1 1,500 5.25%, 7/1/21, Ser. X.... 1,438,515
Puerto Rico Tel. Auth.
Rev.,
7.88%, 1/16/15,
Aaa 1,000 Ser. I, M.B.I.A.......... 1,057,500
Upper Potomac River
Comn.,
Poll. Ctrl. Rev.,
Westvaco Corp. Proj.,
A1 500 9.125%, 8/1/15........... 565,910
Virgin Islands Pub. Fin. Auth. Rev.,
Ref. Matching Loan Notes,
NR 600 7.25%, 10/1/18, Ser. A... 680,177
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 600 8.50%, 1/1/10, Ser. A.... 689,484
Wtr. Sys. Rev.,
NR 400 7.20%, 1/1/02, Ser. B.... 442,951
Washington Suburban San.
Dist., Sewage Disp.,
Aa 1,500 5.375%, 6/1/12........... 1,514,834
-----------
Total long-term
investments
(cost $52,368,887)..... 57,835,295
-----------
</TABLE>
See Notes to Financial Statements.
B-239
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--1.5%
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 $ 900 2.15%, 9/1/93, Ser. 85
(cost $900,000).......... $ 900,000
-----------
Total Investments--97.0%
(cost $53,268,887; Note
4)..................... 58,735,295
Other assets in excess of
liabilities--3.0%...... 1,793,039
-----------
Net Assets--100%......... $60,528,334
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.N.M.A.--Federal National Mortgage Association.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's Rating.
@ Pledged as initial margin on financial futures contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
See Notes to Financial Statements.
B-240
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
-----------
<S> <C>
Investments, at value (cost $53,268,887)................................................... $58,735,295
Cash....................................................................................... 37,820
Accrued interest receivable................................................................ 970,293
Receivable for investments sold............................................................ 841,500
Receivable for Fund shares sold............................................................ 145,730
Due from broker-variation margin........................................................... 3,906
Other assets............................................................................... 1,610
-----------
Total assets............................................................................. 60,736,154
-----------
Liabilities
Accrued expenses........................................................................... 77,581
Dividends payable.......................................................................... 41,680
Payable for Fund shares reacquired......................................................... 38,793
Due to Manager............................................................................. 25,372
Due to Distributors........................................................................ 24,394
-----------
Total liabilities........................................................................ 207,820
-----------
Net Assets................................................................................. $60,528,334
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 51,947
Paid-in capital in excess of par......................................................... 54,275,273
-----------
54,327,220
Accumulated net realized gain............................................................ 763,581
Net unrealized appreciation.............................................................. 5,437,533
-----------
Net assets, August 31, 1993.............................................................. $60,528,334
-----------
-----------
Class A:
Net asset value and redemption price per share ($2,930,204 / 251,785 shares of beneficial
interest
issued and outstanding)................................................................ $11.64
Maximum sales charge (4.5% of offering price)............................................ .55
-----------
Maximum offering price to public......................................................... $12.19
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share ($57,598,130 / 4,942,909
shares of beneficial interest issued and outstanding).................................. $11.65
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-241
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest........................... $3,613,945
----------
Expenses
Management fee..................... 279,241
Distribution fee--Class A.......... 2,068
Distribution fee--Class B.......... 268,900
Custodian's fees and expenses...... 102,600
Transfer agent's fees and
expenses........................... 38,000
Reports to shareholders............ 25,000
Registration fees.................. 10,500
Audit fee.......................... 10,500
Legal fees......................... 9,500
Trustees' fees..................... 3,375
Miscellaneous...................... 3,532
----------
Total expenses................... 753,216
----------
Net investment income................ 2,860,729
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............ 1,165,771
Financial futures transactions..... (86,437)
----------
1,079,334
----------
Net change in unrealized
appreciation/depreciation of:
Investments........................ 2,247,300
Financial futures contracts........ (28,875)
----------
2,218,425
----------
Net gain on investments.............. 3,297,759
----------
Net Increase in Net Assets
Resulting from Operations............ $6,158,488
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ------------------------------
in Net Assets 1992
1993 -------------
-------------
<S> <C> <C>
Operations
Net investment income..... $ 2,860,729 $ 2,825,423
Net realized gain on
investment
transactions............ 1,079,334 964,656
Net change in unrealized
appreciation of
investments............. 2,218,425 1,121,071
------------- -------------
Net increase in net assets
resulting from
operations.............. 6,158,488 4,911,150
------------- -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................... (112,413) (62,633)
Class B................... (2,748,316) (2,762,790)
------------- -------------
(2,860,729) (2,825,423)
------------- -------------
Distributions to
shareholders from net
realized gains on
investment transactions
Class A................... (18,889) --
Class B................... (562,219) --
------------- -------------
(581,108) --
------------- -------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 8,738,496 5,471,585
Net asset value of shares
issued in reinvestment
of dividends
and distributions....... 2,374,657 1,901,452
Cost of shares
reacquired................ (5,949,464) (8,724,189)
------------- -------------
Net increase (decrease) in
net
assets from Fund share
transactions............ 5,163,689 (1,351,152)
------------- -------------
Total increase.............. 7,880,340 734,575
Net Assets
Beginning of year........... 52,647,994 51,913,419
------------- -------------
End of year................. $ 60,528,334 $ 52,647,994
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-242
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Maryland Series (the ``Series'') commenced
investment operations in January, 1985. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
B-243
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''). PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the
services of PIC, the cost of compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
year ended August 31, 1993. PMFD pays various broker-dealers, including PSI and
Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Series under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $58,200 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons and incurred
other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the year ended
August 31, 1993, it received approximately $26,000 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $1,314,900. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$26,300 for the services of PMFS. As of August 31, 1993, approximately $2,200 of
such fees were due to PMFS. Transfer agent
B-244
<PAGE>
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993 were $25,065,882 and $22,345,090, respectively.
At August 31, 1993, the Fund sold 25 financial futures contracts on the
Municipal Bond Index expiring September 1993. The value at disposition of such
contracts is $2,575,031. The value of such contracts on August 31, 1993 was
$2,603,906, thereby resulting in an unrealized loss of $28,875. The Fund has
pledged $925,000 principal amount of Maryland State Housing and Community
Development Bonds as initial margin on such contracts.
The cost basis of investments for federal income tax purposes is
substantially the same as for financial reporting purposes and, accordingly, as
of August 31, 1993, net and gross unrealized appreciation of investments,
including short-term investments, for federal income tax purposes is $5,466,408.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
-------- ----------
Year ended August 31, 1993:
Shares sold.................... 178,669 $2,012,997
Shares issued in reinvestment
of dividends and
distributions................ 9,349 104,954
Shares reacquired.............. (56,465 ) (642,673)
-------- ----------
Net increase in shares
outstanding.................. 131,553 $1,475,278
-------- ----------
-------- ----------
Year ended August 31, 1992:
Shares sold.................... 70,028 $ 740,763
Shares issued in reinvestment
of dividends................. 4,700 51,222
Shares reacquired.............. (29,834 ) (304,927)
-------- ----------
Net increase in shares
outstanding.................. 44,894 $ 487,058
-------- ----------
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
Class B
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 598,587 $ 6,725,499
Shares issued in reinvestment
of dividends and
distributions............... 202,460 2,269,703
Shares reacquired............. (473,226) (5,306,791)
-------- -----------
Net increase in shares
outstanding................. 327,821 $ 3,688,411
-------- -----------
-------- -----------
Year ended August 31, 1992:
Shares sold................... 439,728 $ 4,730,822
Shares issued in reinvestment
of dividends................ 164,792 1,850,230
Shares reacquired............. (774,768) (8,419,262)
-------- -----------
Net decrease in shares
outstanding................. (170,248) $(1,838,210)
-------- -----------
-------- -----------
</TABLE>
B-245
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
------------------------------------------
January
22, Class B
1990+ ------------------------------------------------
Year Ended through
August 31, August Year Ended August 31,
------------------------------- 31, ------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------- ------ ------ -------- -------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 11.11 $10.67 $10.23 $10.44 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23
------ ------ ------ -------- -------- ------- ------- ------- -------
Income from investment operations
Net investment income............. .62 .63 .67 .40 .58 .59 .63 .62 .65
Net realized and unrealized gain
(loss) on investment
transactions.................... .65 .44 .44 (.21) .65 .44 .45 (.25) .25
------ ------ ------ -------- -------- ------- ------- ------- -------
Total from investment
operations.................... 1.27 1.07 1.11 .19 1.23 1.03 1.08 .37 .90
------ ------ ------ -------- -------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income.......................... (.62) (.63) (.67) (.40) (.58) (.59) (.63) (.62) (.65)
Distributions from net realized
gains........................... (.12) -- -- -- (.12) -- -- -- --
------ ------ ------ -------- -------- ------- ------- ------- -------
Total distributions............. (.74) (.63) (.67) (.40) (.70) (.59) (.63) (.62) (.65)
------ ------ ------ -------- -------- ------- ------- ------- -------
Net asset value, end of period.... $ 11.64 $11.11 $10.67 $10.23 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48
------ ------ ------ -------- -------- ------- ------- ------- -------
------ ------ ------ -------- -------- ------- ------- ------- -------
TOTAL RETURN#:.................... 11.89% 10.35% 10.84% 1.71% 11.43 % 9.90% 10.49% 3.58% 9.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)... $2,930 $1,335 $804 $349 $57,598 $51,313 $51,110 $48,226 $47,409
Average net assets (000).......... $2,068 $1,080 $518 $141 $53,780 $50,970 $48,422 $48,573 $44,243
Ratios to average net assets:
Expenses, including distribution
fees.......................... .96% .96% 1.10% 1.01%* 1.36 % 1.37% 1.49% 1.40% 1.37%
Expenses, excluding distribution
fees.......................... .86% .86% 1.00% .91%* .86 % .87% .99% .92% .90%
Net investment income........... 5.51% 5.80% 6.07% 6.31%* 5.11 % 5.42% 5.70% 5.95% 6.26%
Portfolio turnover................ 41% 34% 18% 46% 41 % 34% 18% 46% 47%
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
See Notes to Financial Statements.
B-246
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Maryland Series
We have audited the statement of assets and liabilities of Prudential
Municipal Series Fund, Maryland Series, including the portfolio of investments,
as of August 31, 1993, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Maryland Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-247
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MASSACHUSETTS SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.5%
Boston Ind. Dev. Fin.
Auth., Swr. Fac. Rev.,
Harbor Elec. Energy Co.
Proj.,
Baa1 $ 1,500 7.375%, 5/15/15.......... $ 1,669,215
Boston Mass., Gen.
Oblig., Ser. A,
A-* 500+ 9.75%, 1/1/05............ 556,180
Aaa 2,000 7.375%, 2/1/10,
A.M.B.A.C.............. 2,313,320
Boston Wtr. & Swr. Comn.
Rev.,
A 495+ 7.875%, 11/1/13, Ser.
A...................... 567,730
A 875 7.875%, 11/1/13, Ser.
A...................... 990,675
Brockton Mass.,
Baa1 530 6.125%, 6/15/18.......... 548,624
Holyoke, Gen. Oblig.,
Sch. Proj.,
Aaa 700 8.10%, 6/15/05,
M.B.I.A................ 876,078
Lowell, Gen. Oblig.,
Baa1 750 7.625%, 2/15/10.......... 873,480
Lynn Wtr. & Swr. Comn.,
Gen. Rev., Ser. A,
Aaa 2,100+ 7.25%, 12/1/10,
M.B.I.A................ 2,504,292
Mass. Bay Trans. Auth.,
A 1,500 6.20%, 3/1/16, Ser. B.... 1,646,910
Mass. Mun. Wholesale
Elec. Co.
Pwr., Supply Sys. Rev.,
Baa1 750 6.75%, 7/1/17, Ser. B.... 822,997
Mass. St. Gen. Oblig.,
Dedicated Inc. Tax,
A 1,000 7.875%, 6/1/97, Ser. A... 1,090,650
A 665 Zero Coupon, 8/1/06, Ser.
A...................... 341,783
A 500 5.50%, 11/1/07, Ser.
B...................... 514,865
Mass. St. Hlth. & Edl.
Facs. Auth. Rev.,
Bentley Coll.,
A 1,325+ 8.125%, 7/1/17, Ser. G... 1,457,911
Beth Israel Hosp.
Aaa 1,500 9.08%, 7/1/25,
A.M.B.A.C.............. 1,689,375
Beverly Hosp., Ser. D,
Aaa 750 7.30%, 7/1/13,
M.B.I.A................ 866,513
Mass. St. Hlth. & Edl.
Facs. Auth. Rev.,
Holy Cross Coll., Ser.
F,
AAA* $ 1,500+ 8.35%, 11/1/07........... $ 1,650,915
AAA* 500+ 8.40%, 11/1/15........... 550,705
Jordan Hosp.,
A-* 650 6.875%, 10/1/22.......... 715,715
Lahey Clinic,
Aaa 1,000 5.375%, 7/1/23, Ser. B,
M.B.I.A................ 996,230
Mass. Gen. Hosp.,
Aaa 1,250 5.25%, 7/1/23, Ser. G,
A.M.B.A.C.............. 1,209,675
Mass. Inst. Techn.,
Aaa 1,885 5.00%, 7/1/23............ 1,814,199
New England Med. Ctr.,
A1 1,175 7.875%, 7/1/11, Ser. E... 1,352,731
Aaa 1,000 6.875%, 4/1/22, Ser. D,
A.M.B.A.C.............. 1,127,590
Newton-Wellesley Hosp.,
Aaa 2,000 8.00%, 7/1/18, Ser. C,
B.I.G.................. 2,345,020
Northeastern Univ., Ser.
D,
Aaa 1,500 7.125%, 10/1/10,
A.M.B.A.C.............. 1,734,570
St. Elizabeth Hosp.,
Aaa 1,200+ 7.75%, 8/1/27, Ser. B,
F.H.A.................. 1,387,824
Tufts Univ.,
Aaa 1,235+ 7.40%, 8/1/18, Ser. C.... 1,436,181
A1 265 7.40%, 8/1/18, Ser. C.... 301,416
Valley Regl. Hlth. Sys.,
Baa 1,000 8.00%, 7/1/18, Ser. B.... 1,133,650
Mass. St. Hsg. Fin. Agcy. Hsg. Rev.,
AAA* 250 10.00%, 12/1/05, Ser. A,
F.N.M.A................ 269,420
Sngl. Fam. Mtge.,
Aa 190 11.00%, 12/1/09, Ser.
1984A.................. 198,653
Aa 1,755 8.10%, 12/1/14, Ser. 6... 1,929,605
Aa 695 9.50%, 12/1/16, Ser.
1985A.................. 733,211
Aa 515 6.30%, 6/1/25............ 532,216
Aa 985 7.125%, 6/1/25, Ser.
21..................... 1,063,524
Mass. St. Ind. Fin. Agcy.
Rev.,
Brooks Sch.,
A 640 5.95%, 7/1/23............ 661,933
Cape Cod Hlth. Sys.,
Baa 2,000+ 8.50%, 11/15/20.......... 2,520,720
</TABLE>
See Notes to Financial Statements.
B-248
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Mass. St. Ind. Fin. Agcy.
Rev.,
Merrimack College,
BBB-* $ 990 7.125%, 7/1/12........... $ 1,073,556
Mass. St. Indl. Fin.
Agcy., Poll. Ctrl.
Rev.,
Baa 1,000 5.875%, 8/1/08........... 1,019,250
Mass. St. Port Auth.
Rev.,
AA-* 640+ 9.375%, 7/1/15, Ser. B... 719,386
Aa 260 9.375%, 7/1/15, Ser. B... 293,449
Aa 500 5.00%, 7/1/18............ 472,135
Mass. St. Tpke. Auth.
Rev.,
Aaa 450 5.125%, 1/1/23, Ser. A,
F.G.I.C................ 437,000
Mass. St. Wtr. Res.
Auth., Ser. A
A 1,000 6.50%, 7/15/19........... 1,146,170
A 800 5.75%, 12/1/21........... 799,904
New England Ed. Loan Mkt.
Corp.,
Mass. Student Loan
Rev.,
A 1,500 6.75%, 9/1/02, Ser. C.... 1,655,220
Palmer, Gen. Oblig.,
A.M.B.A.C.
Aaa 500 7.30%, 3/1/10, Ser. F.... 591,545
Plymouth Cnty. Corr.
Facs. Proj.,
Cert. of Part.,
BBB* 500 7.00%, 4/1/22, Ser. A.... 549,305
Puerto Rico Aqueduct &
Swr.
Auth. Rev.,
Aaa 400** 10.25%, 7/1/09, E.T.M.... 577,116
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 1,250 8.882%, 7/1/20, F.S.A.... 1,404,688
Puerto Rico Comnwlth.,
Hwy. & Trans. Auth.
Rev.,
Baa1 1,000 5.25%, 7/1/21, Ser. X.... 959,010
Puerto Rico Comnwlth.,
Pub. Impvt. Ref.,
Baa1 $ 1,500 5.40%, 7/1/07............ $ 1,529,205
Baa1 1,000 7.00%, 7/1/10............ 1,175,700
Puerto Rico Port. Auth.
Rev.,
American Airlines,
Baa3 500 6.30%, 6/1/23............ 515,865
Virgin Islands Pub. Fin.
Auth. Rev.,
NR 400 7.25%, 10/1/18, Ser. A... 453,452
Virgin Islands Wtr. &
Pwr. Auth.,
NR 1,000 8.50%, 1/1/10, Ser. A.... 1,149,140
NR 270 7.60%, 1/1/12, Ser. B.... 304,247
-----------
Total long-term
investments
(cost $55,149,382)....... 61,821,644
-----------
SHORT-TERM INVESTMENTS--1.7%
Mass. Hlth. & Edl. Facs.
Auth. Rev.,
Cap. Asset Prog.,
F.R.D.D.,
VMIG1 100 2.25%, 9/1/93, Ser.
85B.................... 100,000
VMIG1 100 2.25%, 9/1/93, Ser.
85C.................... 100,000
Mass. Ind. Fin. Agcy.
Poll.
Ctrl. Rev.,
Holyoke Wtr. Pwr. Co.,
VMIG1 200 2.20%, 9/8/93, Ser. 92A,
F.R.W.D................ 200,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 700 2.15% 9/8/93, Ser. 85.... 700,000
-----------
Total short-term
investments
(cost $1,100,000)...... 1,100,000
-----------
</TABLE>
See Notes to Financial Statements.
B-249
<PAGE>
<TABLE>
<CAPTION>
Value
Description (a) (Note 1)
<S> <C> <C> <C>
Total Investments--99.2%
(cost $56,249,382; Note
4)..................... $62,921,644
Other assets in excess of
liabilities--0.8%...... 523,870
-----------
Net Assets--100%......... $63,445,514
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.H.A.--Federal Housing Administration.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** Principal amount segregated as collateral for future contracts.
+ Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-250 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
---------------
<S> <C>
Investments, at value (cost $56,249,382)................................................ $62,921,644
Cash.................................................................................... 34,334
Receivable for investments sold......................................................... 925,929
Accrued interest receivable............................................................. 924,797
Receivable for Fund shares sold......................................................... 72,759
Due from broker-variation margin........................................................ 2,344
Deferred expenses and other assets...................................................... 1,741
---------------
Total assets.......................................................................... 64,883,548
---------------
Liabilities
Payable for investments purchased....................................................... 1,208,594
Accrued expenses........................................................................ 97,514
Dividends payable....................................................................... 51,923
Payable for Fund shares reacquired...................................................... 28,048
Due to Manager.......................................................................... 26,591
Due to Distributors..................................................................... 25,364
---------------
Total liabilities..................................................................... 1,438,034
---------------
Net Assets.............................................................................. $63,445,514
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 52,143
Paid-in capital in excess of par...................................................... 56,550,948
---------------
56,603,091
Accumulated net realized gain......................................................... 232,035
Net unrealized appreciation........................................................... 6,610,388
---------------
Net assets, August 31, 1993........................................................... $63,445,514
---------------
---------------
Class A:
Net asset value and redemption price per share ($2,324,947 / 191,026 shares of
beneficial interest
issued and outstanding)............................................................. $12.17
Maximum sales charge (4.5% of offering price)......................................... .57
---------------
Maximum offering price to public...................................................... $12.74
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share ($61,120,567 /
5,023,281 shares of beneficial interest issued and outstanding)..................... $12.17
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-251
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest........................... $3,860,004
----------
Expenses
Management fee..................... 286,520
Distribution fee--Class A.......... 1,336
Distribution fee--Class B.......... 279,824
Custodian's fees and expenses...... 88,000
Transfer agent's fees and
expenses........................... 39,000
Reports to shareholders............ 29,000
Registration fees.................. 18,000
Audit fee.......................... 10,500
Legal fees......................... 9,500
Trustees' fees..................... 3,375
Miscellaneous...................... 1,000
----------
Total expenses................... 766,055
----------
Net investment income................ 3,093,949
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............ 1,215,030
Financial futures transactions..... (172,681)
----------
1,042,349
----------
Net change in unrealized
appreciation/depreciation of:
Investments........................ 2,335,328
Financial futures contracts........ (61,875)
----------
2,273,453
----------
Net gain on investments.............. 3,315,802
----------
Net Increase in Net Assets
Resulting from Operations............ $6,409,751
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------
Increase in Net Assets 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income..... $ 3,093,949 $ 2,953,171
Net realized gain on
investment
transactions............ 1,042,349 694,879
Net change in unrealized
appreciation of
investments............. 2,273,453 1,837,220
------------- -------------
Net increase in net assets
resulting from
operations.............. 6,409,751 5,485,270
------------- -------------
Dividends paid to
shareholders from net
investment income (Note 1)
Class A..................... (76,855) (46,941)
Class B..................... (3,017,094) (2,906,230)
------------- -------------
(3,093,949) (2,953,171)
------------- -------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 10,228,873 7,626,121
Net asset value of shares
issued in reinvestment
of dividends............ 1,821,686 1,747,654
Cost of shares
reacquired................ (6,272,800) (7,859,449)
------------- -------------
Net increase in net assets
from Fund share
transactions............ 5,777,759 1,514,326
------------- -------------
Total increase.............. 9,093,561 4,046,425
Net Assets
Beginning of year........... 54,351,953 50,305,528
------------- -------------
End of year................. $ 63,445,514 $ 54,351,953
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-252
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Series (the ``Series'')
commenced investment operations in September, 1984. The Series is diversified
and seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
of significant accounting Policies
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
B-253
<PAGE>
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributor for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement, at the
rates noted below, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares, at an annual rate of up to .30 of 1% of the average
daily net asset value of the Class A shares. Such expenses under the Class A
Plan were .10 of 1% of the average daily net assets of the Class A shares for
the fiscal year ended August 31, 1993. PMFD pays various broker-dealers,
including PSI and Pruco Securities Corporation (``Prusec'') affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net asset value of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the Plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $43,400 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the year ended August
31, 1993, it received approximately $605,200 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as Distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $1,538,900. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-254
<PAGE>
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1993, the Series incurred fees of approximately
$25,300 for the services of PMFS. As of August 31, 1993, approximately $2,200 of
such fees were due to PMFS. Transfer agent fees and expenses in the statement of
operations include certain out-of-pocket expenses paid to non-affiliates.
Purchases and sales of
Note 4. Portfolio
portfolio securities of the Series, Securities
excluding short-term investments, for the year
ended August 31, 1993 were $36,443,127 and $31,159,307, respectively.
At August 31, 1993, the Series sold 15 financial futures contracts on the
Municipal Bond Index expiring in September 1993. The value at disposition of
such contracts was $1,500,469. The value of such contracts on August 31, 1993
was $1,562,344, thereby resulting in an unrealized loss of $61,875. The Series
has pledged $400,000 principal amount of Puerto Rico Aqueduct & Sewer Authority
Revenue bonds as intial margin on such contracts.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, at
August 31, 1993, net and gross unrealized appreciation of investments, including
short-term investments, for federal income tax purposes was $6,672,262.
The Fund utilized its capital loss carryforward of $756,300 to partially
offset the Fund's net taxable gains realized and recognized in the year ended
August 31, 1993.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ -------------- -----------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 117,227 $ 1,391,818
Shares issued in reinvestment
of
dividends................... 3,409 40,192
Shares reacquired............. (8,122) (95,498)
-------------- -----------
Net increase in shares
outstanding................. 112,514 $ 1,336,512
-------------- -----------
-------------- -----------
Year ended August 31, 1992:
Shares sold................... 27,909 $ 313,025
Shares issued in reinvestment
of
dividends................... 3,126 35,060
Shares reacquired............. (13,293) (148,442)
-------------- -----------
Net increase in shares
outstanding................. 17,742 $ 199,643
-------------- -----------
-------------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 750,946 $ 8,837,055
Shares issued in reinvestment
of
dividends................... 151,724 1,781,494
Shares reacquired............. (529,282) (6,177,302)
-------------- -----------
Net increase in shares
outstanding................. 373,388 $ 4,441,247
-------------- -----------
-------------- -----------
Year ended August 31, 1992:
Shares sold................... 649,654 $ 7,313,096
Shares issued in reinvestment
of
dividends................... 152,829 1,712,594
Shares reacquired............. (690,875) (7,711,007)
-------------- -----------
Net increase in shares
outstanding................. 111,608 $ 1,314,683
-------------- -----------
-------------- -----------
</TABLE>
B-255
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------- ----------------------------------------------------
January 22,
1990+
through
Year ended August 31, August 31, Year ended August 31,
PER SHARE OPERATING -------------------------------- ----------------------------------------------------
PERFORMANCE: 1993 1992 1991 1990 1993 1992 1991 1990 1989
--------- --------- -------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.............. $11.50 $10.94 $10.44 $10.70 $11.49 $10.94 $10.44 $10.74 $10.53
--------- --------- -------- --------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment
income.............. .68 .69 .70 .41 .63 .64 .65 .65 .68
Net realized and
unrealized gain
(loss) on investment
transactions........ .67 .56 .50 (.26) .68 .55 .50 (.30) .21
--------- --------- -------- --------- -------- -------- -------- -------- --------
Total from
investment
operations........ 1.35 1.25 1.20 .15 1.31 1.19 1.15 .35 .89
--------- --------- -------- --------- -------- -------- -------- -------- --------
Less distributions
Dividends from net
investment income... (.68) (.69) (.70) (.41) (.63) (.64) (.65) (.65) (.68)
--------- --------- -------- --------- -------- -------- -------- -------- --------
Net asset value, end
of period........... $12.17 $11.50 $10.94 $10.44 $12.17 $11.49 $10.94 $10.44 $10.74
--------- --------- -------- --------- -------- -------- -------- -------- --------
--------- --------- -------- --------- -------- -------- -------- -------- --------
TOTAL RETURN#:........ 12.10% 11.76% 11.81% 1.41% 11.77 % 11.23 % 11.38 % 3.40 % 8.67 %
RATIOS TO AVERAGE NET
ASSETS:
Net assets, end of
period (000)........ $2,325 $903 $665 $257 $61,121 $53,449 $49,641 $50,575 $52,754
Average net assets
(000)............... $1,336 $770 $344 $127 $55,965 $50,607 $49,083 $52,974 $49,841
Ratios to average net
assets:
Expenses, including
distribution
fees.............. .95% .99% 1.05% 1.04%* 1.35 % 1.39 % 1.45 % 1.37 % 1.34 %
Expenses, excluding
distribution
fees.............. .85% .89% .95% .95%* .85 % .89 % .95 % .90 % .87 %
Net investment
income.............. 5.79% 6.14% 6.53% 6.60%* 5.39 % 5.74 % 6.13 % 6.21 % 6.24 %
Portfolio turnover.... 56% 32% 34% 33% 56 % 32 % 34 % 33 % 23 %
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on
the first day and a sale on the last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-256
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Massachusetts Series, including the portfolio
of investments, as of August 31, 1993, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Massachusetts Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-257
<PAGE>
Massachusetts Money Market Portfolio of Investments
Series August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--104.1%
Boston Wtr. & Swr. Comn.,
F.R.W.D.,
VMIG1 $ 500 2.25%, 9/1/93, Ser. 85A... $ 500,000
Gardner, B.A.N.,
NR 965 3.10%, 10/29/93........... 965,118
Mass. Bay Trans. Auth.,
S.E.M.O.T.,
P1 1,000 2.85%, 3/1/94, Ser. 84A... 1,000,000
T.E.C.P.,
P1 1,000 2.30%, 9/13/93, Ser. A.... 1,000,000
P1 600 2.45%, 10/28/93, Ser. A... 600,000
Mass. Comnwlth., Ded. Inc.
Tax,
F.R.D.D.,
VMIG1 1,000 2.45%, 9/1/93, Ser. 90B... 1,000,000
F.R.W.D.,
VMIG1 700 2.70%, 9/1/93, Ser. 90A... 700,000
Mass. Comnwlth., Gen
Oblig.,
MIG2 2,000 3.00%, 11/18/93, Ser.
93A..................... 2,002,733
Mass. Hlth. & Edl. Facs.
Auth. Rev.,
Boston Coll., F.R.W.D.,
VMIG1 1,400 2.50%, 9/2/93, Ser. 85F... 1,400,000
Cap. Asset Prog.,
F.R.D.D.,
VMIG1 1,000 2.25%, 9/1/93, Ser. 85B... 1,000,000
VMIG1 800 2.25%, 9/1/93, Ser. 85C... 800,000
Harvard Univ., F.R.W.D.,
VMIG1 1,200 2.30%, 9/2/93, Ser. 85I... 1,200,000
Wellesley Coll., F.R.W.D.,
VMIG1 1,300 2.30%, 9/2/93, Ser. E..... 1,300,000
Mass. Hsg. Fin. Agcy.,
Hsg. Proj. Rev.,
F.R.W.D.,
VMIG1 1,500 2.60%, 9/1/93............. 1,500,000
Residential Dev. Bds.,
Aaa 575 3.60%, 11/15/93, Ser. C... 576,231
Sngl. Fam. Hsg. Rev.,
A.N.N.M.T.,
VMIG1 700 2.95%, 9/1/94, Ser. 25.... 700,000
Q.T.R.O.T.,
Aaa 1,500 2.80%, 12/1/93, Ser. 5.... 1,500,000
Mass. Ind. Fin. Agcy. Ind.
Rev.,
United Med. Corp.,
F.R.W.D.,
P1 $ 900 2.60%, 9/1/93, Ser. 92.... $ 900,000
Mass. Ind. Fin. Agcy.
Poll. Ctrl. Rev.,
Holyoke Wtr. Pwr. Co.,
F.R.W.D.,
VMIG1 1,500 2.20%, 9/1/93, Ser. 92A... 1,500,000
New England Pwr. Co.,
T.E.C.P.,
VMIG1 1,150 2.55%, 9/10/93, Ser.
92B..................... 1,150,000
VMIG1 1,500 2.60%, 10/22/93, Ser.
92B..................... 1,500,000
VMIG1 1,000 2.45%, 10/29/93, Ser.
92...................... 1,000,000
VMIG1 1,500 2.40%, 11/30/93, Ser.
92...................... 1,500,000
Mass. Ind. Fin. Agcy. Res.
Rec. Rev.,
Ogden Haverhill Proj.,
F.R.W.D.,
VMIG1 800 2.30%, 9/1/93, Ser. 92A... 800,000
Mass. Ind. Fin. Agcy.
Rev., F.R.W.D.,
New England Deaconess,
VMIG1 1,500 2.40%, 9/1/93, Ser. 93B... 1,500,000
Milton Academy Bonds,
Aaa 455 2.18%, 9/1/93, Ser. B..... 455,000
Puerto Rico Comnwlth. Hwy.
& Trans. Auth. Rev.,
F.R.W.D.
VMIG1 1,500 2.35%, 9/1/93, Ser. 85.... 1,500,000
Puerto Rico Ind. Med &
Environ. Facs.,
Reynolds Metal Co.
Proj., A.N.N.O.T.,
P1 1,000 2.90%, 9/1/94, Ser. 83
A....................... 1,000,970
Puerto Rico Ind. Med. &
Environ. Facs., F.R.W.D.
Ana G. Mendez Ed. Fndtn.
A1+* 1,700 2.30%, 9/1/93, Ser. 85.... 1,700,000
Schering-Plough Corp.,
A.N.N.O.T.,
AAA* 500 3.00%, 12/1/93, Ser. 83... 500,000
Revere Hsg. Auth.,
Multifamily Mtge. Rev.,
F.R.W.D.,
Aaa 990 2.60%, 9/3/93, Ser. 91C... 990,000
Univ. Mass. Bldg. Auth.
Rev.,
Aaa 1,000+ 9.875%, 5/1/94, Ser.
84A..................... 1,076,701
</TABLE>
B-258 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Waltham, B.A.N.,
NR $ 1,500 2.13%, 2/23/94............ $ 1,496,033
Worcester., Gen. Oblig.,
Aaa 1,730 6.70%, 5/15/94............ 1,777,768
-----------
Total Investments--104.1%
(amortized
cost--$38,090,554**).... 38,090,554
Liabilities in excess of
other
assets--(4.1%).......... (1,482,848)
-----------
Net Assets--100%.......... $36,607,706
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender
A.N.N.O.T.--Annual Optional Tender
B.A.N.--Bond Anticipation Note
F.R.D.D.--Floating Rate (Daily) Demand Note #
F.R.W.D.--Floating Rate (Weekly) Demand Note #
Q.T.R.O.T.--Quarterly Tax & Revenue Optional Tender
R.A.N.--Revenue Anticipation Note
S.E.M.O.T.--Semi-Monthly Tender
T.E.C.P.--Tax-Exempt Commercial Paper
T.R.A.N.--Tax Revenue Anticipation Note
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-259 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
-----------
<S> <C>
Investments, at amortized cost which
approximates market value................................................................ $38,090,554
Cash....................................................................................... 38,145
Receivable for investments sold............................................................ 2,500,088
Receivable for Fund shares sold............................................................ 609,284
Interest receivable........................................................................ 248,816
Deferred organization expenses and other assets............................................ 35,995
Due from Manager........................................................................... 4,211
-----------
Total assets........................................................................... 41,527,093
-----------
Liabilities
Payable for investments purchased.......................................................... 4,210,533
Payable for Fund shares reacquired......................................................... 636,535
Accrued expenses........................................................................... 54,666
Dividends payable.......................................................................... 11,799
Due to Distributor......................................................................... 5,854
-----------
Total liabilities...................................................................... 4,919,387
-----------
Net Assets................................................................................. $36,607,706
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value......................................... $ 366,077
Paid-in capital in excess of par......................................................... 36,241,629
-----------
Net assets, August 31, 1993.............................................................. $36,607,706
-----------
-----------
Net asset value, offering price and redemption price per share ($36,607,706 / 36,607,706
shares of beneficial interest issued and outstanding; unlimited number of shares
authorized)............................................................................ $1.00
</TABLE>
See Notes to Financial Statements.
B-260
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year
Ended
August
Net Investment Income 31, 1993
--------
<S> <C>
Income
Interest............................... $797,168
--------
Expenses
Management fee, net of waiver of
$161,228............................... --
Distribution fee....................... 40,307
Custodian's fees and expenses.......... 55,000
Registration fees...................... 22,000
Reports to shareholders................ 20,000
Transfer agent's fees and expenses..... 19,000
Amortization of organization
expenses............................... 12,151
Audit fee.............................. 10,000
Legal fees............................. 9,500
Trustees' fees......................... 3,375
Miscellaneous.......................... 601
--------
Total expenses....................... 191,934
Less: expense subsidy (Note 4)....... (74,043)
--------
Net expenses......................... 117,891
--------
Net investment income.................... 679,277
Realized Gain on Investments
Net realized gain on investment
transactions........................... 369
--------
Net Increase in Net Assets
Resulting from Operations................ $679,646
--------
--------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) -----------------------------
in Net Assets 1992
1993 ------------
-------------
<S> <C> <C>
Operations
Net investment income... $ 679,277 $ 495,622
Net realized gain on
investment
transactions.......... 369 970
------------- ------------
Net increase in net
assets
resulting from
operations............ 679,646 496,592
------------- ------------
Dividends and
distributions to
shareholders (Note 1)... (679,646) (496,592)
------------- ------------
Fund share transactions
(at $1 per share)
Net proceeds from shares
subscribed............ 139,607,603 50,742,058
Net asset value of
shares
issued in reinvestment
of
dividends and
distributions......... 638,146 445,986
Cost of shares
reacquired.............. (121,656,791) (39,534,507)
------------- ------------
Net increase in net
assets
from Fund share
transactions.......... 18,588,958 11,653,537
------------- ------------
Total increase............ 18,588,958 11,653,537
Net Assets
Beginning of year......... 18,018,748 6,365,211
------------- ------------
End of year............... $ 36,607,706 $ 18,018,748
------------- ------------
------------- ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-261
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Money Market Series (the
``Series'') commenced investment operations on August 5, 1991. The Series is
non-diversified and seeks to provide the highest level of income that is exempt
from Massachusetts State, local and federal income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities having a
maturity of thirteen months or less and whose ratings are within the two highest
ratings categories by a nationally recognized statistical rating organization,
or if not rated, are of comparable quality. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $51,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses except as set forth in Note 4.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. PMF
voluntarily agreed to waive its management fee until further notice. The amount
of fees waived for the year ended August 31, 1993 amounted to $161,228 ($.005
per share; .50% of average net assets).
PMF has agreed that, in any fiscal year, it will reimburse the Fund for each
of the series' expenses (including the fees of PMF but excluding interest,
taxes, brokerage commissions, distribution fees, litigation and indemnification
expenses and other extraordinary expenses) in excess of the most restrictive
expense limitation imposed by state securities commissions. The most restrictive
expense limitation is presently believed to be 2.5% of the Series' average daily
net assets up to $30 million, 2.0% of the next $70 million of average daily net
assets and 1.5% of the Series' average daily net assets in excess of $100
B-262
<PAGE>
million. Such expense reimbursement, if any, will be estimated and accrued daily
and payable monthly. No reimbursement was required for the year ended August 31,
1992.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$17,900 for the services of PMFS. As of August 31, 1993, approximately $1,800 of
such fees were due to PMFS.
Note 4. Expense PMF voluntarily agreed to
Subsidy subsidize 75% of the operat
ing expenses of the Series (other than management
and distribution fees) through February 28, 1993. Effective March 1, 1993, PMF
reduced the operating expense subsidy to 25%. For the year ended August 31,
1993, PMF subsidized $74,043 ($.002 per share; .23% of average net assets) of
the Series' expenses. The Series is not required to reimburse PMF for such
expense subsidy.
B-263
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
Year Ended August August 5, 1991*
31, through
------------------- August 31,
1993 1992 1991
------- ------- ---------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................ $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains+....................................... .021 .034 .003
Dividends and distributions to shareholders..................................... (.021) (.034) (.003)
------- ------- -------
Net asset value, end of period.................................................. $ 1.00 $ 1.00 $ 1.00
------- ------- -------
------- ------- -------
TOTAL RETURN#:.................................................................. 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................................. $36,608 $18,019 $ 6,365
Average net assets (000)........................................................ $32,246 $15,477 $ 3,200
Ratio to average net assets:+
Expenses, including distribution fee.......................................... .365% .125% .125%**
Expenses, excluding distribution fee.......................................... .240% .00% .00%**
Net investment income......................................................... 2.11% 3.20% 4.46%**
<FN>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management fee waiver and expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total returns for periods less
than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-264
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Massachusetts Money Market Series, including
the portfolio of investments, as of August 31, 1993, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
two years in the period then ended and for the period August 5, 1991
(commencement of investment operations) through August 31, 1991. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatment. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Massachusetts Money Market Series, as of August 31, 1993, the
results of its operations, the changes in net assets and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-265
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MICHIGAN SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--98.0%
Breitung Twnshp. Sch. Dist. Rev.,
Gen. Oblig.,
Aaa $ 250 6.30%, 5/1/15, M.B.I.A... $ 271,623
Canton Charter Twnshp. Bldg. Auth.,
Wayne Cnty. Golf Course,
Aaa 450 4.75%, 1/1/11, F.S.A. .... 417,789
Aaa 450 4.75%, 1/1/12, F.S.A. .... 415,206
Aaa 500 4.75%, 1/1/13, F.S.A. .... 457,890
Aaa 500 4.75%, 1/1/14, F.S.A. .... 456,690
Central Michigan Univ. Rev.,
A 700+ 7.00%, 10/1/10 ........... 823,739
Chippewa Valley Sch. Dist.,
Aaa 1,000 5.00%, 5/1/21, F.G.I.C.... 940,070
Detroit Conv. Fac. Rev.,
Cobo Hall Expansion Proj.,
A* 500@ 9.00%, 9/30/10 ........... 544,990
Detroit Econ. Dev. Corp.,
Res. Recovery Rev.,
Aaa 1,000 6.875%, 5/1/09, Ser. A, F.S.A.. 1,108,780
Detroit Sewage Disp. Rev.,
Aaa 1,500 6.25%, 7/1/11, M.B.I.A...... 1,569,315
Aaa 1,000 8.38%, 7/1/23, Ser. A, F.G.I.C.. 1,036,250
Detroit St. Aid, Gen. Oblig.,
Baa 1,500 5.625%, 5/1/97 ............. 1,560,465
Detroit Wtr. Supply Sys. Rev.,
Aaa 1,000 6.25%, 7/1/12, F.G.I.C. .... 1,084,320
Aaa 1,000 7.25%, 7/1/20, F.G.I.C. .... 1,159,470
Ferris St. Univ. Gen. Rev.,
Aaa 440 5.80%, 10/1/05, A.M.B.A.C.... 467,504
Grand Rapids San. Swr. Sys. Rev.,
A1 500 7.00%, 1/1/16................ 563,600
Grand Rapids Wtr. Supply Sys. Rev.,
Aaa 515 7.05%, 1/1/05, F.G.I.C....... 599,990
A 2,100+ 7.875%, 1/1/18 .............. 2,463,342
Guam Arpt. Auth. Rev.,
BBB* 550 6.70%, 10/1/23, Ser. B....... 597,526
Huron Valley Sch. Dist.,
Gen. Oblig.,
Aaa 3,500 Zero Coupon, 5/1/10, F.G.I.C... 1,367,240
Kent Hosp. Fac. Fin. Auth. Rev.,
Blodgette Mem. Med. Ctr.,
A $ 500 7.25%, 7/1/05, Ser. A........ $ 556,760
Butterworth Hosp.,
A1 500 7.25%, 1/15/12, Ser. A....... 554,670
Michigan Econ. Dev. Auth.,
Oil & Gas Rev.,
Baa 45 11.50%, 9/1/94, Ser. A....... 46,809
Michigan Higher Ed., Student
Loan Auth. Rev., M.B.I.A.,
Aaa 500 7.55%, 10/1/08, Ser. XIII-A... 581,955
Michigan Mun. Bond Auth. Rev.,
Local Gov't Loan Prog.,
AAA* 500+ 7.80%, 5/1/13................. 594,710
Michigan Pub. Pwr. Agcy. Rev.,
Belle River Proj.,
A1 1,250 5.25%, 1/1/18, Ser. A.......... 1,214,775
Michigan St. Comp. Trans. Rev.,
A1 1,250 5.875%, 5/15/05, Ser. B....... 1,341,850
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr.,
Baa1 2,000 8.25%, 7/1/12, Ser. A......... 2,311,080
McLaren Obligated Group,
A 800 7.50%, 9/15/21, Ser. A........ 925,040
Oakwood Hosp. Obligated Group,
Aaa 1,000+ 6.95%, 7/1/02, F.G.I.C........ 1,165,800
Sisters of Mercy, M.B.I.A.,
Aaa 2,000 7.50%, 8/15/07, Ser. H........ 2,288,280
Michigan St. Hsg. Dev. Auth. Rev.,
Multifamily Mtge. Insured Hsg.,
A+* 1,000 7.15%, 4/1/10, Ser. A......... 1,078,760
Aaa 1,000@ 8.875%, 7/1/17, Ser. A, F.G.I.C. 1,083,600
A+* 500 7.70%, 4/1/23, Ser. A......... 540,370
Single Family Mtge.,
AA* 945 7.50%, 6/1/15, Ser. A......... 1,023,293
AA* 445 7.70%, 12/1/16, Ser. A........ 479,750
AA* 235 7.75%, 12/1/19, Ser. D........ 258,441
</TABLE>
See Notes to Financial Statements.
B-266
<PAGE>
Prudential Municipal Series Fund
New Jersey Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Michigan St. Strategic Fund
Ltd. Obligated Rev.,
Waste Mgmt. Inc. Proj.,
A1 $ 2,000 6.625%, 12/1/12............ $ 2,148,420
Michigan St. Trunk Line
Hwy.,
A1 2,000+ 7.00%, 8/15/17, Ser. A..... 2,321,240
Ser. A, A.M.B.A.C.,
Aaa 2,600 Zero Coupon, 10/1/05....... 1,360,866
Aaa 1,250 Zero Coupon, 10/1/06....... 613,062
Michigan St. University
Rev.,
A1 1,140 5.50%, 8/15/22, Ser. A..... 1,131,781
Monroe Cnty. Poll. Ctrl.
Rev.,
Detroit Edison Co.,
Baa1 1,500 10.50%, 12/1/16, Ser. A.... 1,749,480
Aaa 2,000 7.65%, 9/1/20, F.G.I.C..... 2,351,080
Oak Park, Gen. Oblig.,
Aaa 375+ 7.00%, 5/1/11,
A.M.B.A.C................ 444,862
Aaa 400+ 7.00%, 5/1/12,
A.M.B.A.C................ 474,520
Oakland Cnty., City of
Lathrup,
Evergreen Farmington Swr.
Rev.,
A 600 6.00%, 11/1/08............. 627,426
A 700 6.00%, 11/1/09............. 730,870
Oakland Cnty., Leuders
Drainage Dept.,
Aaa 350 5.50%, 5/1/09,
A.M.B.A.C................ 359,460
Ottawa Cnty., Gen. Oblig.,
Northwest Ottawa Wtr.
Supply,
A1 415 6.25%, 10/1/08............. 438,008
Wtr. Supply Sys.,
NR 1,045+ 7.60%, 8/1/07.............. 1,176,984
Puerto Rico Elec. Pwr.
Auth. Rev.,
Baa1 2,500 7.125%, 7/1/14, Ser. N..... 2,795,125
Puerto Rico Hwy. Auth.
Rev.,
Baa1 1,000 6.75%, 7/1/05, Ser. R...... 1,115,030
Baa1 1,500+ 7.75%, 7/1/16, Ser. Q...... 1,831,005
Puerto Rico Pub. Bldgs.
Auth.,
Gtd. Pub. Ed. & Hlth.
Facs.,
Baa1 625+ 8.00%, 7/1/12, Ser. F...... 712,594
Baa1 1,325+ 6.875%, 7/1/21, Ser. L..... 1,565,819
Pub. Ed. & Hlth. Facs.,
Baa1 990+ 7.875%, 7/1/16, Ser. H..... 1,153,677
Puerto Rico, Gen. Oblig.,
Aaa $ 1,000 8.79%, 7/1/08, Ser. A,
M.B.I.A.................. $ 1,138,750
Saginaw Valley St. Univ.
Gen. Rev.,
Aaa 790 5.375%, 7/1/16, M.B.I.A.... 790,956
Saline Area Sch. Dist.,
Aaa 700 5.00%, 5/1/04, Ser. 1,
M.B.I.A.................. 709,779
Tri-Cnty. Area Schs., Gen.
Oblig.,
Aaa 2,000 5.25%, 5/1/20, F.G.I.C..... 1,957,680
University of Michigan
Major
Cap. Proj. Rev.,
Aa 355 5.50%, 4/1/13.............. 359,839
University of Michigan
Rev.,
Parking Sys. Rfdg.,
Aa 500 5.00%, 6/1/15.............. 480,725
Virgin Islands Pub. Fin.
Auth. Rev.,
Matching Loan Notes,
NR 500 7.25%, 10/1/18, Ser. A..... 566,815
Virgin Islands Wtr. & Pwr.
Auth.,
Elec. Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser. A...... 551,790
Wtr. Sys. Rev.,
NR 500 8.50%, 1/1/10, Ser. A...... 574,570
NR 200 7.60%, 1/1/12, Ser. B...... 225,368
Wayne Cnty. Bldg. Auth.,
Baa 1,250 8.00%, 3/1/17, Ser. A...... 1,457,062
Wayne Cnty., Livonia Public
School Dist.,
Aaa 500 5.50%, 5/1/21.............. 501,230
Western Michigan Univ. Gen.
Rev.,
Aaa 500 5.00%, 7/15/21, F.G.I.C.... 472,685
Wixom, Gen. Oblig.,
Aaa 475 6.00%, 4/1/07,
A.M.B.A.C................ 517,888
Aaa 475 6.00%, 4/1/08,
A.M.B.A.C................ 515,983
Aaa 500 6.00%, 4/1/09,
A.M.B.A.C................ 540,755
Wyandotte Elec. Rev.,
Aaa 2,000 6.25%, 10/1/08, M.B.I.A.... 2,233,120
-----------
Total long-term investments
(cost $64,507,531)......... 72,648,046
-----------
</TABLE>
See Notes to Financial Statements.
B-267
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--1.9%
Michigan Strategic Fund
Poll. Ctrl. Rev.,
Consumers Pwr. Proj.,
P1 $ 1,400 2.30%, 9/1/93, Ser. 88A,
F.R.D.D.
(cost $1,400,000)........ $ 1,400,000
-----------
Total Investments--99.9%
(cost $65,907,531; Note
4)....................... 74,048,046
Other assets in excess of
liabilities--0.1%........ 67,473
-----------
Net Assets--100%........... $74,115,519
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
@ Pledged either in whole or in part as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-268 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
-----------
<S> <C>
Investments, at value (cost $65,907,531)................................................... $74,048,046
Cash....................................................................................... 45,170
Accrued interest receivable................................................................ 1,106,322
Receivable for Fund shares sold............................................................ 547,748
Receivable for investments sold............................................................ 30,150
Other assets............................................................................... 1,806
-----------
Total assets............................................................................. 75,779,242
-----------
Liabilities
Payable for investments purchased.......................................................... 1,408,195
Accrued expenses........................................................................... 84,953
Dividends payable.......................................................................... 58,752
Payable for Fund shares reacquired......................................................... 49,027
Due to Manager............................................................................. 31,777
Due to Distributors........................................................................ 29,456
Due to broker-variation margin............................................................. 1,563
-----------
Total liabilities........................................................................ 1,663,723
-----------
Net Assets................................................................................. $74,115,519
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 59,248
Paid-in capital in excess of par......................................................... 65,992,198
-----------
66,051,446
Distributions in excess of net realized gains............................................ (57,379)
Net unrealized appreciation.............................................................. 8,121,452
-----------
Net assets, August 31, 1993.............................................................. $74,115,519
-----------
-----------
Class A:
Net asset value and redemption price per share ($3,813,701 / 304,756 shares of beneficial
interest issued and outstanding)....................................................... $12.51
Maximum sales charge (4.5% of offering price)............................................ .59
-----------
Maximum offering price to public......................................................... $13.10
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share ($70,301,818 / 5,620,087
shares of beneficial interest issued and outstanding).................................. $12.51
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-269
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest............................. $4,132,634
----------
Expenses
Management fee....................... 319,163
Distribution fee--Class A............ 2,285
Distribution fee--Class B............ 307,738
Custodian's fees and expenses........ 80,400
Transfer agent's fees and expenses... 58,800
Reports to shareholders.............. 40,000
Registration fees.................... 22,000
Audit fee............................ 10,500
Legal fees........................... 9,500
Trustees' fees....................... 3,375
Miscellaneous........................ 4,994
----------
Total expenses..................... 858,755
----------
Net investment income.................. 3,273,879
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.............. 321,244
Financial futures transactions....... (248,685)
----------
72,559
----------
Net change in unrealized
appreciation/depreciation on:
Investments.......................... 3,786,660
Financial futures contracts.......... (23,281)
----------
3,763,379
----------
Net gain on investments................ 3,835,938
----------
Net Increase in Net Assets
Resulting from Operations.............. $7,109,817
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1993 1992
------------ -----------
<S> <C> <C>
Operations
Net investment income..... $ 3,273,879 $ 2,902,439
Net realized gain on
investment
transactions............ 72,559 818,097
Net change in unrealized
appreciation of
investments............. 3,763,379 1,935,169
------------ -----------
Net increase in net assets
resulting from
operations.............. 7,109,817 5,655,705
------------ -----------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................... (125,767) (71,933)
Class B................... (3,148,112) (2,830,506)
------------ -----------
(3,273,879) (2,902,439)
------------ -----------
Distributions to
shareholders
from net realized gains
on investments
Class A................... (15,062) --
Class B................... (460,116) --
------------ -----------
(475,178) --
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 16,968,562 9,946,207
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 2,426,469 1,805,961
Cost of shares
reacquired................ (6,352,793) (9,028,459)
------------ -----------
Net increase in net assets
from Fund share
transactions............ 13,042,238 2,723,709
------------ -----------
Total increase.............. 16,402,998 5,476,975
Net Assets
Beginning of year........... 57,712,521 52,235,546
------------ -----------
End of year................. $ 74,115,519 $57,712,521
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-270
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Michigan Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts:A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging it's existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
B-271
<PAGE>
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''). PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the
services of PIC, the cost of compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated, (``PSI''),
which acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended August 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Series under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $80,600 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the fiscal
year ended August 31, 1993, it received approximately $43,500 in contingent
deferred sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Series that at August 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Series or
recovered through contingent deferred sales charges approximated $2,116,100.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect),
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions with Services, Inc. (``PMFS''), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's
B-272
<PAGE>
transfer agent. During the fiscal year ended August 31, 1993, the Series
incurred fees of approximately $36,300 for the services of PMFS. As of August
31, 1993, approximately $3,300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of
Securities portfolio securities of the
Series, excluding short-term investments, for the
fiscal year ended August 31, 1993 were $20,000,984 and $9,071,711, respectively.
At August 31, 1993, the Fund sold 35 financial futures contracts on the
Municipal Bond Index of which 10 contracts expire in September and 25 contracts
in December 1993. The value at disposition of such contracts is $3,982,656. The
value of such contracts on August 31, 1993 was $4,001,719, thereby resulting in
an unrealized loss of $19,063. The Fund has pledged $500,000 principal amount of
Detroit Convention Facilities Revenue Bonds and $600,000 principal amount of
Michigan State Housing Development Bonds as initial margin on such contracts.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, as
of August 31, 1993, net and gross unrealized appreciation of investments,
including short-term investments, for federal income tax purposes is $8,140,515.
Note 5. Capital The Series offers both
Class A and Class B shares. Class A shares are
sold with a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ --------- -----------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 184,780 $ 2,261,702
Shares issued in reinvestment
of
dividends and
distributions............... 7,339 88,939
Shares reacquired............. (23,307) (285,030)
--------- -----------
Net increase in shares
outstanding................. 168,812 $ 2,065,611
--------- -----------
--------- -----------
Year ended August 31, 1992:
Shares sold................... 77,377 $ 898,176
Shares issued in reinvestment
of
dividends................... 3,428 39,790
Shares reacquired............. (18,744) (221,911)
--------- -----------
Net increase in shares
outstanding................. 62,061 $ 716,055
--------- -----------
--------- -----------
<CAPTION>
Class B
- -----------------------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold.................. 1,212,261 $14,706,860
Shares issued in reinvestment
of
dividends and
distributions.............. 193,681 2,337,530
Shares reacquired............ (501,158) (6,067,763)
--------- -----------
Net increase in shares
outstanding................ 904,784 $10,976,627
--------- -----------
--------- -----------
Year ended August 31, 1992:
Shares sold.................. 779,786 $ 9,048,031
Shares issued in reinvestment
of
dividends.................. 152,579 1,766,171
Shares reacquired............ (764,873) (8,806,548)
--------- -----------
Net increase in shares
outstanding................ 167,492 $ 2,007,654
--------- -----------
--------- -----------
</TABLE>
B-273
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
---------------------------------------- Class B
January 22, ------------------------------------------------
1990+
Year Ended August 31, through Year Ended August 31,
PER SHARE OPERATING -------------------------- August 31, ------------------------------------------------
PERFORMANCE: 1993 1992 1991 1990 1993 1992 1991 1990 1989
------- ------ ------ ----------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................ $ 11.90 $11.30 $10.81 $ 11.02 $ 11.90 $ 11.30 $ 10.81 $ 11.03 $ 10.57
------- ------ ------ ----------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income............... .67 .68 .67 .41 .62 .63 .63 .65 .68
Net realized and unrealized gain
(loss) on investment
transactions...................... .71 .60 .49 (.21) .71 .60 .49 (.22) .46
------- ------ ------ ----------- ------- ------- ------- ------- -------
Total from investment
operations...................... 1.38 1.28 1.16 .20 1.33 1.23 1.12 .43 1.14
------- ------ ------ ----------- ------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income............................ (.67) (.68) (.67) (.41) (.62) (.63) (.63) (.65) (.68)
Distributions from net realized
gains............................. (.10) -- -- -- (.10) -- -- -- --
------- ------ ------ ----------- ------- ------- ------- ------- -------
Total distributions............... (.77) (.68) (.67) (.41) (.72) (.63) (.63) (.65) (.68)
------- ------ ------ ----------- ------- ------- ------- ------- -------
Net asset value, end of period...... $ 12.51 $11.90 $11.30 $ 10.81 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.03
------- ------ ------ ----------- ------- ------- ------- ------- -------
------- ------ ------ ----------- ------- ------- ------- ------- -------
TOTAL RETURN#:...................... 11.95% 11.63% 11.04% 1.82% 11.51% 11.18% 10.60% 4.02% 11.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $ 3,814 $1,618 $ 835 $ 501 $70,302 $56,095 $59,400 $49,923 $47,025
Average net assets (000)............ $ 2,285 $1,235 $ 694 $ 365 $61,548 $52,137 $50,809 $48,694 $43,957
Ratios to average net assets:
Expenses, including distribution
fees............................ 1.06% .98% 1.09% 1.09%* 1.46% 1.38% 1.49% 1.44% 1.35%
Expenses, excluding distribution
fees............................ .96% .88% .99% .99%* .96% .88% .99% .97% .96%
Net investment income............. 6.15% 5.82% 6.09% 6.25%* 5.75% 5.42% 5.66% 5.95% 6.20%
Portfolio turnover.................. 14% 30% 62% 55% 14% 30% 62% 55% 36%
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated
assuming a purchase of shares on the first day and a sale on the last day of each
period reported and includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-274
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Michigan Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Michigan Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Michigan Series, as of August 31, 1993, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-275
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MINNESOTA SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.3%
Breckenridge Hosp. Facs.
Rev.,
Franciscan Sisters
Healthcare,
A-* $ 800 9.375%, 9/1/17, Ser. B1... $ 944,040
Dakota Cnty. Hsg. & Redev.
Auth.,
Burnsville & Inver Grove,
Sngl. Fam. Mtge.,
Aaa 10 9.375%, 5/1/18,
F.G.I.C................. 11,107
Metropolitan Council of Minneapolis,
Hubert H. Humphrey Metrodome,
A 500 6.00%, 10/1/09............ 539,025
St. Paul Met. Area,
Aaa 750 6.25%, 12/1/06, Ser. A.... 812,670
Aaa 500 6.75%, 9/1/10, Ser. D..... 555,500
Minneapolis Cmnty. Dev.
Agcy.,
St. Paul Hsg. & Redev.
Auth. Rev.,
Aa 10 9.875%, 12/1/15........... 10,700
Tax Increment Rev.,
M.B.I.A.,
Aaa 750 Zero Coupon, 9/1/01....... 518,812
Aaa 1,000 Zero Coupon, 3/1/06....... 525,110
Aaa 1,000 Zero Coupon, 9/1/07....... 480,120
Minneapolis Hosp. Rev.,
Lifespan, Inc., Ser. B,
A1 820 8.70%, 12/1/02............ 970,609
A 800 8.125%, 8/1/17............ 913,112
Minneapolis-St. Paul Hsg.
Fin.
Brd. Rev., Sngl. Fam.
Mtge.,
AAA* 1,000 7.30%, 8/1/31, G.N.M.A.... 1,086,230
Minneapolis-St. Paul Met.
Arpts.,
Aaa 1,000 7.80%, 1/1/14, Ser. 7..... 1,168,000
Minnesota Pub. Facs.
Auth.,
Wtr. Poll. Ctrl. Rev.,
AA+* 500 6.90%, 3/1/03, Ser. A..... 571,725
AA+* 650 7.00%, 3/1/09............. 735,501
Minnesota St. Higher Ed.
Facs. Auth. Rev.,
Macalester Coll.,
AA-* 500 6.40%, 3/1/22............. 540,800
St. Mary's Coll. Mtge.,
Baa 625 6.10%, 10/1/16............ 646,019
Minnesota St. Higher Ed.
Facs. Auth. Rev.,
Univ. of St. Thomas,
A1 $ 490 5.60%, 9/1/14............. $ 499,433
Minnesota St. Hsg. Fin.
Agcy.,
Sngl. Fam. Mtge., Ser. A,
Aa 1,105@ 7.45%, 7/1/22, F.H.A...... 1,212,528
Northern Mun. Pwr. Agcy.,
Elec. Sys. Rev.,
A 370 7.25%, 1/1/16, Ser. A..... 416,243
Aaa 750 5.50%, 1/1/18, Ser. B,
A.M.B.A.C............... 760,673
Northfield Coll. Fac.
Rev.,
St. Olaf Coll.,
A1 370 6.30%, 10/1/12............ 399,082
Owatonna Hosp. Rev.,
Hlth. Central Sys. Proj.,
A 200 10.00%, 10/1/14, Ser. C... 228,178
Ramsey Cnty., Gen. Oblig.,
Aaa 500 7.25%, 2/1/04............. 555,755
Red Wing Indpt. Sch.
Dist.,
No. 256 Sch. Bldg.,
Aa 500 5.60%, 2/1/09............. 519,620
Rochester Hlth. Care Facs.
Rev.,
Mayo Med. Ctr.,
AA+* 500 8.30%, 11/15/07, Ser. A... 589,120
Science Museum,
St. Paul Cert. of Part.,
AAA* 1,403 7.50%, 12/15/01........... 1,654,575
Southern Mun. Pwr. Agcy.,
Pwr. Supply Sys. Rev.,
Ser. B,
Aaa 500 5.50%, 1/1/15,
A.M.B.A.C............... 507,965
St. Louis Park Hosp. Rev.,
Methodist Hosp., Ser. C.
Aaa 1,400 7.25%, 7/1/18,
A.M.B.A.C............... 1,621,480
St. Louis Park Residential Mtge. Rev.,
Sngl. Fam. Mtge., Ser. A,
Aaa 945 7.25%, 4/20/23,
G.N.M.A................. 1,030,343
St. Paul Hsg. & Redev.
Auth., Tax
Increment Rev.,
Aaa 1,530 5.25%, 9/1/05,
A.M.B.A.C............... 1,576,420
Ramsey Med. Ctr. Proj.,
Aaa 420 5.55%, 5/15/23,
A.M.B.A.C............... 426,829
</TABLE>
B-276 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
St. Paul Port Auth.,
Energy Park
Tax Increment Rev.,
Baa $ 890 8.00%, 12/1/07............ $ 1,033,210
Univ. of Minnesota Rev.,
AAA* 150+ 9.625%, 2/1/05............ 166,161
A1 1,000 6.00%, 2/1/11, Ser. A..... 1,056,750
Western Mun. Pwr. Agcy.,
Supply Rev., Ser. A,
Aaa 325+ 9.50%, 1/1/13............. 373,974
A 500 5.50%, 1/1/15............. 502,515
Transmission Rev.,
Aaa 500+ 8.125%, 1/1/16,
A.M.B.A.C............... 560,325
-----------
Total long-term
investments
(cost $23,848,095)........ 26,720,259
-----------
SHORT-TERM INVESTMENTS--1.5%
Beltrami Cnty. Envirn.
Ctl. Rev.,
Northwood Panel Board
Prog.,
A-1+* 400 2.40%, 9/1/93, Ser. 91,
F.R.D.D.
(cost $400,000)......... 400,000
-----------
Total Investments--98.8%
(cost $24,248,095; Note
4)...................... 27,120,259
Other assets in excess of
liabilities--1.2%....... 339,590
-----------
Net Assets--100%.......... $27,459,849
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate Daily Demand Note. #
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
# For purposes of amortized cost valuation, the maturity date of these
instruments is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
@ Pledged as initial margin on financial futures contracts.
* Standard & Poor's ratings.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-277 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
-----------
<S> <C>
Investments, at value (cost $24,248,095)................................................... $27,120,259
Accrued interest receivable................................................................ 397,982
Receivable for Fund shares sold............................................................ 59,052
Other assets............................................................................... 833
-----------
Total assets............................................................................. 27,578,126
-----------
Liabilities
Accrued expenses........................................................................... 47,479
Bank overdraft............................................................................. 22,556
Dividends payable.......................................................................... 19,424
Due to Manager............................................................................. 11,609
Due to Distributors........................................................................ 11,316
Payable for Fund shares reacquired......................................................... 5,018
Due to broker-variation margin............................................................. 875
-----------
Total liabilities........................................................................ 118,277
-----------
Net Assets................................................................................. $27,459,849
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 22,274
Paid-in capital in excess of par......................................................... 24,507,638
-----------
24,529,912
Accumulated net realized gain............................................................ 58,210
Net unrealized appreciation.............................................................. 2,871,727
-----------
Net assets, August 31, 1993.............................................................. $27,459,849
-----------
-----------
Class A:
Net asset value and redemption price per share
($894,431 / 72,565 shares of beneficial interest issued and outstanding)............... $12.33
Maximum sales charge (4.5% of offering price)............................................ .58
-----------
Maximum offering price to public......................................................... $12.91
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($26,565,418 / 2,154,882 shares of beneficial interest issued and outstanding)......... $12.33
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-278
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1993
---------------
<S> <C>
Income
Interest............................. $ 1,675,054
---------------
Expenses
Management fee....................... 130,014
Distribution fee--Class A............ 616
Distribution fee--Class B............ 126,935
Custodian's fees and expenses........ 75,700
Transfer agent's fees and expenses... 34,500
Reports to shareholders.............. 24,000
Registration fees.................... 12,500
Audit fee............................ 10,500
Legal fees........................... 9,500
Trustees' fees....................... 3,375
Miscellaneous........................ 9,101
---------------
Total expenses..................... 436,741
---------------
Net investment income.................. 1,238,313
---------------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions.............. 248,244
Financial futures transactions....... (105,525)
---------------
142,719
---------------
Net change in unrealized appreciation/depreciation on:
Investments.......................... 1,111,580
Financial futures contracts.......... (437)
---------------
1,111,143
---------------
Net gain on investments................ 1,253,862
---------------
Net Increase in Net Assets
Resulting from Operations.............. $ 2,492,175
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1993 1992
------------ -----------
<S> <C> <C>
Operations
Net investment income..... $ 1,238,313 $ 1,287,989
Net realized gain on
investment
transactions............ 142,719 280,626
Net change in unrealized
appreciation/depreciation
on investments.......... 1,111,143 506,603
------------ -----------
Net increase in net assets
resulting from
operations.............. 2,492,175 2,075,218
------------ -----------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................. (31,491) (16,535)
Class B................. (1,206,822) (1,271,454)
------------ -----------
(1,238,313) (1,287,989)
------------ -----------
Distributions to
shareholders from
net realized gains on
investments
Class A................. (992) --
Class B................. (46,636) --
------------ -----------
(47,628) --
------------ -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 4,761,162 3,790,935
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 838,823 798,654
Cost of shares
reacquired................ (4,494,663) (4,057,062)
------------ -----------
Net increase in net assets
from Fund share
transactions............ 1,105,322 532,527
------------ -----------
Total increase.............. 2,311,556 1,319,756
Net Assets
Beginning of year........... 25,148,293 23,828,537
------------ -----------
End of year................. $ 27,459,849 $25,148,293
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-279
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Minnesota Series (the ``Series'')
commenced investment operations in October, 1984. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund and the Series in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations
B-280
<PAGE>
which may differ from generally accepted accounting principles.
Reclassification of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital and increase accumulated net realized
gains on investments by $749 compared to amounts previously reported through
August 31, 1992. Net investment income, net realized gains, and net assets were
not affected by this change.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers and employees of the
Fund, and occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A shares
of the Fund and Prudential Securities Incorporated (``PSI''), who acts as
distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse PMFD and PSI for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
year ended August 31, 1993. PMFD pays various broker-dealers, including PSI and
Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, and the cost of printing and mailing prospectuses to potential
investors and of advertising incurred in connection with the distribution of
shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the Plans,
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $18,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Plan. PSI has advised the Series that for the year ended August 31, 1993,
it received approximately $25,300 in contingent deferred sales charges imposed
upon certain redemptions by shareholders. PSI, as Distributor, has also advised
the Series that at August 31, 1993, the amount of distribution expenses incurred
by PSI and not yet reimbursed by the Series or recovered through contingent
deferred sales charges approximated $973,900. This amount may be recovered
through future payments under the Class B Plan or contingent deferred sales
charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
B-281
<PAGE>
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
wholly-owned subsidiary of with Affiliates
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1993, the Series incurred fees of approximately
$21,000 for the services of PMFS. As of August 31, 1993, approximately $2,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993, were $7,271,919 and $6,952,349, respectively.
At August 31, 1993 the Series sold 7 financial futures contracts on the
Municipal Bond Index expiring in December, 1993. The value at disposition of
such contracts was $828,406. The value of such contracts on August 31, 1993 was
$828,843, thereby resulting in an unrealized loss of $437. The Series had
pledged $1,105,000 principal amount of Minnesota State Housing Finance Agency
bonds as initial margin on such contracts.
The Series utilized its capital loss carryforward of approximately $6,500 to
partially offset the Series' net taxable gains realized and recognized in the
fiscal year ended August 31, 1993.
The cost basis of investments for federal income tax purposes at August 31,
1993 was substantially the same as the basis for financial reporting purposes
and, accordingly, net and gross unrealized appreciation of investments,
including short-term investments, for federal income tax purposes was
$2,872,164.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 1993 and 1992 were as follows:
<TABLE>
<S> <C> <C>
Class A Shares Amount
------------- -----------
Year ended August 31, 1993:
Shares sold................... 40,044 $ 478,217
Shares issued in reinvestment
of dividends and
distributions............... 2,253 26,990
Shares reacquired............. (3,877) (46,769)
------------- -----------
Net increase in shares
outstanding................. 38,420 $ 458,438
------------- -----------
------------- -----------
Year ended August 31, 1992:
Shares sold................... 18,976 $ 220,463
Shares issued in reinvestment
of dividends................ 1,164 13,518
Shares reacquired............. (6,041) (70,589)
------------- -----------
Net increase in shares
outstanding................. 14,099 $ 163,392
------------- -----------
------------- -----------
<CAPTION>
Class B
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 359,576 $ 4,282,945
Shares issued in reinvestment
of
dividends and
distributions............... 68,005 811,833
Shares reacquired............. (373,090) (4,447,894)
------------- -----------
Net increase in shares
outstanding................. 54,491 $ 646,884
------------- -----------
------------- -----------
Year ended August 31, 1992:
Shares sold................... 308,071 $ 3,570,472
Shares issued in reinvestment
of dividends................ 67,754 785,136
Shares reacquired............. (344,540) (3,986,473)
------------- -----------
Net increase in shares
outstanding................. 31,285 $ 369,135
------------- -----------
------------- -----------
</TABLE>
B-282
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
-------------------------------------- Class B
January 22, -----------------------------------------------
1990++
Year Ended August 31, Through Year Ended August 31,
------------------------ August 31, -----------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ ----------- ------- ------- ------- ------- -------
<CAPTION>
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $11.78 $11.40 $10.98 $ 11.14 $ 11.78 $ 11.41 $ 10.98 $ 11.14 $ 10.80
------ ------ ------ ----------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income.................. .62 .66 .64 .39 .58 .61 .60 .62 .66+
Net realized and unrealized gain (loss)
on
investment transactions.............. .57 .38 .42 (.16) .57 .37 .43 (.16) .34
------ ------ ------ ----------- ------- ------- ------- ------- -------
Total from investment operations..... 1.19 1.04 1.06 .23 1.15 .98 1.03 .46 1.00
------ ------ ------ ----------- ------- ------- ------- ------- -------
Less distributions
Dividends from net investment income... (.62) (.66) (.64) (.39) (.58) (.61) (.60) (.62) (.66)
Distributions from net realized
gains................................ (.02) -- -- -- (.02) -- -- -- --
------ ------ ------ ----------- ------- ------- ------- ------- -------
Total distributions.................. (.64) (.66) (.64) (.39) (.60) (.61) (.60) (.62) (.66)
------ ------ ------ ----------- ------- ------- ------- ------- -------
Net asset value, end of period......... $12.33 $11.78 $11.40 $ 10.98 $ 12.33 $ 11.78 $ 11.41 $ 10.98 $ 11.14
------ ------ ------ ----------- ------- ------- ------- ------- -------
------ ------ ------ ----------- ------- ------- ------- ------- -------
TOTAL RETURN#:......................... 10.45% 9.38% 9.93% 2.00% 9.99% 8.83% 9.64% 4.20% 9.51%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $894 $402 $229 $130 $26,565 $24,746 $23,600 $24,080 $22,933
Average net assets (000)............... $616 $291 $202 $87 $25,387 $24,038 $23,997 $23,558 $21,198
Ratios to average net assets:
Expenses, including distribution
fees............................... 1.29% 1.22% 1.41% 1.46%* 1.69% 1.62% 1.81% 1.78% 1.64%+
Expenses, excluding distribution
fees............................... 1.19% 1.11% 1.31% 1.33%* 1.19% 1.12% 1.31% 1.28% 1.17%+
Net investment income................ 5.15% 5.69% 5.73% 5.80%* 4.75% 5.29% 5.33% 5.49% 5.87%+
Portfolio turnover..................... 27% 32% 56% 30% 27% 32% 56% 30% 31%
<FN>
- ---------------
* Annualized.
+ Net of expense subsidy.
++ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-283
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Minnesota Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Minnesota Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Minnesota Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-284
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW JERSEY SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.0%
Atlantic City, Gen.
Oblig., Ser. A,
Baa1 $ 1,490 Zero Coupon, 11/1/06.... $ 718,508
Atlantic City Mun.
Utils. Auth.
Rev., Water System,
A-* 2,000 7.75%, 5/1/17........... 2,404,200
Bergen Cnty., Utils.
Auth.,
Wtr. Poll. Ctrl. Rev.,
F.G.I.C.,
Aaa 1,000 5.75%, 12/15/05, Ser.
B..................... 1,095,130
Aaa 7,250 Zero Coupon, 12/15/08,
Ser. B................ 3,307,305
Aaa 1,000 5.50%, 12/15/15, Ser.
A..................... 1,022,980
Camden Cnty. Fin. Auth.,
Aaa 1,600 Zero Coupon, 2/15/03.... 1,006,736
Camden Cnty. Mun. Utils.
Auth.,
Sewage Rev.,
Aaa 1,750 8.25%, 12/1/17,
F.G.I.C............... 2,056,145
Camden Cnty. Poll. Ctrl.
Fin. Auth.,
Solid Waste Res. Recovery Rev.,
Baa1 2,000 6.70%, 12/1/99, Ser.
D..................... 2,185,960
Baa1 3,500 7.50%, 12/1/09, Ser.
B..................... 3,956,085
Cape May Cnty. Ind.
Poll. Ctrl.,
Fin. Auth. Rev.,
Aaa 2,615 6.80%, 3/1/21,
M.B.I.A............... 3,263,912
Cherry Hill Township,
Aa 1,000 5.90%, 6/1/05........... 1,083,580
Aa 2,000 6.30%, 6/1/12........... 2,194,720
Cinnaminson Sewage Auth.
Rev.,
A1 1,600 7.40%, 2/1/15........... 1,848,976
Delaware River Jt. Toll Bridge Comn.,
Bridge Rev.,
A 3,050+** 7.875%, 7/1/18.......... 3,608,913
Delaware River Port
Auth. Rev.,
Pennsylvania & New
Jersey River Bridges,
Aaa $ 4,470 7.375%, 1/1/07,
A.M.B.A.C............. $ 5,148,054
Egg Harbor Twnshp. Sch.
Dist.,
Cert. of Part.,
Aaa 1,000 7.40%, 4/1/02,
M.B.I.A............... 1,147,150
Evesham Mun. Utils.
Auth. Rev.,
Ser. B, M.B.I.A.,
Aaa 2,000 7.00%, 7/1/10........... 2,256,040
Aaa 1,600 5.55%, 7/1/18........... 1,657,488
Guam Power Auth. Rev.,
BBB* 1,750 6.30%, 10/1/22, Ser.
A..................... 1,853,005
Hammonton, Gen. Oblig.,
A.M.B.A.C.,
Aaa 500 6.85%, 8/15/03.......... 593,440
Aaa 500 6.85%, 8/15/04.......... 595,950
Aaa 500 6.85%, 8/15/05.......... 597,455
Howell Twnshp. Mun.
Utils. Auth. Rev.,
NR 750+ 8.60%, 1/1/14, 2nd
Ser................... 912,465
Hudson Cnty., Impr.
Auth.,
Solid Waste Sys.,
BBB-* 6,500 7.10%, 1/1/20........... 7,262,970
Jackson Twnshp. Sch.
Dist., F.G.I.C.,
Aaa 1,020 6.60%, 6/1/04........... 1,187,617
Aaa 940 6.60%, 6/1/05........... 1,096,049
Aaa 1,600 6.60%, 6/1/10........... 1,875,936
Aaa 1,600 6.60%, 6/1/11........... 1,886,208
Jersey City, Gen.
Oblig.,
Aaa 4,310 9.25%, 5/15/04, Ser. A,
F.S.A................. 5,948,834
Jersey City, Redev.
Auth. Rev.,
Red Dixon Mill Apts.
Proj.,
AAA* 5,000 6.10%, 5/1/12,
F.N.M.A............... 5,412,200
Keansburg Mun. Utils.
Auth. Rev.,
Monmouth Cnty.,
Aaa 4,000 6.00%, 12/1/19,
F.G.I.C............... 4,296,040
</TABLE>
See Notes to Financial Statements.
B-285
<PAGE>
Prudential Municipal Series Fund
New Jersey Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Lakewood Twnshp., Gen.
Oblig.,
F.G.I.C.,
Aaa $ 450 6.60%, 12/1/04.......... $ 524,003
Aaa 445 6.60%, 12/1/05.......... 518,496
Lenape Regl. High Sch.
Dist.,
Aaa 400 7.625%, 1/1/12,
M.B.I.A............... 521,028
Mercer Cnty. Impvt.
Auth. Rev.,
Aa1 2,500 Zero Coupon, 4/1/06..... 1,316,825
Aa1 2,725 Zero Coupon, 4/1/07..... 1,351,464
Aa1 11,480 Zero Coupon, 4/1/16,
Ser. B................ 2,588,855
Solid Waste Site Proj.,
Aa1 1,500+ 7.80%, 4/1/13, Ser. A... 1,730,280
West Windsor Twnshp.
Police Proj.,
Aa 1,250 6.00%, 11/15/10......... 1,339,550
Middle Twnshp. Sch.
Dist.,
Aaa 1,200 7.00%, 7/15/05,
F.G.I.C............... 1,430,700
Middlesex Cnty.,
Aaa 1,500 4.50%, 7/15/01.......... 1,514,790
Aaa 1,000 4.60%, 7/15/02.......... 1,009,380
Monmouth Cnty. Impvt.
Auth. Rev.,
Asbury Park Proj.,
Baa 1,315 7.375%, 12/1/09......... 1,481,111
Board of Education
Proj.,
AA* 2,000 6.45%, 7/1/08........... 2,236,820
Nat'l. Auth. Rev.,
AA* 4,065 6.55%, 7/1/12........... 4,522,434
Wtr. Treatment Fac.,
Aaa 750 6.875%, 8/1/12,
M.B.I.A............... 846,225
New Jersey St. Bldg.
Auth. Rev.,
Garden St. Svg. Bonds,
Aa 890 Zero Coupon, 6/15/03,
Ser. A................ 551,453
New Jersey St. Econ.
Dev. Auth.,
BBB-* 2,725 6.20%, 12/1/07, Ser.
B..................... 2,836,316
BBB-* 600 6.20%, 12/1/10.......... 624,510
Amer. Airlines Inc.
Proj.,
Baa1 4,000 7.10%, 11/1/31.......... 4,345,960
New Jersey St. Econ.
Dev. Auth.,
Jersey Central Pwr. &
Light,
Aa $ 400 7.10%, 7/1/15........... $ 450,004
Morris Hall St. Lawrence
Proj.,
A+* 2,400 6.25%, 4/1/25........... 2,575,968
Nat'l. Assoc. of
Accountants,
NR 1,050 7.50%, 7/1/01........... 1,133,549
NR 950 7.65%, 7/1/09........... 1,039,272
Natural Gas Facs. Rev.,
A2 1,000 7.25%, 3/1/21, Ser. B... 1,099,730
New Jersey St. Edl.
Facs. Fin. Auth. Rev.,
Inst. For Advanced
Study,
Aaa 5,620 6.35%, 7/1/21, Ser. B... 6,163,510
Seton Hall Univ. Proj.,
Aaa 680 6.25%, 7/1/07, Ser. B,
M.B.I.A............... 746,966
Baa 2,900 7.00%, 7/1/21, Ser. D... 3,246,898
New Jersey St. Higher
Ed.,
Assistance Auth.,
Student Loan Rev.,
Ser. A,
A 1,005 6.70%, 1/1/99........... 1,083,048
A 840 6.70%, 7/1/99........... 910,518
A 1,200 6.85%, 1/1/01........... 1,318,560
A 1,275 6.85%, 7/1/01........... 1,407,957
A 840 7.00%, 7/1/05........... 871,903
New Jersey St. Hlth.
Care Facs. Fin. Auth.
Rev.,
Atlantic City Med.
Ctr.,
A 4,150 6.80%, 7/1/11, Ser. C... 4,577,533
Burdette Tomlin Mem.
Hosp.,
Aaa 1,000+ 8.125%, 7/1/12,
F.G.I.C., Ser. C...... 1,170,690
Columbus Hosp.,
Ba1 5,900 7.50%, 7/1/21, Ser. A... 6,085,201
Deborah Heart & Lung
Ctr.,
Baa1 1,000 6.20%, 7/1/13........... 1,048,650
Baa1 1,100 6.30%, 7/1/23........... 1,154,197
East Orange Gen. Hosp.,
BBB* 2,250 7.75%, 7/1/20, Ser. B... 2,532,960
</TABLE>
B-286 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
New Jersey Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
New Jersey St. Hlth.
Care Facs. Fin. Auth.
Rev.,
Helene Fuld Med. Ctr.,
A* $ 2,700 8.00%, 7/1/08, Ser. C... $ 3,106,350
A* 500 8.125%, 7/1/13, Ser.
C..................... 576,275
Holy Name Hosp.,
Aaa 3,460 6.875%, 7/1/04, Ser. A,
A.M.B.A.C............. 3,808,526
Intercare Hlth. Systems-JFK Ctr.,
A 1,000 7.50%, 7/1/07........... 1,112,230
A 1,000 7.625%, 7/1/18.......... 1,117,510
Kensington Cmnty. Med.
Ctr.,
Aaa 3,700 7.00%, 7/1/20,
M.B.I.A............... 4,231,912
Shore Mem. Hosp.,
M.B.I.A.,
Aaa 3,000 7.875%, 7/1/07, Ser.
C..................... 3,447,870
St. Claires Riverside
Med. Ctr.,
B.I.G.,
Aaa 1,750 7.60%, 7/1/02, Ser. D... 1,993,355
Aaa 1,380 7.75%, 7/1/14........... 1,579,162
St. Peters Med. Ctr., M.B.I.A.,
Aaa 1,725 6.50%, 7/1/07, Ser. E... 1,926,204
New Jersey St. Hsg. &
Mtge. Fin. Agcy.,
Aa 3,757** 6.25%, 4/1/07........... 3,813,338
Aaa 3,450 7.65%, 10/1/16, Ser. E,
M.B.I.A............... 3,631,815
Aaa 7,590 7.70%, 10/1/29, Ser. D,
M.B.I.A............... 8,362,131
Multi-family Hsg. Rev.,
AAA* 8,000 7.00%, 5/1/30, F.H.A.... 8,827,760
Tiffany Manor,
A+* 2,190 6.75%, 11/1/11, Ser.
B..................... 2,390,144
New Jersey St. Hwy.
Auth.,
Garden St. Pkwy. Gen.
Rev.,
A1 3,035 6.20%, 1/1/10........... 3,408,973
Aaa 4,365+ 7.25%, 1/1/16........... 5,092,209
New Jersey St. Tpke.
Auth. Rev.,
AAA* 2,990 10.375%, 1/1/03......... 3,810,067
A 2,000 6.75%, 1/1/08, Ser. A... 2,262,780
A 1,000 6.50%, 1/1/09, Ser. C... 1,139,530
A 5,000 6.50%, 1/1/16, Ser. C... 5,750,900
New Jersey St. Trans.
Trust Fund Auth.,
Aa $ 2,000 6.00%, 6/15/02, Ser.
A..................... $ 2,182,260
New Jersey St.
Wastewater
Treatment, Trust Loan
Rev.,
Aa 1,000 6.875%, 6/15/06......... 1,110,720
Aa 7,090 6.875%, 6/15/08......... 8,066,789
Aa 2,210 6.00%, 7/1/09, Ser. A... 2,372,722
North Brunswick Twnshp.,
Brd. of Ed.,
AA* 350 6.80%, 6/15/06.......... 414,442
AA* 350 6.80%, 6/15/07.......... 415,671
Gen. Oblig.,
Aa 2,000 6.40%, 5/15/10.......... 2,226,000
Ocean Cnty. Utils.
Auth.,
Wastewater Rev.,
Aaa 4,100 5.00%, 1/1/14,
F.G.I.C............... 4,053,260
Old Bridge Twnshp. Mun.
Utils.
Auth., Sys. Rev.,
Aaa 1,000+ 8.00%, 11/1/16,
F.G.I.C............... 1,149,010
Paterson Cnty.,
Aaa 2,000 6.50%, 2/15/05,
F.S.A................. 2,260,740
Pennsauken Twnshp.,
Brd. of Ed., Cert. of
Part.,
Aaa 1,030 7.70%, 7/15/09,
B.I.G................. 1,216,543
Pequannock Twnshp. Brd.
of Ed.,
Cert. of Part.,
Aaa 750 7.875%, 3/1/08,
B.I.G................. 841,253
Port Auth. of New York &
New Jersey,
A1 5,300 7.125%, 6/1/25, Ser.
69.................... 6,060,974
Puerto Rico Comnwlth.
Pub. Impvt.,
Baa1 3,000 5.40%, 7/1/07........... 3,058,410
Baa1 5,000 7.00%, 7/1/10........... 5,878,500
Puerto Rico Comnwlth.,
Gen. Oblig.,
Baa1 4,190 5.00%, 7/1/01........... 4,257,543
Puerto Rico Elec. Pwr.
Auth. Rev. Ref.,
Baa1 1,500 8.40%, 7/1/15, Ser. L... 1,723,845
</TABLE>
B-287 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
New Jersey Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* $ 745 7.50%, 4/1/22........... $ /807,512
Puerto Rico Hwy. Auth.
Rev.,
Baa1 1,000 6.75%, 7/1/05, Ser. R... 1,115,030
Baa1 2,000+ 7.75%, 7/1/10, Ser. Q... 2,434,660
Baa1 5,550+ 7.75%, 7/1/16, Ser. Q... 6,774,719
Baa1 750+ 6.50%, 7/1/22, Ser. S... 866,820
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth.
Facs.,
Baa1 5,500+ 7.875%, 7/1/16, Ser.
H..................... 6,409,315
Baa1 6,150 5.50%, 7/1/21, Ser. M... 6,063,224
Baa1 3,750+ 6.875%, 7/1/21, Ser.
L..................... 4,431,563
Puerto Rico Tel. Auth.
Rev.,
Aaa 7,875 7.66%, 1/25/07, Ser. M,
M.B.I.A............... 8,357,343
A 2,000 5.50%, 1/1/22, Ser. N... 2,026,780
Rutgers St. Univ. Rev.,
A1 2,000 5.10%, 5/1/05, Ser. S... 2,047,580
Aaa 3,500+** 8.10%, 5/1/07, Ser. A... 4,071,270
A1 2,060 5.25%, 5/1/11, Ser. S... 2,090,385
A1 2,015 5.25%, 5/1/11, Ser. T... 2,044,720
A1 2,810 6.85%, 5/1/12, Ser. P... 3,216,607
A1 2,375 5.25%, 5/1/14........... 2,385,094
Sayreville, Hsg. Dev.
Corp., Mtge. Rev.,
AAA* 2,000 7.75%, 8/1/24, F.H.A.... 2,351,860
South Brunswick Twnshp.,
Wtr. & Swr. Utils.,
Gen. Impvt.,
Aa 850 6.90%, 8/1/05........... 979,260
Aa 850 6.90%, 8/1/06........... 973,250
South Jersey Port Corp.
Rev.,
Marine Term.,
A+* 1,250 4.90%, 1/1/08........... 1,276,087
A+* 2,000 5.60%, 1/1/23, Ser. G... 2,033,380
South Jersey Trans.
Auth.,
Aaa $ 1,200 5.90%, 11/1/07, Ser. B,
M.B.I.A............... $ 1,298,927
Stony Brook Regl. Swr.
Auth. New Jersey Rev.,
Aa 2,895 5.45%, 12/1/12, Ser.
B..................... 3,007,210
Union Cnty. Utils.
Auth.,
Solid Waste Rev., Ser.
A,
A-* 1,255 7.10%, 6/15/06.......... 1,381,128
A-* 6,850 7.20%, 6/15/14.......... 7,615,214
Univ. of Medicine &
Dentistry,
A 1,750 6.50%, 12/1/18, Ser.
E..................... 1,923,758
Virgin Islands Port
Auth.,
Marine Div. Rev.,
NR 1,385 10.125%, 11/1/05, Ser.
A..................... 1,572,971
Virgin Islands Pub. Fin.
Auth. Rev.,
Hwy. Trans. Trust
Fund,
BBB* 2,750 7.70%, 10/1/04.......... 3,174,297
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
NR 2,160 7.75%, 10/1/06, Ser.
91.................... 2,493,742
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 1,400 8.50%, 1/1/10, Ser. A... 1,608,796
West Morris Regl. High
Sch. Dist.,
Cert. of Part.,
Aaa 1,500 7.50%, 3/15/09,
B.I.G................. 1,739,430
West New York & New
Jersey,
Mun. Utils., Auth.
Swr. Rev.,
Aaa 3,540 Zero Coupon, 12/15/06,
F.G.I.C............... 1,812,799
------------
Total long-term
investments
(cost $317,295,849)..... 352,449,819
------------
</TABLE>
B-288 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
New Jersey Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--0.8%
Port Auth. of New York &
New Jersey,
Versatile Structure
Spec. Obligation,
F.R.D.D.,
VMIG1 $ 2,700 2.50%, 9/1/93, Ser. 1... $ 2,700,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 500 2.15%, 9/8/93, Ser.
85.................... 500,000
------------
Total short-term
investments
(cost $3,200,000)....... 3,200,000
------------
Total Investments--96.8%
(cost $320,495,849; Note
4).................... 355,649,819
Other assets in excess
of
liabilities--3.2%..... 11,728,876
------------
Net Assets--100%........ $367,378,695
------------
------------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's Rating.
** Principal amount segregated as collateral for futures contracts. Aggregate
Value of Segregated Securities--$11,493,521.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-289 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
----------------
<S> <C>
Investments, at value (cost $320,495,849).............................................. $355,649,819
Cash................................................................................... 83,701
Receivable for investments sold........................................................ 6,434,161
Accrued interest receivable............................................................ 4,856,313
Receivable for fund shares sold........................................................ 1,523,553
Deferred expenses and other assets..................................................... 5,469
Due from broker-variation margin....................................................... 3,125
----------------
Total assets......................................................................... 368,556,141
----------------
Liabilities
Payable for fund shares reacquired..................................................... 504,197
Dividends payable...................................................................... 292,255
Due to distributors.................................................................... 148,185
Accrued expenses....................................................................... 117,776
Due to manager......................................................................... 115,033
----------------
Total liabilities.................................................................... 1,177,446
----------------
Net Assets............................................................................. $367,378,695
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 312,877
Paid-in capital in excess of par..................................................... 328,014,087
----------------
328,326,964
Accumulated net realized gain........................................................ 3,980,261
Net unrealized appreciation.......................................................... 35,071,470
----------------
Net assets, August 31, 1993.......................................................... $367,378,695
----------------
----------------
Class A:
Net asset value and redemption price per share ($15,501,028 / 1,320,055 shares of
beneficial interest issued and outstanding)........................................ $11.74
Maximum sales charge (4.5% of offering price)........................................ .55
----------------
Maximum offering price to public..................................................... $12.29
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share ($351,877,667 /
29,967,641 shares of beneficial interest issued and outstanding)................... $11.74
----------------
----------------
</TABLE>
See Notes to Financial Statements.
B-290
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................ $20,594,078
-----------
Expenses
Management fee, net of waiver of
$412,271............................ 1,236,812
Distribution fee--Class A........... 13,444
Distribution fee--Class B........... 1,581,862
Custodian's fees and expenses....... 195,300
Transfer agent's fees and
expenses............................ 136,000
Registration fees................... 40,000
Reports to shareholders............. 39,000
Audit fee........................... 10,500
Legal fees.......................... 9,500
Insurance expense................... 8,800
Trustees' fees...................... 3,375
Amortization of organization
expenses............................ 2,200
Miscellaneous....................... 8,800
-----------
Total expenses................. 3,285,593
-----------
Net investment income................. 17,308,485
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 4,459,642
Financial futures contracts
transactions........................ (42,600)
-----------
4,417,042
-----------
Net change in unrealized appreciation/depreciation
of:
Investments......................... 16,811,814
Financial futures contracts......... (82,500)
-----------
16,729,314
-----------
Net gain on investments............... 21,146,356
-----------
Net Increase in Net Assets
Resulting from Operations............. $38,454,841
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------
Increase in Net Assets 1993 1992
------------ ------------
<S> <C> <C>
Operations
Net investment
income................. $ 17,308,485 $ 16,070,386
Net realized gain on
investment
transactions......... 4,417,042 3,870,066
Net change in
unrealized
appreciation of
investments.......... 16,729,314 9,288,550
------------ ------------
Net increase in net
assets resulting from
operations........... 38,454,841 29,229,002
------------ ------------
Dividends and
distributions to
shareholders (Note 1):
Dividends to
shareholders from net
investment income
Class A................ (755,963) (597,794)
Class B................ (16,552,522) (15,472,592)
------------ ------------
(17,308,485) (16,070,386)
------------ ------------
Distributions to
shareholders from net
realized gains on
investments
Class A................ (130,182) (71,899)
Class B................ (3,218,353) (2,035,495)
------------ ------------
(3,348,535) (2,107,394)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from
shares
subscribed........... 66,639,119 63,212,920
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 12,440,617 10,452,102
Cost of shares
reacquired............. (37,221,332) (29,356,525)
------------ ------------
Net increase in net
assets from Fund
share transactions... 41,858,404 44,308,497
------------ ------------
Total increase........... 59,656,225 55,359,719
Net Assets
Beginning of year........ 307,722,470 252,362,751
------------ ------------
End of year.............. $367,378,695 $307,722,470
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-291
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Notes to Financial Statement
Prudential Municipal Series Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984, and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Series (the ``Series'')
commenced investment operations in March 1988. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
B-292
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Deferred Organization Expenses: The Series incurred $21,000 in organization and
initial registration expenses. Such amount was deferred and amortized over a
period of 60 months ended March 1993.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''), PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the
services of PIC, the cost of compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the year ended August 31, 1993, PMF waived 25% of its management fee. The amount
of fees waived for the year ended August 31, 1993, amounted to $412,271 ($0.013
per share; 0.13% of average net assets).
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net asset value of the Class A shares. Such expenses under the Class A
Plan were .10 of 1% of the average daily net asset value of the Class A shares
for the year ended August 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the Plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $150,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI advised the Series that for the year ended
August 31, 1993, it received approximately $451,000 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as Distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $9,954,900. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-293
<PAGE>
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1993, the Series incurred fees of approximately
$106,500 for the services of PMFS. As of August 31, 1993, approximately $9,400
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993, were $135,191,866 and $101,001,650, respectively.
At August 31, 1993, the Series sold 20 financial futures contracts on the
Municipal Bond Index expiring in September 1993. The value at disposition of
such contracts was $2,000,625. The value of such contracts on August 31, 1993
was $2,083,125, thereby resulting in an unrealized loss of $82,500. The Series
has pledged $3,050,000 principal amount of Delaware River Joint Toll Bridge
Community bonds, $3,500,000 principal amount of Rutgers State University Revenue
bonds, and $3,756,983 principal amount of New Jersey State Housing & Mortgage
Finance Agency bonds as initial margin on such contracts.
The federal income tax basis of the Series' investments at August 31, 1993,
was $320,508,124 and, accordingly, gross and net unrealized appreciation for
federal income tax purposes is $35,141,695.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993, and 1992 were as follows:
<TABLE>
<S> <C> <C>
Class A Shares Amount
---------- ------------
Year ended August 31, 1993:
Shares sold................... 481,101 $ 5,443,721
Shares issued in reinvestment
of dividends and
distributions............... 49,263 555,537
Shares reacquired............. (280,954) (3,184,387)
---------- ------------
Net increase in shares
outstanding................. 249,410 $ 2,814,871
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................... 448,824 $ 4,907,630
Shares issued in reinvestment
of dividends and
distributions............... 37,173 404,649
Shares reacquired............. (164,663) (1,798,760)
---------- ------------
Net increase in shares
outstanding................. 321,334 $ 3,513,519
---------- ------------
---------- ------------
Class B
Year ended August 31, 1993:
Shares sold................... 5,414,811 $ 61,195,397
Shares issued in reinvestment
of dividends and
distributions............... 1,055,089 11,885,079
Shares reacquired............. (3,024,547) (34,036,945)
---------- ------------
Net increase in shares
outstanding................. 3,445,353 $ 39,043,531
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................... 5,356,831 $ 58,305,290
Shares issued in reinvestment
of dividends and
distributions............... 923,445 10,047,453
Shares reacquired............. (2,528,217) (27,557,765)
---------- ------------
Net increase in shares
outstanding................. 3,752,059 $ 40,794,978
---------- ------------
---------- ------------
</TABLE>
B-294
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 22,
1990++
Year Ended August 31, Through Year Ended August 31,
---------------------------- August 31, --------------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
------
------- ------- ------ -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 11.15 $ 10.73 $10.16 $10.30 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95
------- ------- ------ ------ -------- -------- -------- -------- --------
Income from investment
operations
Net investment
income+.............. .64 .67 .69 .41 .59 .63 .65 .67 .73
Net realized and
unrealized gain
(loss)
on investment
transactions......... .71 .51 .59 (.14) .71 .51 .59 (.14) .38
------- ------- ------ ------ -------- -------- -------- -------- --------
Total from investment
operations......... 1.35 1.18 1.28 .27 1.30 1.14 1.24 .53 1.11
------- ------- ------ ------ -------- -------- -------- -------- --------
Less distributions
Dividends from net
investment income.... (.64) (.67) (.69) (.41) (.59) (.63) (.65) (.67) (.73)
Distributions from net
realized gains....... (.12) (.09) (.02) -- (.12) (.09) (.02) (.03) --
------- ------- ------ ------ -------- -------- -------- -------- --------
Total
distributions........ (.76) (.76) (.71) (.41) (.71) (.72) (.67) (.70) (.73)
------- ------- ------ ------ -------- -------- -------- -------- --------
Net asset value, end of
period............... $ 11.74 $ 11.15 $10.73 $10.16 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33
------- ------- ------ ------ -------- -------- -------- -------- --------
------- ------- ------ ------ -------- -------- -------- -------- --------
TOTAL RETURN#:......... 12.57% 11.35% 12.96% 2.70% 12.12% 10.93% 12.52% 5.28% 11.48%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)......... $15,501 $11,941 $8,041 $3,616 $351,878 $295,781 $244,322 $180,636 $125,650
Average net assets
(000)................ $13,444 $9,759 $5,637 $1,902 $316,372 $269,318 $208,893 $155,162 $79,269
Ratios to average net
assets:+
Expenses, including
distribution fees.. .61% .48% .29% .20%* 1.01% .88% .69% .50% .20%
Expenses, excluding
distribution fees.. .51% .38% .19% .10%* .51% .38% .19% .10% .14%
Net investment
income............... 5.63% 6.14% 6.58% 6.79%* 5.23% 5.74% 6.18% 6.50% 6.55%
Portfolio turnover..... 32% 38% 116% 87% 32% 38% 116% 87% 20%
<FN>
- ---------------
* Annualized.
+ Net of management and/or distribution fee waiver.
++ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-295
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New Jersey Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New Jersey Series, as of August 31, 1993, the results of its
operations, the changes in net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-296
<PAGE>
PRUDENTIAL MUNICIPAL SERIES Portfolio of Investments
NEW JERSEY MONEY MARKET August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Atlantic Cnty. Impvt.
Auth. Rev.,
Pooled Gov't. Loan,
VMIG1 $ 3,800 2.50%, 9/1/93, Ser. 86,
F.R.W.D................ $ 3,800,000
Bayonne, T.A.N.,
MIG1 5,000 2.78%, 10/1/93........... 5,001,539
Burlington Cnty., B.A.N.,
NR 2,000 2.93%, 8/12/94........... 2,000,550
Camden Cnty., B.A.N.,
NR 2,300 3.25%, 2/28/94, Ser. C... 2,305,378
Cherry Hill Twnshp.,
B.A.N.,
NR 2,600 2.17%, 9/30/93........... 2,600,139
Edison Twnshp., T.A.N.,
NR 7,500 2.62%, 12/17/93.......... 7,504,733
Essex Cnty., B.A.N.,
MIG1 4,000 3.00%, 10/7/93, Ser. B... 4,002,160
Ft. Lee, T.A.N.,
NR 5,000 2.69%, 2/1/94............ 5,000,793
Gloucester Cnty. Ind.
Poll. Ctrl.,
Fin. Auth. Rev.,
Monsanto Co. Proj.,
P1 3,120 2.40%, 9/1/93, Ser. 92... 3,120,000
Hudson Cnty. Impvt. Auth., F.R.W.D.
Pooled Gov't. Loan Prog.,
A-1* 4,445 2.40%, 9/2/93, Ser. 86... 4,445,000
Solid Waste Res. Rec.
Rev.,
P1 4,000 2.40%, 9/2/93, Ser.
89A.................... 4,000,000
Hudson County Impvt.
Auth. Solid Waste,
F.R.W.D.,
Res. Rec. Rev.,
A1+* 3,000 2.40%, 9/2/93, Ser.
89B.................... 3,000,000
Jersey City, B.A.N.,
MIG2 10,000 3.50%, 9/20/93........... 10,001,262
Maplewood Twnshp.,
T.A.N.,
NR 3,500 2.33%, 9/14/93........... 3,500,097
Mercer County, T.A.N.,
NR 8,000 2.60%, 4/15/94........... 8,000,000
Montgomery Twnshp.,
B.A.N.,
NR 2,283 3.00%, 12/17/93.......... 2,286,400
New Jersey St. Econ. Dev.
Auth.,
No. Plainfield Holding
Co., O.T.,
Dev. Rev.,
VMIG 4,335 3.05%, 9/1/94............ 4,335,000
New Jersey St. Econ. Dev.
Auth., F.R.D.D.,
400 Rockefeller Intl. Dr. Partners,
Aaa $ 1,900 2.30%, 9/1/93, Ser. 85... $ 1,900,000
New Jersey St. Econ. Dev.
Auth., F.R.W.D.,
Applewood Ctr. for Aging,
A-1+* 4,500 2.50%, 9/2/93, Ser. 89... 4,500,000
GSA Bldg. Assoc.,
A1+* 4,200 2.75%, 9/1/93, Ser. 85... 4,200,000
Kent Place,
VMIG1 2,000 2.50%, 9/2/93, Ser.
92L.................... 2,000,000
Marriot Corp. Proj.,
P1 6,700 2.65%, 9/1/93, Ser. 84... 6,700,000
Owens Drive Bldg. Ltd.,
A1+* 1,200 2.75%, 9/1/93, Ser. 84... 1,200,000
A1+* 1,450 2.75%, 9/1/93, Ser. 90... 1,450,000
Raritan Bldg. Assoc.,
A1+* 3,500 2.60%, 9/1/93, Ser. 85... 3,500,000
Russ Berrie & Co.,
P1 200 2.50%, 9/1/93, Ser. 83... 200,000
West Essex Assoc. Ltd.,
A1+* 1,300 2.60%, 9/1/93, Ser. 84... 1,300,000
New Jersey St. Econ. Dev.
Auth., F.R.W.D., Poll.
Ctrl. Rev.,
Gen. Motors Proj.,
VMIG2 7,350 2.55%, 9/8/93............ 7,350,000
New Jersey St. Econ. Dev.
Auth.,
T.E.C.P., Rev. Adj.,
Chambers Cogeneration
Proj.,
VMIG1 2,000 2.25%, 9/1/93............ 2,000,000
VMIG1 3,000 2.45%, 9/9/93............ 3,000,000
VMIG1 2,500 2.50%, 9/14/93........... 2,500,000
Rev. Keystone Proj.,
VMIG1 2,360 2.40%, 11/30/93.......... 2,360,000
New Jersey St., O.T.,
VMIG1 8,000 2.80%, 2/15/94, Ser.
A-4.................... 8,000,000
New Jersey St. Hsg. &
Mtge. Fin. Agcy. Rev.,
NR 4,785 2.35%, 10/1/93, Ser.
88A.................... 4,785,000
Home Mtge., M.B.I.A.
NR 3,485 2.70%, 10/1/93, Ser. D... 3,485,000
</TABLE>
-4- See Notes to Financial Statements.
B-297
<PAGE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
No. Brunswick Twnshp.,
T.A.N.,
NR $ 4,000 2.75%, 2/15/94........... $ 4,004,446
Port Auth. New York & New
Jersey,
Spec. Oblig., F.R.D.D.,
VMIG 1,100 2.50%, 9/1/93, Ser. 1.... 1,100,000
Port Auth. New York & New Jersey,
F.R.D.D.,
NR 8,000 2.375%, 9/1/93........... 8,000,000
Spec. Oblig. Rev.,
KIAC Partners Proj.,
VMIG1 2,900 2.40%, 9/1/93, Ser. 3.... 2,900,000
Ridgewood, B.A.N.,
NR 3,135 2.78%, 8/3/94............ 3,136,097
Roxbury Twnshp.,
NR 3,978 2.83%, 9/17/93, B.A.N.... 3,978,451
Trenton, B.A.N.,
NR 2,500 3.00%, 2/4/94............ 2,502,587
------------
Total Investments--98.7%
(amortized cost--
$160,954,632**)........ 160,954,632
Other assets in excess of
liabilities--1.3%...... 2,132,169
------------
Net Assets--100%......... $163,086,801
------------
------------
<FN>
(a) The following abbreviations are used in portfolio descriptions:
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
M.B.I.A.--Municipal Bond Insurance Association
O.T.--Optional Tender
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax Exempt Commercial Paper.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-298 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Year Ended
August 31,
Assets 1993
------------
<S> <C>
Investments, at amortized cost which approximates market value............................ $160,954,632
Cash...................................................................................... 101,207
Receivable for investments sold........................................................... 4,410,000
Receivable for Fund shares sold........................................................... 2,481,118
Accrued interest receivable............................................................... 1,160,340
Deferred expenses and other assets........................................................ 18,418
------------
Total assets.......................................................................... 169,125,715
------------
Liabilities
Payable for investments purchased......................................................... 4,002,160
Payable for Fund shares reacquired........................................................ 1,863,920
Accrued expenses and other liabilities.................................................... 72,285
Dividends payable......................................................................... 50,541
Due to Manager............................................................................ 39,937
Due to Distributor........................................................................ 10,071
------------
Total liabilities..................................................................... 6,038,914
------------
Net Assets................................................................................ $163,086,801
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value........................................ $ 1,630,868
Paid-in capital in excess of par........................................................ 161,455,933
------------
Net assets, August 31, 1993............................................................. $163,086,801
------------
------------
Net asset value, offering price and redemption price per share ($163,086,801 /
163,086,801 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized).................................................................... $1.00
------------
------------
</TABLE>
See Notes to Financial Statements.
B-299
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest............................ $4,528,157
----------
Expenses
Management fees, net of waiver of
$323,145............................ 523,804
Distribution fee.................... 212,629
Custodian's fees and expenses....... 155,000
Transfer agent's fees and
expenses............................ 81,000
Reports to shareholders............. 45,000
Registration fees................... 37,000
Audit fees.......................... 10,000
Legal fees and expenses............. 9,500
Deferred organization expenses...... 6,639
Trustees' fees...................... 3,375
Miscellaneous....................... 1,147
----------
Total expenses.................... 1,085,094
----------
Net investment income................. 3,443,063
----------
Net Increase in Net Assets
Resulting from Operations............. $3,443,063
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease)
in Net Assets
Year Ended August 31,
------------------------------
1993 1992
------------- -------------
Operations
<S> <C> <C>
Net investment
income................ $ 3,443,063 $ 5,199,142
Net realized gain on
investment
transactions........ -- 726
------------- -------------
Net increase in net
assets
resulting from
operations.......... 3,443,063 5,199,868
------------- -------------
Dividends and
distribuions to
shareholders (Note
1).................... (3,443,063) (5,199,868)
------------- -------------
Fund share transactions
(at $1 per share)
Net proceeds from
shares
subscribed.......... 492,846,812 477,627,758
Net asset value of
shares
issued in
reinvestment of
dividends and
distributions....... 3,379,946 5,097,538
Cost of shares
reacquired............ (497,232,130) (436,092,994)
------------- -------------
Net increase
(decrease) in net
assets from Fund
share
transactions........ (1,005,372) 46,632,302
------------- -------------
Total increase
(decrease)............ (1,005,372) 46,632,302
Net Assets
Beginning of year....... 164,092,173 117,459,871
------------- -------------
End of year............. $ 163,086,801 $ 164,092,173
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-300
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Money Market Series (the
``Series'') commenced investment operations on December 3, 1990. The Series is
non-diversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New Jersey State and federal income
taxes with a minimum of risk by investing in ``investment grade'' tax-exempt
securities maturing within 13 months or less and whose ratings are within the
two highest ratings categories by a nationally recognized statistical rating
organization, or if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Deferred Organization Expenses: The Series incurred $32,200 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending December 1995.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of each of the Series.
Prior to March 1, 1993, PMF voluntarily waived 50% of its management fees for
the Series. On March 1, 1993, PMF reduced the management fee waiver to 25%. The
amount of such fees waived for the year ended August 31, 1993 amounted to
$323,145 ($.002 per share; .19% of average net assets).
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
B-301
<PAGE>
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$72,500 for the services of PMFS. As of August 31, 1993, approximately $7,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
B-302
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
December 3,
Year Ended August 1990*
31, Through
-------------------- August 31,
1993 1992 1991
-------- -------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................ $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains+................................... .02 .04 .03
Dividends and distributions..................................................... (.02) (.04) (.03)
-------- -------- -----------
Net asset value, end of period.................................................. $ 1.00 $ 1.00 $ 1.00
-------- -------- -----------
-------- -------- -----------
TOTAL RETURN#:.................................................................. 2.31% 3.48% 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................................. $163,087 $164,092 $ 117,460
Average net assets (000)........................................................ $170,103 $155,915 $ 89,273
Ratios to average net assets+:
Expenses, including distribution fee.......................................... .64% .32% .13%**
Expenses, excluding distribution fee.......................................... .51% .19% .00%**
Net investment income......................................................... 2.02% 3.33% 4.48%**
<FN>
---------------
* Commencement of investment operations.
** Annualized.
+ Net of management fee waiver and/or expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total returns for periods of less than
one year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-303
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New Jersey Money Market Series, including the
portfolio of investments, as of August 31, 1993, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
two years in the period then ended and for the period December 3, 1990
(commencement of investment operations) through August 31, 1991. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New Jersey Money Market Series, as stated August 31, 1993, the
results of its operations, the changes in net assets and the financial
highlights for the respective periods in conformity with generally accepted
accounting principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-304
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW YORK SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.9%
Babylon Ind. Dev. Agcy.
Res. Recovery Rev.,
Babylon Cmnty. Waste
Mgmt. Facs.,
Baa1 $ 3,520 7.875%, 7/1/06, Ser.
A..................... $ 4,005,936
Ogden Martin Sys., Inc.,
Baa1 495 8.50%, 1/1/19, Ser. B... 573,700
Baa1 3,450 8.50%, 1/1/19, Ser. C... 3,998,515
Buffalo Swr. Auth. Sys.
Rev.,
Aaa 2,400 5.00%, 7/1/12, Ser. G
F.G.I.C............... 2,370,984
City of New Rochelle
Ind. Dev.,
Agcy., Coll. of New
Rochelle,
BBB-* 500 6.625%, 7/1/12.......... 527,835
BBB-* 2,000 6.75%, 7/1/22........... 2,113,080
Dutchess Cnty. Res. Rec. Agcy. Rev.,
Solid Waste Mgmt.,
Aaa 1,150 7.50%, 1/1/09, Ser. A,
F.G.I.C............... 1,338,888
Great Neck No. Wtr.
Auth.,
Wtr. Sys. Rev.,
A1 1,750 7.00%, 1/1/18, Ser. A... 1,966,458
Guam Pwr. Auth. Rev.,
BBB* 1,750 6.30%, 10/1/22, Ser.
A..................... 1,853,005
Jefferson Cnty. Ind.
Dev. Agcy.
Solid Waste Disposal
Rev.,
Baa1 1,500 7.20%, 12/1/20.......... 1,660,845
Metro. Trans. Auth.
Facs. Rev.,
Commuter Facs.,
Baa1 1,000 5.75%, 7/1/13, Ser. O... 1,021,340
Baa1 1,000 5.50%, 7/1/17, Ser. O... 976,560
Transit Facs.,
Baa1 3,000 7.00%, 7/1/12, Ser. 5... 3,385,740
Nassau Cnty. Ind. Dev. Agcy. Rev.,
Hofstra Univ. Proj.,
A 2,500+ 8.25%, 7/1/03........... 2,971,775
Nassau Cnty. Ind. Dev. Agcy. Rev.,
Long Beach Proj.,
NR $ 1,550 9.25%, 1/1/97........... $ 1,677,395
S&S Incinerator Jt. Venture Proj.,
NR 2,785 9.00%, 1/1/07........... 3,021,725
New York Business
Improv. Dist.,
34th St. Partnership
Inc.,
A1 2,000 5.50%, 1/1/23........... 1,982,560
New York City, Gen.
Oblig.,
Baa1 1,900 8.00%, 6/1/99, Ser. B... 2,215,609
Baa1 4,000 7.50%, 2/1/01, Ser. B... 4,570,440
Baa1 3,500 7.75%, 3/15/03, Ser.
A..................... 4,069,135
Baa1 2,500 8.00%, 8/1/03, Ser. D... 2,990,575
Baa1 3,000 8.20%, 11/15/03, Ser.
F..................... 3,648,900
Baa1 3,040 7.70%, 2/1/09, Ser. D... 3,539,077
Baa1 2,275 7.00%, 10/1/10, Ser.
B..................... 2,538,832
New York City Hsg. Dev.
Corp.
Mtge. Rev., So. Bronx
>Co-operatives,
Aa 1,000 8.10%, 9/1/23, Ser. A... 1,114,880
New York City Ind. Dev.
Agcy., Spec. Fac.
Rev.,
Amer. Airlines Inc.,
Baa2 2,850 8.00%, 7/1/20........... 3,149,450
Y.M.C.A. of Greater N.Y.
Proj.,
NR 1,350 8.00%, 8/1/16........... 1,499,702
New York City Mun. Wtr.
Fin.
Auth. Rev., Wtr. &
Swr. Sys.,
A-* 4,000+ 7.375%, 6/15/13, Ser.
C..................... 4,818,120
Aaa 3,000 7.25%, 6/15/15, Ser. A,
M.B.I.A............... 3,472,770
New York City Transit
Auth.,
Aaa 7,900 5.40%, 1/1/18, Ser.
1993, F.S.A........... 8,116,065
New York Hsg. Corp.
Rev.,
Aaa 2,150 8.625%, 11/1/06, Ser.
87A, M.B.I.A.,........ 2,499,375
New York St. Dorm. Auth.
Rev.,
City Univ. Sys. Cons.,
Baa1 5,000 8.75%, 7/1/02, Ser. D... 6,287,450
</TABLE>
B-305 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
New York Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
New York St. Dorm. Auth.
Rev.,
City Univ. Sys. Cons.,
Aaa $ 5,000+ 8.00%, 7/1/07, Ser. A... $ 5,829,200
Baa1 3,435 8.125%, 7/1/07, Ser.
A..................... 4,027,194
Baa1 1,880 7.00%, 7/1/09, Ser. D... 2,186,233
Aaa 3,500 7.50%, 7/1/10, Ser. C,
F.G.I.C............... 4,459,595
Baa1 2,000 5.75%, 7/1/18, Ser. A... 2,021,000
Coll. & Univ. Ed.,
M.B.I.A.,
Aaa 2,255 Zero Coupon, 7/1/04..... 1,294,415
Aaa 3,750 Zero Coupon, 7/1/05..... 2,023,950
Aaa 1,000 Zero Coupon, 7/1/06..... 506,580
Aaa 1,700 Zero Coupon, 7/1/07..... 806,905
Aaa 500 Zero Coupon, 7/1/08..... 221,975
Episcopal Hlth. Svcs.,
AAA* 4,500 7.55%, 8/1/29,
G.N.M.A............... 5,159,115
Long Island Med. Ctr.,
F.H.A.,
Aa 3,610 7.625%, 8/15/08, Ser.
A..................... 4,040,565
Aa 4,100 7.75%, 8/15/27, Ser.
A..................... 4,653,254
Menorah Campus,
AA* 3,000 7.40%, 2/1/31, F.H.A.... 3,472,080
Spec. Act Sch.
Districts,
Aaa 3,050 7.00%, 7/1/13,
F.G.I.C............... 3,500,089
St. Univ. Edl. Facs.,
Baa1 500 5.50%, 5/15/08, Ser.
A..................... 502,460
Aaa 2,500 5.50%, 5/15/08, Ser. A
A.M.B.A.C............. 2,604,975
Baa1 2,000 5.875%, 5/15/11, Ser.
A..................... 2,083,980
Baa1 6,800 5.25%, 5/15/15, Ser.
A..................... 6,527,184
Aaa 2,200 5.25%, 5/15/15, Ser. A
A.M.B.A.C............. 2,191,332
Aaa 2,500 7.25%, 5/15/15, Ser. B,
F.G.I.C............... 2,953,375
Baa1 1,770+ 7.25%, 5/15/18, Ser.
A..................... 2,138,089
Baa1 230 7.25%, 5/15/18, Ser.
A..................... 276,761
New York St. Energy
Research
& Dev. Auth. Rev.,
Brooklyn Union Gas Co.,
A1 5,225 7.125%, 12/1/20, Ser.
1..................... 5,792,435
Aaa 3,000 6.75%, 2/1/24,
M.B.I.A............... 3,373,650
Aaa 2,000 8.31%, 7/8/26, Ser. D,
M.B.I.A............... 2,120,000
New York St. Energy
Research
& Dev. Auth. Rev.,
Con. Edison Co.,
Aa2 $ 6,735 7.50%, 7/1/25........... $ 7,667,932
Aa2 4,775 7.50%, 1/1/26........... 5,431,181
Long Island Ltg. Co.,
Baa3 4,000 7.15%, 9/1/19, Ser. A... 4,450,800
Baa3 500 7.15%, 2/1/22, Ser. A... 556,350
Baa3 3,500 6.90%, 8/1/22, Ser. C... 3,851,155
Baa3 1,000 6.90%, 8/1/22, Ser. D... 1,100,330
New York St. Environ.
Facs. Corp., Poll.
Ctrl. Rev.,
St. Wtr. Revolving
Fund,
Aa 5,000 7.25%, 6/15/10.......... 5,800,050
Aa 1,300 7.50%, 3/15/11, Ser.
B..................... 1,497,834
Aa 1,000 6.50%, 6/15/14, Ser.
E..................... 1,103,150
New York St. Hsg. Fin.
Agcy. Rev.,
Multifamily Hsg.,
Aa 1,000 7.05%, 8/15/24, Ser.
A..................... 1,076,770
St. Univ. Constr.,
Aaa 1,000+ 8.10%, 11/1/10, Ser.
A..................... 1,205,970
Aaa 3,600 8.00%, 5/1/11, Ser. A... 4,632,588
Svc. Contract,
Baa1 2,000+ 7.375%, 9/15/21, Ser.
A..................... 2,428,040
New York St. Local
Gov't.
Assistance Corp.,
A 3,500 5.00%, 4/1/21........... 3,281,110
A 13,250 5.50%, 4/1/21, Ser. B... 13,174,740
New York St. Med. Care
Facs.
Fin. Agcy. Rev.,
F.H.A.,
Booth Silvercrest &
Kings Brook Hosp.,
AA* 2,750 7.60%, 2/15/29, Ser.
A..................... 3,114,100
Buffalo Gen. Hosp.
& Nursing Home,
A* 2,000 7.60%, 2/15/08, Ser.
C..................... 2,260,740
Ellis & Ira Davenport
Hosp.,
A* 1,495 8.00%, 2/15/28, Ser.
B..................... 1,723,032
Good Samaritian Hosp.,
AA* 3,500 7.625%, 2/15/23, Ser.
A..................... 3,932,390
Hosp. & Nursing Home,
AA* 2,340 8.625%, 2/15/06, Ser.
C..................... 2,523,479
</TABLE>
B-306 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
New York Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
New York St. Med. Care
Facs.,
Hosp. & Nursing Home,
Aa $ 1,000 7.70%, 2/15/25, Ser.
A..................... $ 1,167,270
Long Island Coll. Hosp.,
F.H.A.,
AA* 3,000 8.00%, 2/15/08, Ser.
B..................... 3,360,480
AAA* 4,000 8.50%, 1/15/22, Ser.
A..................... 4,547,440
Mental Hlth. Svcs.
Facs.,
Baa1 3,000 7.50%, 8/15/07, Ser.
A..................... 3,497,280
Baa1 500 7.75%, 8/15/11, Ser.
A..................... 590,565
Baa1 4,300 7.50%, 2/15/21, Ser.
A..................... 5,012,768
St. Francis Hosp.,
F.G.I.C.,
Aaa 2,350 7.60%, 11/1/08, Proj.
A..................... 2,757,725
New York St. Mtge. Agcy.
Rev.,
Homeowner Mtge.,
Aa 1,245 8.20%, 10/1/04, Ser.
AA.................... 1,363,985
Aa 785 8.625%, 4/1/11, Ser.
7..................... 844,252
Aa 3,525 7.50%, 4/1/16, Ser.
EE2................... 3,862,484
Aa 1,885 6.875%, 4/1/17, Ser.
8A.................... 1,988,449
Aa 1,535 8.40%, 10/1/17, Ser.
8C.................... 1,687,410
Aa 3,560 8.05%, 10/1/21.......... 4,025,363
New York St. Mun. Bond
Bank
Agcy., Spec. Proj.
Rev.,
A+* 3,000 6.75%, 3/15/11, Ser.
A..................... 3,346,170
New York St. Pwr. Auth.
Rev.
& Gen. Purpose,
Aa 3,060 6.50%, 1/1/08, Ser. W... 3,474,783
Aa 2,000 6.75%, 1/1/18, Ser. Y... 2,274,760
Aa 1,000 6.25%, 1/1/23........... 1,063,280
New York St. Thrwy.
Auth. Gen. Rev.,
A1 2,125 5.875%, 1/1/07, Ser.
A..................... 2,261,106
New York St. Urban Dev. Corp. Rev.,
Correctional Cap. Facs.,
Baa1 10,000 Zero Coupon, 1/1/08..... 4,499,500
Niagara Falls Bridge
Comn.,
Aaa 3,000+ 6.125%, 10/1/19,
F.G.I.C............... 3,410,850
Toll Bridge Sys. Rev.,
Aaa 3,500 5.25%, 10/1/21,
F.G.I.C............... 3,518,445
Oneida Herkimer Solid Waste Mgmt.
Auth., Solid Waste Sys. Rev.,
Baa 3,000 6.75%, 4/1/14........... 3,250,950
Port Auth. of New York &
New Jersey,
A1 $ 5,100 7.125%, 6/1/25, Ser.
69.................... $ 5,832,258
A1 1,000 7.25%, 8/1/25, Ser.
70.................... 1,147,350
A1 2,500 6.00%, 1/15/28, Ser.
84.................... 2,620,375
A1 3,000 5.375%, 3/1/28.......... 3,011,730
Puerto Rico, Gen.
Oblig.,
Baa1 5,250 7.00%, 7/1/10........... 6,172,425
Pub. Impvt. Ref.,
Baa1 3,000 5.40%, 7/1/07........... 3,058,410
Puerto Rico Hsg. Fin.
Auth. Rev.,
Aaa 1,000 6.85%, 10/15/24, Ser. B,
G.N.M.A............... 1,071,580
Multifamily Mtge.,
AA* 2,385 7.50%, 4/1/22........... 2,585,125
Puerto Rico Hwy. & Trans. Auth. Rev.,
Baa1 2,750 5.25%, 7/1/21, Ser. X... 2,637,278
Puerto Rico Tel. Auth.
Rev.,
Aaa 7,875 7.61%, 1/25/07, Ser. M
M.B.I.A.,............. 8,357,344
Saratoga Cnty. Ind. Dev. Agcy. Rev.,
City Ctr. Proj.,
A1 760 10.00%, 10/1/08......... 965,382
Suffolk Cnty. Water
Auth.,
Waterworks Rev.,
Aaa 915+ 7.375%, 6/1/12, Ser. C,
A.M.B.A.C............. 1,074,009
Aaa 85 7.375%, 6/1/12.......... 97,957
Aaa 90+ 5.25%, 6/1/17, Ser. A,
A.M.B.A.C............. 89,992
Aaa 1,110 5.25%, 6/1/17, Ser. A,
A.M.B.A.C............. 1,113,519
Triborough Bridge &
Tunl. Auth. Rev.,
Aa 2,035+ 7.50%, 1/1/15, Ser. M... 2,358,931
Aa 1,900 5.00%, 1/1/17, Ser. Q... 1,819,136
Aa 2,500 6.00%, 1/1/20, Ser. R... 2,582,025
United Nations Dev.
Corp.,
A 4,500 6.00%, 7/1/26, Ser. A... 4,618,440
</TABLE>
B-307 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
New York Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Virgin Islands Pub. Fin.
Auth. Rev.,
NR $ 2,550 7.25%, 10/1/18, Ser.
A..................... $ 2,890,757
Hwy. Trans. Trust Fund,
BBB* 2,500 7.70%, 10/1/04.......... 2,885,725
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys.,
NR 2,400 8.50%, 1/1/10, Ser. A... 2,757,936
Wtr. Sys. Rev.,
NR 500 7.20%, 1/1/02, Ser. B... 553,690
NR 1,120 7.60%, 1/1/12, Ser. B... 1,262,058
------------
Total long-term
investments
(cost $319,493,503)..... 358,923,600
------------
SHORT-TERM INVESTMENTS--1.2%
Babylon Ind. Dev. Agcy.,
Babylon Common Waste,
VMIG1 650 2.35%, 9/1/93, Ser. 90,
F.R.D.D.,............. 650,000
New York City Hsg. Dev.
Corp. Mtge. Rev.,
Residential East 17th
St.,
A-1* 200 2.40%, 9/1/93, Ser. 93A,
F.R.D.D............... 200,000
New York St. Energy
Research & Dev. Auth.,
Niagara Mohawk Pwr.
Corp.,
VMIG1 1,000 2.50%, 9/1/93, Ser. 86A,
F.R.D.D............... 1,000,000
New York St., Ser. 94A,
R.A.N.
NR 2,000 3.25%, 4/15/94.......... 2,004,866
Port Auth. of New York &
New Jersey Spec.
Obligation,
Versatile Structure
VMIG1 $ 700 2.50%, 9/1/93, Ser. I,
F.R.D.D.,............. $ 700,000
------------
Total short-term
investments
(cost $4,554,866)....... 4,554,866
------------
Total Investments--98.1%
(cost $324,048,369; Note
4).................... 363,478,466
Other assets in excess
of
liabilities--1.9%....... 6,949,732
------------
Net Assets--100%........ $370,428,198
------------
------------
<FN>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
R.A.N.--Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
+ Prerefunded issues are secured by escrowed cash and/or direct
U.S. guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-308 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
----------------
<S> <C>
Investments, at value (cost $324,048,369).............................................. $363,478,466
Cash................................................................................... 48,846
Accrued interest receivable............................................................ 4,823,194
Receivable for investments sold........................................................ 2,216,880
Receivable for Fund shares sold........................................................ 1,262,194
Deferred expenses and other assets..................................................... 9,887
----------------
Total assets......................................................................... 371,839,467
----------------
Liabilities
Payable for Fund shares reacquired..................................................... 673,930
Dividends payable...................................................................... 304,558
Due to Manager......................................................................... 154,724
Due to Distributors.................................................................... 150,874
Accrued expenses....................................................................... 127,183
----------------
Total liabilities.................................................................... 1,411,269
----------------
Net Assets............................................................................. $370,428,198
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 295,336
Paid-in capital in excess of par..................................................... 331,259,315
----------------
331,554,651
Accumulated net realized loss........................................................ (556,550)
Net unrealized appreciation.......................................................... 39,430,097
----------------
Net assets, August 31, 1993.......................................................... $370,428,198
----------------
----------------
Class A:
Net asset value and redemption price per share
($11,820,664 / 942,697 shares of beneficial interest issued and outstanding)....... $12.54
Maximum sales charge (4.5% of offering price)........................................ .59
----------------
Maximum offering price to public..................................................... $13.13
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($358,607,534 / 28,590,912 shares of beneficial interest issued and outstanding)... $12.54
----------------
----------------
</TABLE>
See Notes to Financial Statements.
B-309
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................. $22,140,841
-----------
Expenses
Management fee....................... 1,697,889
Distribution fee--Class A............ 8,755
Distribution fee--Class B............ 1,654,116
Transfer agent's fees and expenses... 190,000
Custodian's fees and expenses........ 176,400
Reports to shareholders.............. 42,000
Registration fees.................... 28,500
Audit fee............................ 10,500
Legal fees........................... 9,500
Insurance expense.................... 7,800
Trustees' fees....................... 3,375
Miscellaneous........................ 6,740
-----------
Total expenses..................... 3,835,575
-----------
Net investment income.................. 18,305,266
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions.............. 9,120,266
Financial futures transactions....... (470,040)
-----------
8,650,226
-----------
Net change in unrealized appreciation
on:
Investments.......................... 13,832,660
Financial futures contracts.......... 20,687
-----------
13,853,347
-----------
Net gain on investments................ 22,503,573
-----------
Net Increase in Net Assets
Resulting from Operations.............. $40,808,839
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) in Net ----------------------------
Assets 1993 1992
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 18,305,266 $ 17,789,513
Net realized gain on
investment
transactions.......... 8,650,226 4,946,727
Net change in unrealized
appreciation of
investments........... 13,853,347 13,082,882
------------ ------------
Net increase in net
assets
resulting from
operations............ 40,808,839 35,819,122
------------ ------------
Dividends to shareholders
(Note 1)
Class A................. (504,683) (247,261)
Class B................. (17,800,583) (17,542,252)
------------ ------------
(18,305,266) (17,789,513)
------------ ------------
Fund share transactions
(Note 5)
Proceeds from shares
subscribed............ 56,310,026 44,574,381
Net asset value of
shares
issued in reinvestment
of
dividends............. 10,865,791 10,279,560
Cost of shares
reacquired.............. (41,780,067) (47,025,571)
------------ ------------
Net increase in net
assets from Fund share
transactions.......... 25,395,750 7,828,370
------------ ------------
Total increase............ 47,899,323 25,857,979
Net Assets
Beginning of year......... 322,528,875 296,670,896
------------ ------------
End of year............... $370,428,198 $322,528,875
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-310
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New York Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state and city income taxes with the minimum
of risk by investing in ``investment grade'' tax-exempt securities and whose
ratings are within the four highest ratings categories by a nationally
recognized statistical rating organization or, if not rated, are of comparable
quality. The ability of the issuers of the securities held by the Series to meet
their obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
There were no financial futures contracts outstanding at August 31, 1993.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
B-311
<PAGE>
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassifications of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital and decrease accumulated net realized
losses on investments by $116,142 compared to amounts previously reported
through August 31, 1992. Net investment income, net realized gains, and net
assets were not affected by this change.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
year ended August 31, 1993. PMFD pays various broker-dealers, including PSI and
Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $239,500 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the year ended August
31, 1993, it received approximately $285,000 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $8,769,000. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
B-312
<PAGE>
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect),
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$131,700 for the services of PMFS. As of August 31, 1993, approximately $11,300
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993 were $162,110,483 and $143,381,244, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1993 was $324,076,569 and, accordingly, net and gross unrealized appreciation of
investments was $39,401,897.
For federal income tax purposes, the Series had a capital loss carryforward
as of August 31, 1993 of approximately $528,400 which expires in 1999. Such
carryforward is after utilization of approximately $8,650,200 to offset the
Series' net taxable gains recognized in the year ended August 31, 1993.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
---------- ------------
Year ended August 31, 1993:
Shares sold................... 629,556 $ 7,599,542
Shares issued in reinvestment
of
dividends................... 25,616 309,097
Shares reacquired............. (227,933) (2,765,199)
---------- ------------
Net increase in shares
outstanding................. 427,239 $ 5,143,440
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................... 333,676 $ 3,807,473
Shares issued in reinvestment
of dividends................ 14,324 163,619
Shares reacquired............. (78,786) (896,068)
---------- ------------
Net increase in shares
outstanding................. 269,214 $ 3,075,024
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 4,042,874 $ 48,710,484
Shares issued in
reinvestment of
dividends................. 877,265 10,556,694
Shares reacquired........... (3,254,011) (39,014,868)
---------- ------------
Net increase in shares
outstanding............... 1,666,128 $ 20,252,310
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 3,570,020 $ 40,766,908
Shares issued in
reinvestment
of dividends.............. 888,601 10,115,941
Shares reacquired........... (4,051,626) (46,129,503)
---------- ------------
Net increase in shares
outstanding............... 406,995 $ 4,753,346
---------- ------------
---------- ------------
</TABLE>
B-313
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 22,
1990+
Year Ended August 31, Through Year Ended August 31,
------------------------- August 31, ----------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
------
------- ------ ------ -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period........................ $11.75 $11.08 $10.62 $10.81 $ 11.75 $ 11.08 $ 10.62 $ 10.88 $ 10.59
------- ------ ------ ------ -------- -------- -------- -------- --------
Income from investment
operations
Net investment income........... .70 .71 .72 .42 .65 .66 .67 .65 .65
Net realized and unrealized gain
(loss) on investment
transactions.................. .79 .67 .46 (.19) .79 .67 .46 (.26) .29
------- ------ ------ ------ -------- -------- -------- -------- --------
Total from investment
operations.................. 1.49 1.38 1.18 .23 1.44 1.33 1.13 .39 .94
Less distributions
Dividends from net investment
income........................ (.70) (.71) (.72) (.42) (.65) (.66) (.67) (.65) (.65)
------- ------ ------ ------ -------- -------- -------- -------- --------
Net asset value, end of
period........................ $12.54 $11.75 $11.08 $10.62 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $ 10.88
------- ------ ------ ------ -------- -------- -------- -------- --------
------- ------ ------ ------ -------- -------- -------- -------- --------
TOTAL RETURN#:.................. 13.06% 12.73% 11.49% 2.03% 12.61% 12.32% 10.96% 3.73% 9.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $11,821 $6,057 $2,729 $1,174 $358,607 $316,472 $293,942 $313,606 $340,728
Average net assets (000)........ $ 8,755 $4,024 $1,579 $ 588 $330,823 $303,016 $295,285 $332,580 $353,225
Ratios to average net assets:
Expenses, including
distribution fees........... .74% .74% .71% .78%* 1.14% 1.14% 1.11% 1.17% 1.05%
Expenses, excluding
distribution fees........... .64% .64% .61% .68%* .64% .64% .61% .67% .64%
Net investment income......... 5.78% 6.19% 6.61% 6.41%* 5.38% 5.79% 6.21% 6.10% 5.77%
Portfolio turnover.............. 44% 45% 78% 127% 44% 45% 78% 127% 96%
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-314
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New York Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New York Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-315
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW YORK MONEY MARKET SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Albany Cnty., F.G.I.C.,
2.25%, 10/1/93, Ser.
Aaa $ 4,650 93................... $ 4,649,805
Amherst Ind. Dev. Agcy.
Rev.,
Gen. Accident Ins.,
2.60%, 11/1/93, Ser.
A-1+* 3,100 85, S.E.M.O.T........ 3,100,000
Babylon Ind. Dev. Agcy.
Rev.,
Babylon Comm. Waste,
2.35%, 9/1/93, Ser.
VMIG1 900 90, F.R.D.D.......... 900,000
Bedford Cent. Sch.
Dist.,
2.50%, 11/5/93,
NR 3,900 Ser. 93-94, T.A.N.... 3,902,176
Guilderland Ind. Dev.
Agcy. Rev.,
Northeastern Ind'l
Park,
2.35%, 9/1/93, Ser.
P-1 1,500 93A, F.R.W.D......... 1,500,000
Hempstead Town, B.A.N.,
2.50%, 3/11/94, Ser.
NR 5,000 A.................... 5,007,666
Monroe Cnty. Ind. Dev. Agcy. Rev.,
Gen'l Accident Ins.
Co.,
2.75%, 3/1/94, Ser.
A-1+* 7,000 84, S.E.M.O.T........ 7,000,000
Granite Building,
2.35%, 9/1/93, Ser.
P-1 2,700 92, F.R.W.D.......... 2,700,000
Monroe Cnty., Pub.
Impvt., F.R.W.D.,
2.45%, 9/2/93, Bt. No.
VMIG1 6,525 91................... 6,525,000
2.45%, 9/2/93, Bt. No.
VMIG1 5,675 92................... 5,675,000
Mt. Pleasant Ind. Dev.
Agcy.,
Poll. Ctrl. Rev.
2.55%, 9/8/93,
VMIG2 6,095 F.R.W.D.............. 6,095,000
New York City, Gen.
Oblig.,
Bankers Trust Tender
Option,
2.45%, 9/2/93,
Ser. BT-79,
MIG1 10,000 F.R.W.D.............. 10,000,000
New York City, R.A.N.,
3.25%, 4/15/94, Ser.
MIG1 8,000 94A.................. 8,022,573
3.50%, 4/15/94, Ser.
MIG1 5,000 94A.................. 5,022,552
New York City Hsg. Dev.
Corp., F.R.W.D.,
Multi Fam. Columbus
Ave.,
2.40%, 9/1/93, Ser.
A-1+* 5,000 93A.................. 5,000,000
New York City Hsg. Dev.
Corp., F.R.W.D.,
Related E. 96th St.
Proj.,
2.35%, 9/2/93, Ser.
VMIG1 $13,500 90A.................. $ 13,500,000
New York City Ind. Dev.
Agcy.,
Japan Airlines, Inc.,
Ser. 91,
2.75%, 9/1/93,
P-1 8,400 F.R.D.D.............. 8,400,000
Viola Bakeries, Ser.
90,
2.50%, 9/1/93,
VMIG1 2,850 F.R.W.D.............. 2,850,000
New York City Trust for
Cultural Research,
Carnegie Hall,
F.R.W.D.,
2.20%, 9/1/93, Ser.
VMIG1 4,275 85................... 4,275,000
New York St., Gen
Oblig.,
2.60%, 10/27/93, Ser.
P-1 5,000 N, T.E.C.P........... 5,000,000
New York St., T.E.C.P.,
2.35%, 9/2/93, Ser.
P-1 8,400 O.................... 8,400,000
2.15%, 9/9/93, Ser.
P-1 5,000 L.................... 5,000,000
New York St., T.R.A.N.,
2.75%, 12/31/93, Ser.
MIG1 5,000 93................... 5,007,276
New York St. Dorm.
Auth. Rev.,
2.30%, 9/8/93, Ser.
A-1+* 1,627 89A, T.E.C.P......... 1,627,000
Cornell University,
F.R.D.D.,
2.30%, 9/1/93, Ser.
VMIG1 1,700 90B.................. 1,700,000
Mem. Sloan Kettering, T.E.C.P.,
2.50%, 9/14/93, Ser.
VMIG1 7,700 89C.................. 7,700,000
2.45%, 10/21/93, Ser.
VMIG1 5,850 89B.................. 5,850,000
Rockefeller Univ.,
F.R.W.D.,
2.60%, 9/1/93, Ser.
Aaa 9,300 91A.................. 9,300,000
Society of New York
Hosp.,
Ser. 91, T.E.C.P.,
VMIG1 1,565 2.30%, 9/8/93........ 1,565,000
VMIG1 3,250 2.35%, 9/8/93.......... 3,250,000
VMIG1 4,950 2.40%, 9/8/93.......... 4,950,000
New York St. Energy
Res. &
Dev. Auth., LILCO
Proj.,
2.50%, 3/1/94, Ser.
VMIG1 3,665 85A, A.N.N.M.T....... 3,665,000
</TABLE>
See Notes to Financial Statements.
B-316
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
New York St. Energy
Res. & Dev. Auth.,
New York St. Elec. &
Gas Co.,
3.00%, 12/1/93, Ser.
A-1+* $ 4,500 84A, A.N.N.M.T....... $ 4,500,000
2.60%, 7/15/94, Ser.
VMIG1 8,000 85C, A.N.N.O.T....... 8,000,000
Niagara Mohawk Pwr.
Corp., F.R.D.D.,
2.40%, 9/1/93, Ser.
P-1 2,800 85B.................. 2,800,000
2.50%, 9/1/93, Ser.
P-1 1,400 86A.................. 1,400,000
New York St. Environ.
Facs. Corp.,
Gen. Elec. Corp.,
T.E.C.P.,
2.20%, 9/1/93, Ser.
P-1 5,500 92A.................. 5,500,000
2.20%, 9/9/93, Ser.
P-1 3,000 87A.................. 3,000,000
2.30%, 9/9/93, Ser.
P-1 2,050 87A.................. 2,050,000
2.40%, 11/30/93, Ser.
P-1 3,000 92A.................. 3,000,000
Resource Recovery Rev.,
2.60%, 9/1/93, Ser.
A-1+* 1,600 89, F.R.D.D.......... 1,600,000
New York St. Job Dev.
Auth., F.R.M.D.,
2.55%, 9/1/93, Ser.
MIG1 1,945 84D.................. 1,945,000
2.55%, 9/1/93, Ser.
MIG1 1,230 84E.................. 1,230,000
2.55%, 9/1/93, Ser.
MIG1 1,760 84F.................. 1,760,000
2.80%, 9/1/93, Ser.
VMIG1 1,355 86C.................. 1,355,000
New York St. Mtge.
Agcy. Rev.,
Homeowner Mtg.,
S.E.M.O.T.,
2.45%, 10/1/93, Ser.
Aa 4,565 HH4.................. 4,565,000
2.45%, 10/1/93, Ser.
Aa 9,000 MM2.................. 8,998,886
Niagara Cnty. Ind. Dev. Agcy. Rev.,
General Abrasive Treibacher,
2.70%, 9/1/93, Ser. 91,
P-1 2,300 F.R.W.D.............. 2,300,000
Oswego Cnty. Ind. Dev.
Agcy.
Rev., Phillip Morris
Co.,
2.45%, 9/1/93, Ser.
P-1 $ 6,300 92, F.R.W.D.......... $ 6,300,000
Port Auth. of New York
& New Jersey,
2.375%, 9/7/93,
Ser. 93-1,
NR 12,000 F.R.W.D.............. 12,000,000
Kiac. Partners,
F.R.W.D.,
2.40%, 9/1/93, Ser.
VMIG1 6,200 3-2.................. 6,200,000
2.40%, 9/1/93, Ser.
VMIG1 4,500 3-3.................. 4,500,000
Spec. Obligation,
F.R.D.D.,
2.50%, 9/1/93, Ser.
VMIG1 1,000 1.................... 1,000,000
Sachem Central Sch.
Dist.,
3.25%, 6/29/94,
MIG1 7,000 T.A.N................ 7,016,894
St. Lawrence Cnty. Ind.
Dev.
Agcy. Rev., Clarkson
Univ. Proj.,,
F.R.W.D.,
2.45%, 9/2/93, Ser.
VMIG1 3,540 90................... 3,540,000
West Babylon New York
Union Free Sch.
Dist.,
3.25%, 6/24/94,
MIG1 11,500 Ser. 93-94, T.A.N.... 11,526,248
West Islip Union Free
Sch. Dist.,
2.90%, 6/29/94,
MIG1 8,000 T.A.N................ 8,008,365
Yates Cnty. Ind. Dev.
Agcy. Rev.,
Clearplass Containers
Inc.,
2.60%, 9/2/93, Ser.
A-1* 1,670 92A, F.R.W.D......... 1,670,000
------------
Total Investments--98.8%
(amortized cost--
$282,904,441**)...... 282,904,441
Other assets in excess
of
liabilities--1.2%.... 3,399,309
------------
Net Assets--100%....... $286,303,750
------------
------------
</TABLE>
B-317 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
<TABLE>
<CAPTION>
<C> <C> <S> <C> <C> <C> <C> <C>
<FN>
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
R.A.N.--Revenue Anticipation Note.
S.E.M.O.T.--Semi-Annual Optional Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-318 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
---------------
<S> <C>
Investments, at amortized cost which approximates market value.......................... $ 282,904,441
Receivable for investments sold......................................................... 7,000,213
Receivable for Fund shares sold......................................................... 5,634,299
Accrued interest receivable............................................................. 1,518,606
Other assets............................................................................ 6,784
---------------
Total assets........................................................................ 297,064,343
---------------
Liabilities
Payable for investments purchased....................................................... 7,000,000
Payable for Fund shares reacquired...................................................... 3,446,965
Due to Manager.......................................................................... 122,386
Accrued expenses and other liabilities.................................................. 89,776
Dividends payable....................................................................... 84,764
Due to Distributor...................................................................... 16,702
---------------
Total liabilities................................................................... 10,760,593
---------------
Net Assets.............................................................................. $ 286,303,750
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value...................................... $ 2,863,038
Paid-in capital in excess of par...................................................... 283,440,712
---------------
Net assets, August 31, 1993........................................................... $ 286,303,750
---------------
---------------
Net asset value, offering price and redemption price per share ($286,303,750 /
286,303,750 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized).................................................................... $1.00
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-319
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1993
---------------
<S> <C>
Income
Interest............................. $ 6,888,417
---------------
Expenses
Management fee....................... 1,378,198
Distribution fee..................... 344,549
Transfer agent's fees and expenses... 138,000
Custodian's fees and expenses........ 113,000
Reports to shareholders.............. 27,000
Registration fees.................... 25,000
Audit fee............................ 10,000
Legal fees........................... 9,500
Insurance expense.................... 8,000
Trustees' fees....................... 3,375
Miscellaneous........................ 10,649
---------------
Total expenses..................... 2,067,271
---------------
Net investment income.................. 4,821,146
---------------
Net Increase in Net Assets Resulting
from Operations........................ $ 4,821,146
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) -----------------------------
in Net Assets 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income... $ 4,821,146 $ 7,029,992
Net realized gain on
investment
transactions.......... -- 94
------------- -------------
Net increase in net
assets resulting from
operations............ 4,821,146 7,030,086
------------- -------------
Dividends and
distributions to
shareholders (Note 1)... (4,821,146) (7,030,086)
------------- -------------
Fund share transactions
(at $1 per share)
Net proceeds from shares
subscribed............ 1,012,741,172 749,572,672
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 4,672,839 6,866,042
Cost of shares
reacquired.............. (980,895,234) (743,014,978)
------------- -------------
Net increase in net
assets
from Fund share
transactions.......... 36,518,777 13,423,736
------------- -------------
Total increase............ 36,518,777 13,423,736
Net Assets
Beginning of year......... 249,784,973 236,361,237
------------- -------------
End of year............... $ 286,303,750 $ 249,784,973
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-320
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The New York Money Market Series (the
``Series'') commenced investment operations in April, 1985. The Series is
diversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New York State, New York City and
federal income taxes with a minimum of risk by investing in ``investment grade''
tax-exempt securities having a maturity of thirteen months or less whose ratings
are within the two highest ratings categories by two nationally recognized
statistical rating organizations, or if not rated, are of comparable quality.
The ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-321
<PAGE>
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the fiscal year ended August 31, 1993, the Series incurred fees of approximately
$126,000 for the services of PMFS. As of August 31, 1993, approximately $11,000
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
B-322
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
Year Ended August 31,
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains.............. .02 .03 .04 .05 .05
Dividends and distributions to shareholders............... (.02) (.03) (.04) (.05) (.05)
-------- -------- -------- -------- --------
Net asset value, end of year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN#:............................................ 1.80% 2.93% 4.37% 5.14% 5.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $286,304 $249,785 $236,361 $226,758 $184,615
Average net assets (000).................................. $275,640 $248,557 $245,494 $218,423 $173,661
Ratios to average net assets:
Expenses, including distribution fee.................... .75% .76% .79% .75% .79%
Expenses, excluding distribution fee.................... .63% .63% .66% .62% .67%
Net investment income................................... 1.75% 2.83% 4.23% 4.99% 5.01%
<FN>
- ---------------
# Total return includes reinvestment of dividends and
distributions.
</TABLE>
See Notes to Financial Statements.
B-323
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New York Money Market Series, including the
portfolio of investments, as of August 31, 1993, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New York Money Market Series, as of August 31, 1993, the results of
its operations, the changes in its net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-324
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NORTH CAROLINA SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--95.7%
Buncombe Cnty.,
Pub. Impvt. Bonds,
A1 $ 1,000 6.90%, 3/1/09.............. $ 1,143,560
Charlotte Cert. of Part.,
Conv. Fac. Proj.,
A.M.B.A.C.
Aaa 3,000 Zero Coupon, 12/1/09....... 1,260,060
Charlotte Wtr. & Swr.,
Aaa 1,500 6.20%, 6/1/17.............. 1,623,375
Cleveland Cnty., F.G.I.C.,
Aaa 2,500 5.10%, 6/1/07, Ser. 1993... 2,559,450
Coastal Regl. Mgmt. Auth.,
Solid Waste Sys.,
A 2,000 6.50%, 6/1/08.............. 2,158,760
Craven No. Carolina,
Regl. Med. Auth.,
M.B.I.A.,
Aaa 500 5.50%, 10/1/23............. 501,725
Hlth. Care Facs. Rev.,
Aaa 750 5.625%, 10/1/17............ 766,133
Durham Cert. of Part.,
Morgan St. Garage Proj.,
AAA* 500 8.00%, 7/1/06.............. 581,505
Durham Cnty.
Pub. Impvt.,
Aaa 2,000 4.60%, 5/1/04.............. 2,001,540
Fayetteville Cert. of
Part.,
San. Swr. & Pub. Impvt.,
A1 250 7.10%, 5/1/07.............. 278,465
Aaa 1,750 6.875%, 12/1/08,
A.M.B.A.C................ 1,978,043
Gastonia No. Carolina,
Wtr. Sys. & St. Impvt.,
Aaa 1,625 5.25%, 4/1/09, F.G.I.C..... 1,650,903
Guilford Cnty.,
Pub. Impvt.,
Aa1 1,500 5.40%, 4/1/09.............. 1,556,085
Martin Cnty. Ind. Facs. &
Poll. Ctrl. Fin. Auth.
Rev.,
Weyerhaueser Co. Proj.,
A2 550 8.50%, 6/15/99............. 652,333
Mecklenberg Cnty., Pub.
Impvt.,
Aaa 1,250 6.25%, 1/1/09.............. 1,370,987
No. Carolina Eastn. Mun.
Pwr. Agcy.,
Pwr. Sys. Rev.,
A $ 1,000 5.50%, 1/1/11, Ser. A...... $ 999,900
A 1,500 6.25%, 1/1/12.............. 1,575,690
Aaa 1,995 6.50%, 1/1/18, E.T.M....... 2,350,629
A 1,005 6.50%, 1/1/18.............. 1,117,118
Aaa 1,000 7.625%, 1/1/22, Ser. A,
A.M.B.A.C................ 1,162,290
Aaa 650+ 6.00%, 1/1/26.............. 715,273
A 400 6.00%, 1/1/26, M.B.I.A..... 404,512
No. Carolina Edl. Facs.
Fin.
Agcy. Rev.,
Davidson Coll. Proj.,
AA* 1,000 8.10%, 12/1/12, Ser. A..... 1,153,240
No. Carolina Hsg. Fin.
Agcy.,
Multi-family Mtge. Rev.,
F.H.A.,
Aa 90 8.875%, 7/1/08, Ser. C..... 96,661
Aa 245 9.75%, 7/1/20, Ser. A...... 252,289
Sngl. Fam. Mtge. Rev.,
Aa 1,000 7.80%, 3/1/21, Ser. G...... 1,093,000
Aa 1,100 7.85%, 9/1/28, Ser. M...... 1,208,295
No. Carolina Med. Care
Comn. Hlth. Care Facs.
Rev.,
Stanley Mem. Hosp. Proj.,
Baa1 650 7.80%, 10/1/19............. 738,959
No. Carolina Med. Care
Comn., Hosp. Rev.,
Annie Pen Mem. Hosp.
Proj.,
Baa 1,000 7.50%, 8/15/21............. 1,133,280
Baptist Hosp. Proj.,
Aa 1,000 6.00%, 6/1/22.............. 1,055,030
Carolina Medicorp Proj.,
Aa 1,000 5.50%, 5/1/15.............. 1,005,520
AAA* 750 7.875%, 5/1/15, Ser. A..... 868,094
Duke Univ. Hosp. Proj.,
AA 595 8.625%, 6/1/10, Ser. 85A... 648,383
Mem. Mission Hosp. Inc.
Proj.,
A1 800 9.10%, 10/1/08............. 889,816
Aaa 1,250 6.00%, 10/1/22, F.S.A...... 1,330,100
Mercy Hosp. Proj.,
AAA* 670 9.625%, 8/1/15, Ser. 85.... 759,284
</TABLE>
B-325 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
North Carolina Series
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
No. Carolina Med. Care
Comn., Hosp. Rev.,
Presbyterian Hlth. Svcs.
Proj.,
Aa $ 2,500 5.50%, 10/1/24............. $ 2,499,850
Rex Hosp. Proj.,
A1 1,750 6.25%, 6/1/17.............. 1,876,403
Scotland Mem. Hosp.,
Baa 1,000 8.625%, 10/1/11, Ser. 88... 1,155,420
No. Carolina Mun. Pwr.
Agcy.,
No. 1 Catawba Elec. Rev.,
A 1,000 5.25%, 1/1/09.............. 989,550
Aaa 2,500 6.00%, 1/1/10, M.B.I.A..... 2,712,300
Aaa 2,000 8.12%, 1/1/12, M.B.I.A..... 2,027,500
Aaa 615+ 7.625%, 1/1/14,
A.M.B.A.C................ 714,808
Aaa 135 7.625%, 1/1/14,
A.M.B.A.C................ 154,058
A 760 8.50%, 1/1/17, Ser. B...... 859,119
A 920+ 7.00%, 1/1/18.............. 998,439
A 80 7.00%, 1/1/18.............. 85,243
Northern Hosp. Dist. Surry
Cnty. Hlth. Care Facs.
Rev.,
No. Carolina Hosp.,
Aaa 700 9.75%, 10/1/12............. 801,682
Baa 1,500 7.875%, 10/1/21............ 1,721,580
Puerto Rico Aqueduct & Swr.
Auth. Rev.,
Baa 2,000 7.875%, 7/1/17, Ser. A..... 2,296,900
Puerto Rico Comnwlth.,
Pub. Impvt. Ref.,
Baa1 1,250 5.40%, 7/1/07.............. 1,274,338
Puerto Rico Hsg. Fin. Corp.
Sngl. Fam. Mtge. Rev.,
G.N.M.A.,
Aaa 175 7.80%, 10/15/21, Ser. A.... 186,456
Aaa 990 7.65%, 10/15/22, Ser.
1-B...................... 1,081,663
Puerto Rico Ind. Med. &
Environ.
Poll. Ctrl. Facs., Upjohn
Co. Proj.,
Aa3 500 7.50%, 12/1/23............. 577,180
Puerto Rico Tel. Auth.
Rev.,
Aaa 1,000 7.61%, 1/25/07, Ser. I,
M.B.I.A.................. 1,061,250
Puerto Rico,
Gen. Oblig.,
Aaa 1,300 8.882%, 7/1/20, F.S.A...... 1,460,875
Robeson Cnty.,
Aaa $ 500 7.80%, 6/1/09.............. $ 588,500
Union Cnty. Gen. Oblig.,
A1 1,500 5.90%, 3/1/10.............. 1,590,780
Union Cnty. Wtr. & Swr.,
Solid Waste Rev.,
A1 850 6.50%, 4/1/07.............. 940,151
Univ. of No. Carolina at
Chapel
Hill, Pkg. Sys. Rev.,
Ser. B,
A1 850 6.80%, 6/1/06.............. 935,204
A1 500 6.00%, 6/1/08.............. 531,425
Virgin Islands Pub. Fin.
Auth. Rev.,
Hwy. Trans. Trust Fund,
BBB* 1,050 7.50%, 10/1/96............. 1,150,538
Ref. Matching Loan Notes,
NR 700 7.25%, 10/1/18, Ser. A..... 793,541
Virgin Islands Territory.,
Hugo Ins. Claims Fund
Proj.,
NR 480 7.75%, 10/1/06, Ser. 91.... 554,165
Virgin Islands Wtr. & Pwr.
Auth.,
Wtr. Sys. Rev.,
NR 400 7.20%, 1/1/02, Ser. B...... 442,952
NR 600 8.50%, 1/1/10, Ser. A...... 689,484
Winston Salem,
Sngl. Fam. Mtge. Rev.,
A1 500 8.00%, 9/1/07.............. 552,500
-----------
Total long-term investments
(cost $66,725,448)......... 73,944,141
-----------
SHORT-TERM INVESTMENTS--2.7%
Halifax Cnty. Ind. Facs. &
Poll.
Ctrl., Fin. Auth. Rev.,
Westmoreland,
Aa2 715 2.50%, 9/1/93, Ser. 91,
F.R.D.D.................. 715,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG 1,400 2.15%, 9/1/93, Ser. 85..... 1,400,000
-----------
Total short-term
investments
(cost $2,115,000).......... 2,115,000
-----------
</TABLE>
B-326 See Notes to Financial Statements.
<PAGE>
Prudential Municipal Series Fund
North Carolina Series
<TABLE>
<CAPTION>
Value
Description (a) (Note 1)
<S> <C> <C> <C>
Total Investments--98.4%
(cost $68,840,448; Note
4)....................... $76,059,141
Other assets in excess of
liabilities--1.6%........ 1,232,411
-----------
Net Assets--100%........... $77,291,552
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate Daily Demand#.
F.R.W.D.--Floating Rate (Weekly) Demand Note#.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's Rating.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
N.R.--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-327 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
---------------
<S> <C>
Investments, at value (cost $68,840,448)................................................ $76,059,141
Cash.................................................................................... 47,253
Accrued interest receivable............................................................. 1,225,531
Receivable for Fund shares sold......................................................... 257,302
Deferred expenses and other assets...................................................... 1,928
---------------
Total assets.......................................................................... 77,591,155
---------------
Liabilities
Payable for Fund shares reacquired...................................................... 116,135
Accrued expenses........................................................................ 76,684
Dividends payable....................................................................... 58,987
Due to Manager.......................................................................... 32,051
Due to Distributors..................................................................... 15,746
---------------
Total liabilities..................................................................... 299,603
---------------
Net Assets.............................................................................. $77,291,552
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 64,147
Paid-in capital in excess of par...................................................... 69,057,276
---------------
69,121,423
Accumulated net realized gain......................................................... 951,436
Net unrealized appreciation........................................................... 7,218,693
---------------
Net assets, August 31, 1993........................................................... $77,291,552
---------------
---------------
Class A:
Net asset value and redemption price per share ($1,776,658 / 147,519 shares of
beneficial interest issued and outstanding)......................................... $12.04
Maximum sales charge (4.5% of offering price)......................................... .57
---------------
Maximum offering price to public...................................................... $12.61
---------------
Class B:
Net asset value, offering price and redemption price per share ($75,514,894 /
6,267,237 shares of beneficial interest issued and outstanding)..................... $12.05
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-328
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest............................. $4,467,565
----------
Expenses
Management fee....................... 346,561
Distribution fee--Class A............ 1,316
Distribution fee--Class B............ 339,983
Custodian's fees and expenses........ 87,600
Transfer agent's fees and expenses... 36,000
Registration fees.................... 23,000
Reports to shareholders.............. 16,500
Audit fee............................ 10,500
Legal fees........................... 9,500
Trustees' fees....................... 3,375
Miscellaneous........................ 537
----------
Total expenses......................... 874,872
----------
Net investment income................ 3,592,693
----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions.............. 1,812,596
Financial futures transactions....... (154,594)
----------
1,658,002
----------
Net change in unrealized appreciation
of investments....................... 2,485,116
----------
Net gain on investments................ 4,143,118
----------
Net Increase in Net Assets
Resulting from Operations.............. $7,735,811
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------
Increase in Net Assets 1993 1992
----------- -----------
<S> <C> <C>
Operations
Net investment income.... $ 3,592,693 $ 3,428,320
Net realized gain on
investment
transactions........... 1,658,002 990,441
Net increase in
unrealized
appreciation of
investments............ 2,485,116 1,821,459
----------- -----------
Net change in net assets
resulting from
operations............. 7,735,811 6,240,220
----------- -----------
Dividends paid to
shareholders
from net investment
income
(Note 1)
Class A.................... (73,032) (36,129)
Class B.................... (3,519,661) (3,392,191)
----------- -----------
(3,592,693) (3,428,320)
----------- -----------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............. 15,956,884 9,564,459
Net asset value of shares
issued in reinvestment
of dividends........... 1,678,716 1,534,979
Cost of shares
reacquired............... (8,977,505) (9,657,597)
----------- -----------
Net increase in net
assets from Fund share
transactions........... 8,658,095 1,441,841
----------- -----------
Total increase............. 12,801,213 4,253,741
----------- -----------
Net Assets
Beginning of year.......... 64,490,339 60,236,598
----------- -----------
End of year................ $77,291,552 $64,490,339
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-329
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The North Carolina Series (the ``Series'')
commenced investment operations in February, 1985. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss until the contracts expire or are closed, at which time
the gain or loss is reclassified to realized gain or loss. The Series invests in
financial futures contracts solely for the purpose of hedging its existing
portfolio securities, or securities the Series intends to purchase against
fluctuations in value caused by changes in prevailing market conditions. Should
market conditions move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
B-330
<PAGE>
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for short-term capital gains and market discount.
Reclassification of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital and increase accumulated net realized
gain on investments by $5,182 compared to amounts previously reported through
August 31, 1992. Net investment income, net realized gains and net assets were
not affected by this change.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''), PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the
services of PIC, the cost of compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Series, and with Prudential Securities Incorporated (``PSI''),
which acts as distributor of the Class B shares of the Series (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Series' Class A and B shares, the Series,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Series reimburses PMFD for its expenses
with respect to Class A shares at an annual rate of up to .30 of 1% of the
average daily net asset value of the Class A shares. Such expenses under the
Class A Plan were .10 of 1% of the average daily net assets of the Class A
shares for the six months ended February 28, 1993. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
Pursuant to the Class B Plan, the Series reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $29,600 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Series
pursuant to the Class B Plan. PSI has advised the Series that for the year ended
August 31, 1993, it received approximately $66,000 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $2,039,600. This amount
may be recovered through future payments
B-331
<PAGE>
under the Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions with Services, Inc. (``PMFS''), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1993, the Series incurred fees of approximately
$26,800 for the services of PMFS. As of August 31, 1993, approximately $2,400 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993 were $32,739,175 and $26,521,432, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, as
of August 31, 1993 net and gross unrealized appreciation of investments,
including short-term investments, for federal income tax purposes is $7,218,693.
During the fiscal year ended August 31, 1993 the Fund fully utilized its
capital loss carryforward of approximately $707,000.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years ended August 31,
1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------- ---------
<S> <C> <C>
------- ---------
Year ended August 31, 1993:
Shares sold...................... 84,457 $ 975,980
Shares issued in reinvestment of
dividends...................... 4,050 47,104
Shares reacquired................ (21,713) (250,645)
------- ---------
Net increase in shares
outstanding.................... 66,794 $ 772,439
------- ---------
------- ---------
Year ended August 31, 1992:
Shares sold...................... 57,350 $ 635,041
Shares issued in reinvestment of
dividends...................... 2,014 22,392
Shares reacquired................ (11,931) (133,531)
------- ---------
Net increase in shares
outstanding.................... 47,433 $ 523,902
------- ---------
------- ---------
</TABLE>
<TABLE>
<CAPTION>
Class B
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................... 1,288,829 $ 14,980,904
Shares issued in reinvestment
of dividends................ 140,597 1,631,612
Shares reacquired............. (753,654) (8,726,860)
---------- ------------
Net increase in shares
outstanding................. 675,772 $ 7,885,656
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................... 804,754 $ 8,929,418
Shares issued in reinvestment
of dividends................ 136,484 1,512,587
Shares reacquired............. (862,193) (9,524,066)
---------- ------------
Net increase in shares
outstanding................. 79,045 $ 917,939
---------- ------------
---------- ------------
</TABLE>
B-332
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 22,
1990*
Years Ended August 31, through Years Ended August 31,
------------------------- August 31, -----------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<CAPTION>
------- ------ ------ ------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.............................. $ 11.37 $10.86 $10.45 $10.63 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35
------
------- ------ ------ ------- ------- ------- ------- -------
Income from investment operations
Net investment income................. .65 .67 .67 .41 .60 .62 .63 .64 .65
Net realized and unrealized gain
(loss) on investment transactions... .67 .51 .41 (.18) .68 .51 .41 (.20) .30
------
------- ------ ------ ------- ------- ------- ------- -------
Total from investment operations.... 1.32 1.18 1.08 .23 1.28 1.13 1.04 .44 .95
------
------- ------ ------ ------- ------- ------- ------- -------
Less distributions
Dividends from net investment
income.............................. (.65) (.67) (.67) (.41) (.60) (.62) (.63) (.64) (.65)
------
------- ------ ------ ------- ------- ------- ------- -------
Total distributions................. (.65) (.67) (.67) (.41) (.60) (.62) (.63) (.64) (.65)
------
------- ------ ------ ------- ------- ------- ------- -------
Net asset value, end of period........ $ 12.04 $11.37 $10.86 $10.45 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65
------
------
------- ------ ------ ------- ------- ------- ------- -------
------- ------ ------ ------- ------- ------- ------- -------
TOTAL RETURN#......................... 11.99% 11.12% 10.63% 2.09% 11.62% 10.64% 10.17% 4.28% 9.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $1,777 $917 $362 $58 $75,515 $63,573 $59,875 $57,429 $34,222
Average net assets (000).............. $1,316 $612 $246 $32 $67,997 $60,751 $59,071 $56,745 $49,868
Ratios to average net assets:
Expenses, including distribution
fees.............................. .87% .91% .99% 1.00%** 1.27% 1.31% 1.39% 1.38% 1.39%
Expenses, excluding distribution
fees.............................. .77% .81% .89% .90%** .77% .81% .89% .89% .89%
Net investment income............... 5.55% 5.90% 6.24% 6.24%** 5.18% 5.58% 5.88% 5.96% 6.06%
Portfolio turnover.................... 38% 36% 27% 24% 38% 36% 27% 24% 47%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-333
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, North Carolina Series
We have audited the statement of assets and liabilities of Prudential
Municipal Series Fund, North Carolina Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, North Carolina Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-334
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
OHIO SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.4%
Akron Bath Copley St.
Twnshp., Hosp. Dist.
Rev.,
Akron Gen. Med. Ctr.,
Aaa $ 1,000 5.50%, 1/1/08,
A.M.B.A.C.............. $ 1,031,840
Childrens Hosp. Med.
Ctr.,
Aaa 2,500 5.25%, 11/15/20,
A.M.B.A.C.............. 2,455,350
Summa Hlth. Sys. Proj.,
A 500 6.25%, 11/15/07.......... 531,865
A 2,000 5.50%, 11/15/13, Ser.
A...................... 1,949,800
Akron, Gen. Oblig.,
A 200 10.50%, 12/1/04.......... 292,430
Allen Cnty. Wtr. & Swr.
Dist.,
Aaa 1,000 7.80%, 12/1/08,
A.M.B.A.C.............. 1,172,100
Berea City Sch. Dist.,
Aaa 4,375 5.00%, 12/15/17,
A.M.B.A.C.............. 4,219,644
Broadview Heights Ind.
Dev. Rev.,
Royalview Manor Dev.,
10.625%, 7/15/14, Ser. A,
F.H.A.................. 238,055
NR 220
Carroll Cnty. Econ. Dev.
Rev.,
Great Trail Lake Ctr.,
AA+* 700 11.75%, 8/1/14, F.H.A.... 818,881
Cincinnati City Sch.
Dist. Rev.,
A+* 1,400 6.15%, 6/15/02........... 1,545,712
Cleveland, Gen. Oblig.,
Aaa 900+ 9.875%, 11/1/05.......... 1,041,561
Cleveland City Sch.
Dist.,
Gen. Oblig.,
Sch. Impvt., Ser. B,
F.G.I.C.,
Aaa 490 Zero Coupon, 6/1/05...... 267,447
Aaa 400 Zero Coupon, 6/1/06...... 205,816
Aaa 315 Zero Coupon, 6/1/07...... 152,617
Aaa 550 Zero Coupon, 12/1/08..... 244,040
Cleveland Waterworks
Mtge. Rev.,
Aaa 715+ 7.625%, 1/1/13, Ser. E,
M.B.I.A................ 813,148
6.25%, 1/1/16, Ser.
F-92B, A.M.B.A.C....... 1,626,960
Aaa 1,500
Columbus Citation Hsg.
Dev. Corp.,
Mtge. Rev.,
NR $ 1,885 7.625%, 1/1/22, F.H.A.... $ 2,276,835
Columbus, Gen. Oblig.,
Aa1 1,000+ 6.00%, 9/15/10, Ser. 1... 1,103,770
Aa1 1,000+ 6.00%, 9/15/11, Ser. 1... 1,103,770
Muni. Arpt. No. 32,
Aa1 435 7.15%, 7/15/06........... 485,917
Swr. Impvt. No. 26,
Aa1 2,000 6.00%, 9/15/09........... 2,103,980
Cuyahoga Cnty.,
Bldg. Impvt. Bond,
Aa 1,500+ 7.40%, 10/1/09, Ser.
83..................... 1,750,890
Cuyahoga Cnty. Hosp.
Auth. Rev.,
Brentwood Hosp.,
Baa1 1,600 9.625%, 11/1/14.......... 1,781,152
Dayton, Gen. Oblig.,
Aaa 480 7.00%, 12/1/07,
M.B.I.A................ 572,602
Dayton Arpt. Rev.,
James M. Cox Int'l.
Arpt.,
Aaa 3,500 8.25%, 1/1/16,
A.M.B.A.C.............. 3,926,125
Dayton Wtr. Sys. Rev.,
Mtge. Ref.,
Aaa 600+@ 10.25%, 12/1/10.......... 699,360
Dublin City Sch. Dist.,
Franklin, Delaware &
Union
Co., A.M.B.A.C.,
Aaa Zero Coupon, 12/1/05..... 733,977
1,370
East Cleveland Rev.,
Local Gov't. Fund
Notes,
NR 1,340 7.90%, 12/1/97........... 1,446,021
Franklin Cnty. Hosp.
Rev.,
Holy Cross Hlth. Sys.,
7.65%, 6/1/10, Ser. B,
A.M.B.A.C.............. 2,960,200
Aaa 2,500
Gahanna Jefferson City
Sch. Dist.,
Gen. Oblig.,
A.M.B.A.C.,
Zero Coupon, 12/1/09..... 187,501
Aaa 445
</TABLE>
B-335 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Garfield Heights Hosp.
Rev.,
Marymount Hosp.,
A $ 1,000 6.70%, 11/15/15.......... $ 1,075,850
Greene Cnty. Swr. Sys.
Rev.,
Zero Coupon, 12/1/08,
A.M.B.A.C.............. 201,154
Aaa 450
Hamilton Cnty. Elec. Sys.
Mtge.
Rev., F.G.I.C.,
8.00%, 10/15/22, Ser.
B...................... 3,583,530
Aaa 3,000+
Hamilton Cnty. Swr. Sys.
Rev.,
Aaa 1,300 5.25%, 12/1/16,
F.G.I.C................ 1,298,154
Met. Swr. Dist. of
Greater Cincinnati,
Aaa 500+ 9.50%, 12/1/05, Ser. A... 579,385
Kettering Cnty., Gen.
Oblig.,
Aa 1,155 7.30%, 12/1/06........... 1,376,933
Logan Hocking Local Sch.
Dist.,
Hocking, Perry & Vinton
Co., Gen. Oblig.,
Zero Coupon, 12/1/09,
A.M.B.A.C.............. 273,878
Aaa 650
Lorain Hosp. Impvt. Rev.,
Lakeland Cmnty. Hosp.,
Inc.,
AAA* 1,125+ 9.50%, 11/1/12........... 1,285,436
Loveland City Sch. Dist.,
Gen. Oblig.,
A1 3,000 7.10%, 12/1/09........... 3,514,350
Lucas Cnty. Hosp. Rev.,
Toledo Hosp., Impvt. &
Ref., M.B.I.A.,
Aaa 2,000 5.00%, 11/15/13.......... 1,935,580
Aaa 4,000 5.00%, 11/15/22.......... 3,810,960
Miami Cnty. Hosp. Facs.
Rev.,
Upper Valley Med. Ctr.
Proj.,
Aaa 500 6.50%, 5/1/21, Ser. A.... 551,040
Montgomery Cnty. Swr.
Sys. Rev.,
Greater Moraine, Beaver
Creek,
F.G.I.C.,
Aaa $ 1,000 Zero Coupon, 9/1/05...... $ 542,610
Aaa 500 Zero Coupon, 9/1/07...... 240,715
Montgomery Cnty. Wtr.
Rev.,
Greater Moraine, Beaver
Creek,
Aaa 500 6.25%, 11/15/17,
F.G.I.C................ 544,110
Newark Ltd. Tax Gen.
Oblig.,
Wtr. Impvt.,
A.M.B.A.C.,
Zero Coupon, 12/1/06..... 406,694
Aaa 805
Ohio St. Air Quality Dev.
Auth. Rev., Poll.
Ctrl., F.G.I.C.,
Cleveland Co. Proj.,
Aaa 2,500 8.00%, 12/1/13........... 3,088,800
Edison Proj.,
Aaa 3,750 7.45%, 3/1/16, Ser. A.... 4,372,725
Ohio St. Bldg. Auth.,
Columbus St. Bldg.
Proj.,
A 750 7.75%, 10/1/07, Ser. A... 864,900
Das Data Ctr. Proj.,
A 615 6.00%, 10/1/08........... 671,014
St. Correctional Facs.,
A 600+ 8.00%, 8/1/06, Ser. A.... 708,738
A 2,450 5.90%, 10/1/07........... 2,612,019
A 500+ 8.00%, 8/1/08, Ser. A.... 590,615
Aaa 1,000+@ 9.75%, 9/1/12, Ser. B.... 1,122,510
Ohio St. Higher Edl. Fac.
Comn. Rev.,
Case Western Reserve
Univ.,
Aa 1,000 7.70%, 10/1/18, Ser. A... 1,146,080
Aa 750 6.50%, 10/1/20, Ser. B... 880,995
Oberlin Coll.,
AA* 1,000+ 7.375%, 10/1/14.......... 1,178,450
AA+* 500+ 9.25%, 10/1/15........... 566,010
Ohio St. Hsg. Fin. Agcy.,
Sngl. Fam. Mtge. Rev.,
AAA* 850 7.40%, 9/1/15, Ser. B,
G.N.M.A................ 921,561
</TABLE>
B-336 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Ohio St. Mtge. Rev.,
AAA* $ 3,500 8.15%, 8/1/17, Ser. A,
F.H.A.................. $ 3,979,465
Ohio St. Poll. Ctrl.
Rev.,
Standard Oil Co.,
A1 1,350 6.75%, 12/1/15........... 1,613,803
Ohio St. Univ., Gen.
Receipts,
A1 1,500 5.75%, 12/1/09, Ser.
A2..................... 1,569,450
A1 750 5.875%, 12/1/12, Ser.
A1..................... 782,880
Ohio St. Wtr. Dev. Auth.
Rev.,
A 1,200+ 7.50%, 12/1/08, Ser. I... 1,395,288
Ottawa Cnty. San. Sew.
Sys. Rev.,
Danbury Proj.,
Aaa 1,000+ 7.375%, 10/1/14,
A.M.B.A.C.............. 1,184,960
Oxford Hosp. Facs. Rev.,
1st Mtge.,
McCullough Hyde Mem.,
NR 1,445 8.00%, 5/1/17............ 1,552,320
Pickerington Local Sch.
Dist., Gen. Oblig.,
A.M.B.A.C.,
Aaa 890 Zero Coupon, 12/1/08..... 397,839
Aaa 935 Zero Coupon, 12/1/09..... 393,962
Aaa 525 Zero Coupon, 12/1/13..... 172,925
Puerto Rico, Gen. Oblig.,
Aaa 1,000 8.789%, 7/1/08, Ser. A,
M.B.I.A................ 1,138,750
Puerto Rico Aqueduct &
Swr. Auth. Rev.,
Baa 1,000 7.875%, 7/1/17, Ser. A... 1,148,450
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth. Facs.,
Baa1 3,000 Zero Coupon, 7/1/06, Ser.
J...................... 1,517,850
Rural Lorain Cnty. Wtr. Auth.
Res. Rev., A.M.B.A.C.,
Aaa 2,000+ 7.70%, 10/1/08........... 2,363,840
Wtr. Res. Refunding &
Impvt.,
Aaa 820 5.25%, 10/1/07,
A.M.B.A.C.............. 837,638
Sandusky Cnty. Hosp. Fac.
Rev.,
Mem. Hosp. Assoc.,
Aaa $ 600+@ 11.25%, 12/1/09.......... $ 673,062
Scioto Cnty. Hosp. Fac.
Rev.,
Portsmouth Proj.,
M.B.I.A.,
7.625%, 5/15/08, Ser.
B...................... 2,629,470
Aaa 2,290
Solon Sch. Dist., Gen.
Oblig.,
Graphic Laminating Inc.
Proj.,
Aa 2,000 7.15%, 12/1/13........... 2,324,540
Student Loan Funding
Corp.,
Cincinnati Rev., Ser.
A,
A 1,400 7.20%, 8/1/03............ 1,542,506
A 2,000 7.25%, 2/1/08............ 2,154,240
Summit Cnty. Refunding & Impvt.,
6.90%, 8/1/12, Ser. A,
A.M.B.A.C.............. 2,261,411
Aaa 1,985
Summit Cnty. Ind. Dev.
Rev.,
Century Products Gerber
Foods,
A2 3,250 7.75%, 11/1/05........... 3,620,273
Univ. of Cincinnati, Gen.
Receipts,
A1 1,000+ 7.30%, 6/1/09, Ser. E1... 1,154,050
A1 1,000 7.00%, 6/1/11, Ser. L.... 1,127,610
Univ. of Toledo, Gen.
Receipts,
Aaa 1,000+ 7.70%, 6/1/18,
M.B.I.A................ 1,172,240
Virgin Islands Pub. Fin.
Auth. Rev.,
NR 1,000 7.25%, 10/1/18, Ser. A... 1,133,630
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Prog.,
NR 480 7.75%, 10/1/06, Ser.
91..................... 554,165
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys.,
NR 1,000 7.40%, 7/1/11, Ser. A.... 1,103,580
Wtr. Sys. Rev.,
NR 1,000 8.50%, 1/1/10, Ser. A.... 1,149,140
NR 400 7.60%, 1/1/12, Ser. B.... 450,736
</TABLE>
B-337 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Woodmore Indpt. Sch.
Dist., Gen. Oblig.,
A.M.B.A.C.,
Aaa $ 490 Zero Coupon, 12/1/05..... $ 257,456
Aaa 480 Zero Coupon, 12/1/06..... 236,266
------------
Total long-term
investments
(cost $109,822,683)...... 123,277,957
------------
SHORT-TERM INVESTMENTS--2.2%
Cuyahoga Cnty.
Univ. Hosp. of
Cleveland,
VMIG1 2,800 2.45%, 9/1/93, Ser. 85,
F.R.D.D.
(cost $2,800,000)........ 2,800,000
------------
Total Investments--99.6%
(cost $112,622,683; Note
4)..................... 126,077,957
Other assets in excess of
liabilities--0.4%...... 505,770
------------
Net Assets--100%......... $126,583,727
------------
------------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
@ Pledged as initial margin on financial futures contracts.
* Standard & Poor's rating.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-338 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
----------------
<S> <C>
Investments, at value (cost $112,622,683)............................................... $126,077,957
Cash.................................................................................... 168,450
Accrued interest receivable............................................................. 2,125,975
Receivable for Fund shares sold......................................................... 976,744
Receivable for investments sold......................................................... 45,000
Other assets............................................................................ 3,033
----------------
Total assets.......................................................................... 129,397,159
----------------
Liabilities
Payable for investments purchased....................................................... 2,410,938
Payable for Fund shares reacquired...................................................... 120,576
Dividends payable....................................................................... 100,275
Accrued expenses........................................................................ 73,401
Due to Manager.......................................................................... 52,604
Due to Distributors..................................................................... 51,263
Due to broker-variation margin.......................................................... 4,375
----------------
Total liabilities..................................................................... 2,813,432
----------------
Net Assets.............................................................................. $126,583,727
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 102,259
Paid-in capital in excess of par...................................................... 114,306,626
----------------
114,408,885
Accumulated net realized loss......................................................... (1,278,245)
Net unrealized appreciation........................................................... 13,453,087
----------------
Net assets, August 31, 1993........................................................... $126,583,727
----------------
----------------
Class A:
Net asset value and redemption price per share
($4,647,200 / 375,500 shares of beneficial interest issued and outstanding)......... $12.38
Maximum sales charge (4.5% of offering price)......................................... .58
----------------
Maximum offering price to public...................................................... $12.96
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($121,936,527 / 9,850,357 shares of beneficial interest issued and outstanding)..... $12.38
----------------
----------------
</TABLE>
See Notes to Financial Statements.
B-339
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................ $ 7,418,475
-----------
Expenses
Management fee...................... 564,784
Distribution fee--Class A........... 2,904
Distribution fee--Class B........... 550,265
Custodian's fees and expenses....... 99,700
Transfer agent's fees and
expenses............................ 78,000
Reports to shareholders............. 38,000
Registration fees................... 13,700
Audit fee........................... 10,500
Legal fees.......................... 9,500
Trustees' fees...................... 3,375
Miscellaneous....................... 13,347
-----------
Total expenses.................... 1,384,075
-----------
Net investment income................. 6,034,400
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions............. 1,593,338
Financial futures transactions...... (371,061)
-----------
1,222,277
-----------
Net change in unrealized appreciation/depreciation
on:
Investments......................... 5,313,224
Financial futures contracts......... (2,187)
-----------
5,311,037
-----------
Net gain on investments............... 6,533,314
-----------
Net Increase in Net Assets Resulting
from Operations....................... $12,567,714
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ----------------------------
in Net Assets 1993 1992
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 6,034,400 $ 5,590,018
Net realized gain on
investment
transactions.......... 1,222,277 1,240,787
Net change in unrealized
appreciation of
investments........... 5,311,037 3,209,890
------------ ------------
Net increase in net
assets
resulting from
operations............ 12,567,714 10,040,695
------------ ------------
Dividends to shareholders
(Note 1)
Class A............... (165,299) (81,810)
Class B............... (5,869,101) (5,508,208)
------------ ------------
(6,034,400) (5,590,018)
------------ ------------
Fund share transactions
(Note 5)
Proceeds from shares
subscribed............ 21,565,565 14,006,120
Net asset value of
shares
issued in reinvestment
of
dividends............. 3,491,240 3,150,134
Cost of shares
reacquired.............. (9,300,053) (10,807,916)
------------ ------------
Net increase in net
assets
from Fund share
transactions.......... 15,756,752 6,348,338
------------ ------------
Total increase............ 22,290,066 10,799,015
Net Assets
Beginning of year......... 104,293,661 93,494,646
------------ ------------
End of year............... $126,583,727 $104,293,661
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-340
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Ohio Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
B-341
<PAGE>
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital and increase accumulated net realized
gains on investments by $5,986 compared to amounts previously reported through
August 31, 1992. Net investment income, net realized gains, and net assets were
not affected by this change.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A shares
of the Fund, and Prudential Securities Incorporated (``PSI''), who acts as
distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended August 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges and the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $84,100 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the year ended August
31, 1993, it received approximately $40,300 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as Distributor, has also
advised the Series that at August 31, 1993, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Series or recovered through
contingent deferred sales charges approximated $3,056,300. This amount may be
recovered through future payments
B-342
<PAGE>
under the Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as Distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993 the Series incurred fees of approximately $49,000
for the services of PMFS. As of August 31, 1993, approximately $4,000 of such
fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of
Securities portfolio securities of the
Series, excluding short-term investments, for the
year ended August 31, 1993 were $46,032,962 and $29,397,288, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1993 was substantially the same as for financial reporting purposes and,
accordingly, net and gross unrealized appreciation of investments, including
short-term investments, for federal income tax purposes was $13,455,274.
For federal income tax purposes, the Series has a capital loss carryforward
as of August 31, 1993 of approximately $1,051,400 which expires in 1996. Such
carryforward is after utilization of approximately $1,418,700 to offset the
Fund's net capital gains realized and recognized in the fiscal year ended August
31, 1993. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
At August 31, 1993 the Series sold 35 financial futures contracts on the
Treasury Bond Index expiring in December, 1993. The value at disposition of such
contracts was $4,142,031. The value of such contracts on August 31, 1993 was
$4,144,218, thereby resulting in an unrealized loss of $2,187. The Series has
pledged $600,000 principal amount of Sandusky County Hospital Facility Revenue
bonds, $600,000 principal amount of Dayton Water Systems Revenue bonds, and
$1,000,000 principal amount of Ohio State Building Authority bonds as initial
margin on such contracts.
Note 5. Capital The Series offers both
Class A and Class B shares. Class A shares are
sold with a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------
<S> <C> <C>
---------- ------------
Year ended August 31, 1993:
Shares sold................. 237,725 $ 2,875,262
Shares issued in
reinvestment
of dividends.............. 9,080 108,980
Shares reacquired........... (50,464) (609,662)
---------- ------------
Net increase in shares
outstanding............... 196,341 $ 2,374,580
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 101,047 $ 1,162,297
Shares issued in
reinvestment
of dividends.............. 5,174 59,138
Shares reacquired........... (9,639) (109,761)
---------- ------------
Net increase in shares
outstanding............... 96,582 $ 1,111,674
---------- ------------
---------- ------------
</TABLE>
B-343
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 1,561,093 $ 18,690,303
Shares issued in
reinvestment
of dividends.............. 282,692 3,382,260
Shares reacquired........... (731,090) (8,690,391)
---------- ------------
Net increase in shares
outstanding............... 1,112,695 $ 13,382,172
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 1,122,123 $ 12,843,823
Shares issued in
reinvestment
of dividends.............. 270,657 3,090,996
Shares reacquired........... (938,646) (10,698,155)
---------- ------------
Net increase in shares
outstanding............... 454,134 $ 5,236,664
---------- ------------
---------- ------------
</TABLE>
B-344
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------------------------------
January
22, Class B
1990+ --------------------------------------------------
Through
Year Ended August 31, August Year Ended August 31,
------------------------------ 31, --------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ -------- -------- -------- -------- ------- -------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $11.69 $11.17 $10.71 $10.85 $ 11.70 $ 11.18 $ 10.71 $ 10.85 $ 10.53
------ ------ ------ -------- -------- -------- -------- ------- -------
Income from investment operations
Net investment income............ .69 .70 .70 .47 .65 .65 .65 .66 .67
Net realized and unrealized gain
(loss) on investment
transactions................... .69 .52 .46 (.14) .68 .52 .47 (.14) .32
------ ------ ------ -------- -------- -------- -------- ------- -------
Total from investment
operations................... 1.38 1.22 1.16 .33 1.33 1.17 1.12 .52 .99
------ ------ ------ -------- -------- -------- -------- ------- -------
Less dividends
Dividends from net investment
income......................... (.69) (.70) (.70) (.47) (.65) (.65) (.65) (.66) (.67)
------ ------ ------ -------- -------- -------- -------- ------- -------
Net asset value, end of period... $12.38 $11.69 $11.17 $10.71 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 10.85
------ ------ ------ ------ ------- -------- -------- ------- -------
------ ------ ------ ------ ------- -------- -------- ------- -------
TOTAL RETURN#:................... 12.12% 11.26% 11.06% 2.58% 11.58 % 10.79% 10.74% 4.87% 9.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $4,647 $2,095 $923 $462 $121,937 $102,199 $92,572 $89,183 $87,426
Average net assets (000)......... $2,904 $1,289 $615 $289 $110,053 $96,178 $90,437 $89,302 $81,613
Ratios to average net assets:
Expenses, including
distribution fees............ .84% .81% .93% .96%* 1.24 % 1.21% 1.33% 1.32% 1.32%
Expenses, excluding
distribution fees............ .74% .71% .83% .86%* .74 % .71% .83% .84% .84%
Net investment income.......... 5.73% 6.34% 6.34% 6.51%* 5.33 % 5.73% 5.94% 6.08% 6.17%
Portfolio turnover............... 28% 37% 37% 24% 28 % 37% 37% 24% 41%
<FN>
- ---------------
* Annualized.
+ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
return for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-345
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Ohio Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Ohio Series, including the portfolio of
investments, as of August 31, 1993, the related statements of operations for the
year then ended and of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Ohio Series, as of August 31, 1993, the results of its operations,
the changes in its net assets, and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-346
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
PENNSYLVANIA SERIES August 31, 1993
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.4%
Allegheny Cnty. Arpt.
Rev.,
Greater Pittsburgh
Int'l. Arpt.,
Aaa $ 1,000 6.60%, 1/1/04, Ser. A,
F.S.A.................. $ 1,112,410
Aaa 1,340 5.625%, 1/1/16,
M.B.I.A................ 1,354,995
Aaa 1,230 5.625%, 1/1/23, F.S.A.... 1,237,565
Allegheny Cnty. Higher Ed. Bldg.
Auth. Rev., Robert Morris Coll.,
Aaa 1,000 7.00%, 6/15/08,
M.B.I.A................ 1,130,390
Allegheny Cnty. Hosp.
Dev. Auth. Rev.,
Magee Womens Hosp.,
A 1,000+ 8.125%, 10/1/08, Ser.
B...................... 1,176,340
Zero Coupon, 10/1/14,
F.G.I.C................ 611,520
Aaa 2,000
Zero Coupon, 10/1/16,
F.G.I.C................ 541,620
Aaa 2,000
Zero Coupon, 10/1/18,
F.G.I.C................ 478,960
Aaa 2,000
Zero Coupon, 10/1/19,
F.G.I.C................ 904,880
Aaa 4,000
Presbyterian Univ. Hosp.,
7.625%, 7/1/15, Ser. C,
M.B.I.A................ 1,266,496
Aaa 1,100
West Pennsylvania Hosp.
Hlth. Ctr. Proj.,
NR 2,000 8.50%, 1/1/20............ 2,293,200
Allegheny Cnty.
Residential Fin.
Auth., Mtge. Rev.,
G.N.M.A.,
Aaa 660 9.00%, 6/1/17, Ser. F.... 734,138
Aaa 970 7.40%, 12/1/22, Ser. Q... 1,064,139
Allegheny Cnty. San.
Auth. Swr. Rev.,
F.G.I.C.,
Aaa 2,620 Zero Coupon, 12/1/05..... 1,377,098
Aaa 1,640 Zero Coupon, 6/1/06, Ser.
A...................... 831,365
Allegheny Cnty., Gen.
Oblig.,
Aaa 1,500+ 7.30%, 12/1/10, Ser.
C-37, M.B.I.A.......... 1,776,585
Beaver Cnty. Ind. Dev.
Auth. Poll. Ctrl. Rev.,
Ohio Edison Proj.,
Baa3 $ 2,900 7.75%, 9/1/24, Ser. A.... $ 3,262,007
7.75%, 9/1/24, Ser. A,
F.G.I.C................ 1,364,222
Aaa 1,150
Berks Cnty. Ind. Dev.
Auth. Rev.,
Lutheran Home Proj.,
NR 1,500 6.875%, 1/1/23........... 1,549,305
Berks Cnty., Gen. Oblig.,
Aaa 3,000+ 7.25%, 11/15/20,
F.G.I.C................ 3,585,180
Bristol Township Sch.
Dist.,
Gen Oblig., M.B.I.A.
Aaa 1,500 6.625%, 2/15/12, Ser.
A...................... 1,677,255
Bucks Cnty. Wtr. & Swr.
Auth. Rev.,
Neshaminy Interceptor
Sys.,
Aaa 2,000+ 7.50%, 12/1/13,
F.G.I.C................ 2,320,120
Butler Cnty. Hosp. Auth.
Rev.,
North Hills, Passavant
Hosp.,
Aaa 1,000 7.00%, 6/1/22,
C.G.I.C................ 1,154,010
Chartiers Valley
Jt. Sch. Dist. Auth.
Rev.,
AAA* 4,440 6.15%, 3/1/07............ 4,897,320
Chester Upland Sch. Auth.
A* 1,000 6.375%, 9/1/21, Ser. A... 1,061,450
Dauphin Cnty. Gen. Auth.
Rev.,
Aaa 1,000 7.40%, 1/1/06, B.I.G..... 1,125,910
13th Term Sch. Dist.,
BBB+* 1,600 7.875%, 6/1/26........... 1,657,264
Delaware Cnty. Auth.
Rev.,
Crozer Chester Med.
Ctr.,
7.15%, 12/15/05, Ser.
ABC, M.B.I.A........... 2,962,743
Aaa 2,550
Villanova Univ.,
A 1,000+ 7.75%, 8/1/18............ 1,179,820
</TABLE>
B-347 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Delaware Cnty. Ind. Dev. Auth.
Rev., Res. Recovery Proj.,
AA3* $ 2,000 8.10%, 12/1/13, Ser. A... $ 2,224,100
Delaware River Jt. Toll
Bridge Comm. Rev.,
Aaa 5,500 6.00%, 7/1/18,
F.G.I.C................ 5,819,935
Doylestown Hosp. Auth.
Rev.,
Pine Run Retirement,
NR 1,180 7.20%, 7/1/23............ 1,243,307
Emmaus Gen. Auth. Rev.,
Local Gov't. Bond,
B.I.G.
Aaa 1,250 7.90%, 5/15/18, Ser. C... 1,447,988
Aaa 2,000 7.90%, 5/15/18, Ser. E... 2,316,780
Aaa 1,600 7.90%, 5/15/18, Ser. F... 1,852,144
Aaa 1,000 8.00%, 5/15/18, Ser. B... 1,151,990
Erie Higher Ed. Bldg. Auth. Coll.
Rev., Mercyhurst Coll. Proj.,
BBB* 1,000 7.85%, 9/15/19........... 1,125,870
Falls Twnshp. Hosp. Auth.
Rev.,
Delaware Valley Med.,
AAA* 2,700 7.00%, 8/1/22, F.H.A..... 3,009,420
Franklin Cnty. Ind. Dev.
Auth. Hosp. Rev.,
Chambersburg Hosp.
Proj.,
Aaa 1,500 6.25%, 7/1/22,
F.G.I.C................ 1,608,495
Guam Arpt. Auth. Rev.,
BBB* 3,500 6.70%, 10/1/23, Ser. B... 3,802,435
Harrisburg Auth. Rev.,
Green Cnty. Prison
Proj.,
Aaa 1,500 6.625%, 6/1/13........... 1,675,530
Harrisburg Redev. Auth.
Rev.,
Cap. Impvt., F.G.I.C.,
Aaa 900 7.875%, 11/2/16, Ser.
A...................... 1,011,285
Lancaster Cnty. Solid
Waste Mgmt. Auth. Rev.,
Res. Recovery Sys.
Landfill,
A 750 7.75%, 12/15/04.......... 856,560
Langhorne Manor Boro.
Higher Ed. & Hlth.
Auth. Rev.,
Lower Bucks Hosp.,
Baa 3,275 7.35%, 7/1/22............ 3,651,494
Lehigh Cnty. Gen. Purpose
Auth. Revs.,
Horizon Hlth. Sys.
Inc.,
NR $ 500 8.25%, 7/1/13, Ser. A.... $ 626,800
A+* 750 8.25%, 7/1/13, Ser. B.... 868,620
St. Lukes Hosp. of
Bethlehem Proj.,
Aaa 750 5.30%, 11/15/06,
A.M.B.A.C.............. 767,123
Aaa 1,000 5.30%, 11/15/07,
A.M.B.A.C.............. 1,015,890
Lehigh Cnty. Ind. Dev.
Auth. Poll. Ctrl. Rev.,
Pa. Pwr. & Lt. Co.,
A2 1,300 9.375%, 7/1/15, Ser. A... 1,440,738
Luzerne Cnty. Ind. Dev.
Auth.
Exmpt. Facs. Rev.
Gas and Water,
Baa3 4,000 7.20%, 10/1/17........... 4,415,960
Baa3 2,000 7.125%, 12/1/22, Ser.
B...................... 2,199,580
Montgomery Cnty. Higher
Ed. & Hlth. Auth. Hosp.
Rev.,
Jeanes Hlth. Sys.
Proj.,
BBB* 4,000+ 8.625%, 7/1/07........... 5,060,680
Montgomery Cnty. Ind.
Dev. Auth. Rev., Poll.
Ctrl.,
Philadelphia Elec.,
Baa2 1,000 7.60%, 4/1/21............ 1,118,130
Res. Recovery,
AA-* 2,000 7.50%, 1/1/12............ 2,211,780
Montgomery Cnty. Redev.
Auth.,
Multi-family Hsg.,
NR 3,000 6.50%, 7/1/25............ 3,087,030
No. Huntingdon Twnshp.
Mun.
Auth., Gtd. Swr. Rev.,
Aaa 1,070 6.70%, 4/1/06,
M.B.I.A................ 1,201,492
Northampton Cnty. Higher
Ed. Auth. Rev.,
Lehigh Univ.,
Aaa 1,500 7.10%, 11/15/09,
M.B.I.A................ 1,729,980
Moravian Coll.,
BBB-* 2,095 8.20%, 6/1/11............ 2,434,767
Northampton Cnty. Ind.
Dev.
Auth. Rev., Citizens
Util. Co.,
AAA* 1,000 6.95%, 8/1/15............ 1,101,840
</TABLE>
B-348 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Northeastern Hosp. & Ed.
Auth.,
Coll. Rev.,
BBB* $ 1,500 6.00%, 7/15/18........... $ 1,501,110
Pennsylvania Hsg. Fin.
Agcy.,
Sngl. Fam. Mtge.,
Aa 780 8.10%, 10/1/10, Ser. X... 848,351
Aa 1,750 8.25%, 4/1/14, Ser. N.... 1,889,895
Aa 1,000 7.60%, 4/1/16, Ser. S.... 1,101,000
Aa 3,000 7.80%, 10/1/20........... 3,329,040
Aa 1,820 8.15%, 4/1/24, Ser. X.... 2,018,835
Aa 1,050 9.378%, 4/1/25, Ser.
27..................... 1,106,438
Pennsylvania Ind. Auth.
Econ. Dev. Rev.,
A 3,000 7.00%, 1/1/11, Ser. A.... 3,314,100
Pennsylvania
Infrastructure
Investment Auth. Rev.,
AA* 750 6.80%, 9/1/10............ 833,348
Pennsylvania
Intergovernmental
Cooperation Auth. Spec.
Tax Rev.,
Aaa 1,000 5.60%, 6/15/15,
M.B.I.A................ 1,002,140
Baa 1,000+ 6.80%, 6/15/22........... 1,146,570
Pennsylvania St. Higher Edl. Facs.
Auth. Rev., Coll. & Univ. Rev.,
Allegheny College,
BBB* 2,000 6.00%, 11/1/22, Ser. B... 2,043,120
Drexel Univ.,
BBB* 2,500 6.375%, 5/1/17........... 2,624,700
Hahnemann Univ. Proj.,
Aaa 1,500 7.20%, 7/1/09,
M.B.I.A................ 1,727,085
La Salle Univ.,
Aaa 1,100 7.70%, 5/1/10,
M.B.I.A................ 1,270,500
Med. Coll. of
Pennsylvania,
Baa1 355 8.375%, 3/1/11, Ser. A... 404,327
Baa1 2,350 7.50%, 3/1/14, Ser. A.... 2,575,953
Thomas Jefferson Univ.,
Aa 1,000 6.625%, 8/15/09, Ser.
A...................... 1,115,110
AAA* 1,250+ 8.00%, 1/1/18, Ser. A,... 1,473,013
Pennsylvania St. Tpke.
Comn. Rev.,
7.625%, 12/1/17, Ser D.
F.G.I.C................ 1,626,818
Aaa 1,375+
Pennsylvania St. Tpke.
Comn. Rev.,
5.50%, 12/1/19, Ser. N,
F.G.I.C................ $ 1,501,815
Aaa $ 1,500
Aaa 4,650+ 7.50%, 12/1/19, Ser. K... 5,559,959
Pennsylvania St. Univ., Gen. Oblig.,
A1 3,000 5.55%, 8/15/07........... 3,099,420
A1 1,000 6.75%, 7/1/09............ 1,146,330
Pennsylvania St., Gen.
Oblig.,
Aaa 4,000 6.25%, 11/1/06, Ser. A.
F.S.A.................. 4,419,080
Philadelphia Arpt. Rev.,
Baa 2,000 9.00%, 6/15/15........... 2,199,760
Philadelphia Gas Wks.
Rev.,
Baa1 500 7.20%, 6/15/98, Ser.
13..................... 559,810
Baa1 625 7.30%, 6/15/99, Ser.
13..................... 699,738
Baa1 215 7.70%, 6/15/11, Ser.
13..................... 244,633
Baa1 1,000 6.375%, 7/1/14........... 1,062,740
Baa1 1,000+ 7.875%, 7/1/17, Ser.
11A.................... 1,156,260
Baa1 3,430+ 7.70%, 6/15/21, Ser.
13..................... 4,187,516
Baa1 2,900 6.375%, 7/1/26........... 3,061,385
Philadelphia Hosps. &
Higher Ed. Fac. Auth.
Rev.,
Childrens Hosp. Proj.,
Aa 1,000+ 6.50%, 2/15/09, Ser. A... 1,146,200
Aa 1,500+ 8.00%, 7/1/18, Ser.
88A.................... 1,738,035
Aa 2,000 5.00%, 2/15/21, Ser. A... 1,869,840
Children's Seashore
House,
BBB+* 1,000 7.00%, 8/15/12........... 1,090,440
BBB+* 1,000 7.00%, 8/15/17, Ser. A... 1,090,440
Grad. Health Systems,
Baa1 1,000 6.25%, 7/1/18, Ser. A.... 1,021,710
Baa1 2,750 7.25%, 7/1/18............ 3,039,300
Pennsylvania Univ. Hosp.,
Aa 845 5.875%, 7/1/08........... 846,884
Philadelphia Ind. Dev.
Auth. Rev.,
Inst. For Cancer
Research,
AA-* 5,770 7.25%, 7/1/10, Ser. B.... 6,473,882
Nat'l. Brd. Of Med.
Examiners Proj.,
A+* 5,000 6.75%, 5/1/12............ 5,462,850
Philadelphia Mun. Auth.
Rev.,
Lease Revenue,
Aaa 2,000 5.625%, 11/15/14,
F.G.I.C................ 2,021,820
Aaa 2,000 5.625%, 11/15/18,
F.G.I.C................ 2,016,480
</TABLE>
B-349 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Philadelphia Pkg. Auth.
Rev.,
Arpt. Pkg.,
Aaa $ 2,200 7.375%, 9/1/18,
A.M.B.A.C.............. $ 2,511,322
Philadelphia Redev. Auth.
Rev.,
Home Impvt. Loan,
A 500 7.375%, 6/1/03, Ser. A... 525,940
A 1,080 7.40%, 6/1/08, Ser. A.... 1,176,368
Philadelphia Wtr. & Swr.
Rev.,
Zero Coupon, 10/1/02,
Ser. 15, M.B.I.A....... 5,093,762
Aaa 7,900
6.875%, 10/1/06, Ser. 15,
M.B.I.A................ 787,878
Aaa 700
Pittsburgh Pub. Parking
Auth.
Parking Rev.,
Aaa 1,000 5.875%, 12/1/12,
F.G.I.C................ 1,043,840
Pittsburgh Stadium Auth.
Rev.,
Aaa 500 7.50%, 10/15/01,
F.G.I.C................ 546,075
Pittsburgh Urban Redev.
Auth.,
Mtge. Rev.,
A1 795 8.30%, 4/1/17, Ser. B.... 852,097
Pottstown Boro. Swr.
Auth. Rev.,
Aaa 1,200 Zero Coupon, 11/1/03,
F.G.I.C................ 715,596
Puerto Rico Comnwlth.,
Baa1 3,750 7.00%, 7/1/10............ 4,408,875
Gen. Oblig.,
Aaa 4,250 8.882%, 7/1/20, Ser. A,
F.S.A.................. 4,775,938
Pub. Impvt. Ref.,
Baa1 2,500 5.40%, 7/1/07............ 2,548,675
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multi-family Mtge.,
AA* 995 7.50%, 4/1/22............ 1,078,490
Puerto Rico Hwy. & Trans.
Auth. Rev.,
Baa1 1,540 6.625%, 7/1/18, Ser. T... 1,697,989
Puerto Rico Port Auth.
Rev.,
American Airlines,
Baa3 1,325 6.30%, 6/1/23, Ser. A.... 1,367,042
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth. Facs.,
Baa1 2,000+ 7.875%, 7/1/16, Ser. H... 2,330,660
Puerto Rico Pub. Impvt.,
Baa1 $ 5,250+ 7.70%, 7/1/20............ $ 6,375,600
Baa1 1,100+ 6.80%, 7/1/21............ 1,295,591
Sayre Hlth. Care Facs. Auth. Rev.,
Cap. Asset Fin. Prog.,
Aaa 500 7.70%, 12/1/13,
A.M.B.A.C.............. 587,440
7.625%, 12/1/15, Ser.
H-2, A.M.B.A.C......... 1,187,570
Aaa 1,000
Scranton Pkg. Auth. Rev.,
A+* 1,600 8.125%, 9/15/14.......... 1,845,600
Univ. Of Scranton Proj.,
A-* 1,000+ 7.50%, 6/15/06, Ser. C... 1,194,360
Scranton-Lackawanna Hlth.
& Welfare Auth. Rev.,
Univ. of Scranton,
A-* 2,250 6.50%, 3/1/15............ 2,410,965
Swarthmore Boro. Gen. Auth. Rev.,
Pennsylvania Coll.,
AA-* 600+ 7.25%, 9/15/10........... 706,548
Venango Cnty. Gen.
Oblig.,
Aaa 2,265 5.25%, 7/15/18, Ser. B... 2,215,600
Virgin Islands Pub. Fin. Auth. Rev.,
NR 1,950 7.25%, 10/1/18, Ser. A... 2,210,579
Hwy. Trans. Gas Tax,
BBB* 1,000 7.70%, 10/1/04........... 1,154,290
Virgin Islands Territory,
Hugo Ins. Claims Fund
Proj.,
NR 1,155 7.75%, 10/1/06........... 1,333,459
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys.
NR 1,500 8.50%, 1/1/10, Ser. A.... 1,723,710
Wtr. Sys. Rev.,
NR 250 7.20%, 1/1/02, Ser. B.... 276,845
NR 800 7.60%, 1/1/12, Ser. B.... 901,472
Washington Cnty. Auth. Lease
Rev., Mun. Fac., Shadyside Hosp.,
Aaa 2,900+ 7.45%, 12/15/18,
Ser. C-1D,
A.M.B.A.C.............. 3,486,322
Washington Cnty. Hosp.
Auth. Rev.,
Monongahela Valley
Hosp.,
A 2,750 6.75%, 12/1/08........... 3,038,063
</TABLE>
B-350 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Washington Cnty. Ind. Dev. Auth.
Rev., Presbyterian Med. Ctr.,
AAA* $ 1,000 6.70%, 1/15/12, F.H.A.... $ 1,097,850
York Cnty. Solid Waste &
Refuse Auth. Ind. Dev.
Rev., Res. Recovery
Proj.,
AA-* 1,000 8.20%, 12/1/14, Ser. C... 1,151,620
------------
Total long-term
investments
(cost $233,600,818)...... 263,087,861
------------
SHORT-TERM INVESTMENTS--1.4%
Allegheny Cnty. Hosp.
Dev.
Auth. Rev., F.R.W.D.,
VMIG1 300 2.50%, 9/2/93, Ser.
88B-2.................. 300,000
Emmaus Local Gov't Auth.,
Bond Pool Proj.,
F.R.W.D.,
A-1+ 500 2.50%, 9/1/93, Ser. B1... 500,000
Philadelphia Hosps. &
Higher
Ed. Facs. Auth. Rev.,
Children's Hosp.,
F.R.D.D.,
VMIG1 300 2.45%, 9/1/93, Ser.
92B.................... 300,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 800 2.15%, 9/1/93, Ser. 85... 800,000
Quakertown Hosp. Pa. Gen'l. Auth.,
Group Pooled Loan, F.R.W.D.,
VMIG1 500 2.45%, 9/8/93, Ser. 85... 500,000
Schuylkill Cnty. Ind. Dev. Auth.,
Westwood Energy Pty., F.R.D.D.,
P1 1,500 2.75%, 9/1/93, Ser. 85... 1,500,000
------------
Total short-term
investments
(cost $3,900,000)........ 3,900,000
------------
Total Investments--97.8%
(cost $237,500,818; Note
4)..................... 266,987,861
Other assets in excess of
liabilities--2.2%...... 6,106,528
------------
Net Assets--100%......... $273,094,389
------------
------------
<FN>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.R.W.D.--Floating Rate (Weekly) Demand Note#.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-351 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
----------------
<S> <C>
Investments, at value (cost $237,500,818).............................................. $266,987,856
Cash................................................................................... 172,908
Receivable for investments sold........................................................ 5,252,539
Accrued interest receivable............................................................ 4,353,517
Receivable for Fund shares sold........................................................ 1,210,061
Deferred expenses and other assets..................................................... 5,246
----------------
Total assets....................................................................... 277,982,127
----------------
Liabilities
Payable for investments purchased...................................................... 4,034,395
Payable for Fund shares reacquired..................................................... 302,893
Dividends payable...................................................................... 228,651
Due to Manager......................................................................... 113,344
Due to Distributors.................................................................... 110,369
Accrued expenses....................................................................... 98,086
----------------
Total liabilities.................................................................. 4,887,738
----------------
Net Assets............................................................................. $273,094,389
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 243,698
Paid-in capital in excess of par..................................................... 241,959,649
----------------
242,203,347
Accumulated net realized gain........................................................ 1,404,004
Net unrealized appreciation.......................................................... 29,487,038
----------------
Net assets, August 31, 1993.......................................................... $273,094,389
----------------
----------------
Class A:
Net asset value and redemption price per share
($9,341,836 / 833,485 shares of beneficial interest issued and outstanding)........ $11.21
Maximum sales charge (4.5% of offering price)........................................ .53
----------------
Maximum offering price to public..................................................... $11.74
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($263,752,553 / 23,536,349 shares of beneficial interest issued and outstanding)... $11.21
----------------
----------------
</TABLE>
See Notes to Financial Statements.
B-352
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................. $15,356,351
-----------
Expenses
Management fee....................... 1,186,546
Distribution fee--Class A............ 7,354
Distribution fee--Class B............ 1,149,777
Transfer agent's fees and expenses... 173,000
Custodian's fees and expenses........ 157,800
Reports to shareholders.............. 30,000
Registration fees.................... 30,000
Audit fee............................ 10,500
Legal fees........................... 9,500
Trustees' fees....................... 3,375
Miscellaneous........................ 16,302
-----------
Total expenses......................... 2,774,154
-----------
Net investment income.................. 12,582,197
-----------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions.............. 2,525,206
Financial futures transactions....... (302,224)
-----------
2,222,982
-----------
Net change in unrealized appreciation
on:
Investments.......................... 13,684,826
Financial futures contracts.......... 19,688
-----------
13,704,514
-----------
Net gain on investments................ 15,927,496
-----------
Net Increase in Net Assets Resulting
from Operations........................ $28,509,693
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ----------------------------
in Net Assets 1993 1992
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 12,582,197 $ 10,668,812
Net realized gain on
investment
transactions.......... 2,222,982 1,604,834
Net change in unrealized
appreciation on
investments........... 13,704,514 9,290,422
------------ ------------
Net increase in net
assets
resulting from
operations............ 28,509,693 21,564,068
------------ ------------
Dividends and
distributions (Note 1):
Dividends to
shareholders from net
investment income
Class A................. (417,688) (265,771)
Class B................. (12,164,509) (10,403,041)
------------ ------------
(12,582,197) (10,668,812)
------------ ------------
Distributions to
shareholders from net
realized gains on
investment
transactions
Class A................. (23,310) . --
Class B................. (813,755) --
------------ ------------
(837,065) --
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............ 65,604,598 45,376,520
Net asset value of
shares
issued in reinvestment
of dividends and
distributions......... 7,674,719 5,875,753
Cost of shares
reacquired.............. (27,211,612) (23,893,249)
------------ ------------
Net increase in net
assets from Fund share
transactions.......... 46,067,705 27,359,024
------------ ------------
Total increase............ 61,158,136 38,254,280
Net Assets
Beginning of year......... 211,936,253 173,681,973
------------ ------------
End of year............... $273,094,389 $211,936,253
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-353
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
sixteen series. The monies of each series are invested in separate,
independently managed portfolios. The Pennsylvania Series (the ``Series'')
commenced investment operations in April, 1987. The Series is diversified and
seeks to achieve it's investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase, against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets. As
of August 31, 1993 there are no financial futures outstanding.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Reclassification of Capital Accounts: Effective September 1, 1992, the Series
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect of adopting this statement was
to decrease paid-in capital and increase accumulated net
B-354
<PAGE>
realized gain by $47,708 compared to amounts previously reported through August
31, 1992. Net investment income, net realized gains and net assets were not
affected by this change.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net asset value of the Class A shares. Such expenses under the Class A
Plan were .10 of 1% of the average daily net assets of the Class A shares for
the year ended August 31, 1993. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .50 of 1% of the average daily net asset value of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $141,300 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Class B Plan. PSI has advised the Series that for the year ended August
31, 1993, it received approximately $228,200 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that at August 31, 1993, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $7,032,000. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or non-continuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI as distributor, for any expenses
not previously reimbursed or recovered through contingent deferred sales
charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
B-355
<PAGE>
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$110,000 for the services of PMFS. As of August 31, 1993, approximately $10,000
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations includes certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993 were $73,291,371 and $30,853,691, respectively.
The cost basis of investments for federal income tax purposes was
$237,615,851 and, accordingly, as of August 31, 1993 net and gross unrealized
appreciation of investments, including short-term investments, for federal
income tax purposes was $29,372,005.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 398,287 $ 4,306,639
Shares issued in
reinvestment of
dividends and
distributions............. 22,903 247,493
Shares reacquired........... (147,976) (1,607,135)
---------- ------------
Net increase in shares
outstanding............... 273,214 $ 2,946,997
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 293,303 $ 3,014,006
Shares issued in
reinvestment of
dividends................. 14,103 144,548
Shares reacquired........... (100,394) (1,027,434)
---------- ------------
Net increase in shares
outstanding............... 207,012 $ 2,131,120
---------- ------------
---------- ------------
<CAPTION>
Class B
- ----------------------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 5,687,242 $ 61,297,959
Shares issued in
reinvestment of
dividends and
distributions............. 689,051 7,427,226
Shares reacquired........... (2,382,063) (25,604,477)
---------- ------------
Net increase in shares
outstanding............... 3,994,230 $ 43,120,708
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 4,132,533 $ 42,362,514
Shares issued in
reinvestment of
dividends................. 559,921 5,731,205
Shares reacquired........... (2,231,391) (22,865,815)
---------- ------------
Net increase in shares
outstanding............... 2,461,063 $ 25,227,904
<CAPTION>
---------- ------------
---------- ------------
</TABLE>
B-356
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
--------------------------------------- Class B
January 22, ----------------------------------------------------
1990++
Year Ended August 31, Through Year Ended August 31,
------------------------ August 31, ----------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ ------------ -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $10.55 $ 9.96 $ 9.60 $ 9.83 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47
------ ------ ------ ------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income............ .62 .62 .62+ .38+ .57 .58 .58+ .61+ .65+
Net realized and unrealized gain
(loss) on investment
transactions................... .70 .59 .39 (.23) .71 .58 .39 (.21) .34
------ ------ ------ ------- -------- -------- -------- -------- --------
Total from investment
operations................... 1.32 1.21 1.01 .15 1.28 1.16 .97 .40 .99
------ ------ ------ ------ -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income......................... (.62) (.62) (.62) (.38) (.57) (.58) (.58) (.61) (.65)
Distributions from net realized
gains.......................... (.04) -- (.03) -- (.04) -- (.03) -- --
------ ------ ------ ------ -------- -------- -------- -------- --------
Total distributions............ (.66) (.62) (.65) (.38) (.61) (.58) (.61) (.61) (.65)
------ ------ ------ ------ -------- -------- -------- -------- --------
Net asset value, end of period... $11.21 $10.55 $ 9.96 $ 9.60 $ 11.21 $ 10.54 $ 9.96 $ 9.60 9.81
------ ------ ------ ------ -------- -------- -------- -------- --------
------ ------ ------ ------ -------- -------- -------- -------- --------
TOTAL RETURN#:................... 12.86% 12.44% 10.82% 1.43% 12.54% 11.92% 10.39% 4.08% 10.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $9,342 $5,908 $3,521 $1,823 $263,752 $206,028 $170,162 $150,824 $118,280
Average net assets (000)......... $7,354 $4,439 $2,366 $977 $229,955 $186,113 $146,591 $141,183 $86,496
Ratios to average net assets:
Expenses, including
distribution fees............ .78% .81% .83%+ .78%**+ 1.18% 1.21% 1.23%+ 1.02%+ .77%+
Expenses, excluding
distribution fees............ .68% .71% .74%+ .68%**+ .68% .71% .74%+ .53%+ .29%+
Net investment income.......... 5.69% 5.99% 6.32%+ 6.51%**+ 5.29% 5.59% 5.94%+ 6.05%+ 6.27%+
Portfolio turnover............... 13% 25% 62% 37% 13% 25% 62% 37% 11%
<FN>
- ---------------
** Annualized.
+ Net of expense subsidy/management fee waiver.
++ Commencement of offering of Class A shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment dividends and distributions. Total
returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-357
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Pennsylvania Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Pennsylvania Series, including the portfolio
of investments, as of August 31, 1993, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Pennsylvania Series, as of August 31, 1993, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-358
