<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
- ------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company, or mutual fund, consisting of fourteen series-- the
Connecticut Money Market Series, the Florida Series, the Hawaii Income Series,
the Maryland Series, the Massachusetts Series, the Massachusetts Money Market
Series, the Michigan 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 fifteenth
series, the New York Income Series, is not currently being offered. The
objective of each series, other than the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series (collectively, the money market series), is to seek
to provide to shareholders who are residents of the respective state the maximum
amount of income that is exempt from federal and applicable state income taxes
and, in the case of the New York Series and the New York Income Series, also New
York City income taxes, consistent with the preservation of capital, and, in
conjunction therewith, the series may invest in debt securities with the
potential for capital gain. The objective of the money market series is to seek
to provide the highest level of current income that is exempt from federal and
applicable state income taxes and, in the case of the New York Money Market
Series, also New York City income taxes, consistent with liquidity and the
preservation of capital. All of the series are diversified except the Florida
Series, the Hawaii Income Series, the New York Income Series, and the money
market series, other than the New York Money Market Series. There can be no
assurance that any series' investment objective will be achieved. 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 November
1, 1995, 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 Hawaii Money
Page Market Florida Income Maryland Massachusetts Market Michigan
---- ----------- ------- ------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Information........... B-1 15 20 17 20 20 15 19
Investment Objectives and
Policies..................... B-1 6 8 6 8 8 6 8
In General.................. B-1 -- -- -- -- -- --
Tax-Exempt Securities....... B-3 6 8 6 8 8 7 8
Risks of Investing in
Defaulted Securities....... B-4 -- -- 6 -- -- -- --
Special Considerations
Regarding Investments in
Tax-Exempt Securities...... B-5 9 12 9 12 12 9 12
Floating Rate and Variable
Rate Securities............ B-15 7 8 6 8 8 7 8
Put Options................. B-15 8 10 7 10 10 8 10
Financial Futures Contracts
and Options Thereon........ B-16 -- 11 8 10 10 -- 10
When-Issued and Delayed
Delivery Securities........ B-18 8 10 8 10 10 8 10
Portfolio Turnover.......... B-19 -- 13 10 13 12 -- 12
Illiquid Securities......... B-19 10 13 10 13 13 10 13
Repurchase Agreements....... B-20 9 12 10 12 12 9 12
Investment Restrictions....... B-20 10 13 11 13 13 10 13
Trustees and Officers......... B-22 10 13 11 13 13 10 13
Manager....................... B-27 10 13 11 13 13 10 13
Distributor................... B-31 11 14 12 14 14 11 14
Portfolio Transactions and
Brokerage.................... B-35 12 16 14 16 16 12 16
Purchase and Redemption of
Fund Shares.................. B-37 16 21 19 21 21 16 21
Specimen Price Make-Up...... B-38 -- -- -- -- -- --
Reduction and Waiver of
Initial Sales
Charges--Class A Shares.... B-38 -- 24 21 23 23 -- 23
Waiver of the Contingent
Deferred Sales
Charge--Class B Shares..... B-40 -- 27 24 26 26 -- 26
Quantity Discount--Class B
Shares Purchased Prior to
August 1, 1994............. B-40 -- -- 26 26 -- 26
Shareholder Investment
Account...................... B-40 22 30 26 29 29 22 28
Automatic Reinvestment of
Dividends and/or
Distributions.............. B-40 22 30 26 29 29 22 28
Exchange Privilege.......... B-41 21 29 26 27 27 21 27
Dollar Cost Averaging....... B-42 -- -- -- -- -- --
Automatic Savings
Accumulation Plan (ASAP)... B-43 22 30 26 29 29 22 29
Systematic Withdrawal
Plan....................... B-43 22 30 26 29 29 22 29
How to Redeem Shares of the
Money Market Series........ B-43 20 -- -- -- -- 19 --
Mutual Fund Programs........ B-44
Net Asset Value............... B-45 13 17 14 16 16 13 16
Performance Information....... B-46 6 17 15 17 17 6 17
Distributions and Tax
Information.................. B-49 13 18 15 17 17 13 17
Distributions............... B-49 15 19 17 19 19 14 19
Federal Taxation............ B-50 13 18 15 17 17 13 17
State Taxation.............. B-53 14 19 16 19 18 14 19
Organization and
Capitalization............... B-59 15 20 17 20 20 15 19
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants...... B-60 12 16 14 16 16 12 16
Description of Tax-Exempt
Security Ratings............. B-61 -- -- A-1 -- -- -- --
Financial Statements.......... B-63 5 5 -- 5 5 5 5
Appendix I.................... I-1 -- -- -- -- -- -- --
Appendix II................... II-1 -- -- -- -- -- -- --
</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 20 15 20 16 14 20 20 19
Investment Objectives and Policies...... B-1 8 6 8 5 6 8 8 8
In General............................ B-1 -- -- -- -- -- -- -- --
Tax-Exempt Securities................. B-3 8 6 8 5 6 8 8 8
Risks of Investing in Defaulted
Securities........................... B-4 -- -- -- -- -- -- -- --
Special Considerations Regarding
Investments in Tax-Exempt
Securities........................... B-5 12 9 12 9 8 12 12 12
Floating Rate and Variable Rate
Securities........................... B-15 8 7 8 5 7 8 8 8
Put Options........................... B-15 10 8 9 6 8 10 10 10
Financial Futures Contracts and
Options Thereon...................... B-16 11 -- 10 8 -- 11 11 10
When-Issued and Delayed Delivery
Securities........................... B-18 10 8 10 7 8 10 10 10
Portfolio Turnover.................... B-19 13 -- 12 10 -- 12 13 12
Illiquid Securities................... B-19 13 10 12 10 9 13 13 13
Repurchase Agreements................. B-20 12 9 12 9 9 12 12 12
Investment Restrictions................. B-20 13 10 13 10 9 13 13 13
Trustees and Officers................... B-22 13 10 13 10 9 13 13 13
Manager................................. B-27 13 10 13 10 10 13 13 13
Distributor............................. B-31 14 11 14 11 10 14 14 14
Portfolio Transactions and Brokerage.... B-35 16 12 16 12 11 16 16 16
Purchase and Redemption of Fund
Shares................................. B-37 21 16 21 17 15 21 21 21
Specimen Price Make-Up................ B-38 -- -- -- -- -- -- -- --
Reduction and Waiver of Initial Sales
Charges--Class A Shares.............. B-38 23 -- 23 18 -- 23 24 23
Waiver of the Contingent Deferred
Sales Charge--Class B Shares......... B-40 26 -- 26 -- -- 26 27 26
Quantity Discount--Class B Shares
Purchased Prior to August 1, 1994.... B-40 27 -- 26 -- -- 26 27 26
Shareholder Investment Account.......... B-40 29 22 29 21 21 28 29 28
Automatic Reinvestment of Dividends
and/or Distributions................. B-40 29 22 29 21 21 28 29 28
Exchange Privilege.................... B-41 28 22 28 20 20 27 28 27
Dollar Cost Averaging................. B-42 -- -- -- -- -- -- -- --
Automatic Savings Accumulation Plan
(ASAP)............................... B-43 29 22 29 21 21 29 29 28
Systematic Withdrawal Plan............ B-43 29 23 29 21 21 29 29 28
How to Redeem Shares of the Money
Market Series........................ B-43 -- 20 -- -- 18 -- -- --
Mutual Fund Programs.................. B-44
Net Asset Value......................... B-45 17 13 16 13 12 16 16 16
Performance Information................. B-46 17 6 17 13 6 17 17 17
Distributions and Tax Information....... B-49 18 13 17 14 12 17 18 17
Distributions......................... B-49 19 15 19 15 13 19 19 19
Federal Taxation...................... B-50 18 14 17 14 12 17 18 17
State Taxation........................ B-53 19 14 18 15 13 19 19 18
Organization and Capitalization......... B-59 20 15 20 16 14 20 20 19
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants............................ B-60 16 13 16 13 12 16 16 16
Description of Tax-Exempt Security
Ratings................................ B-61 -- -- -- -- -- -- --
Financial Statements.................... B-63 5 5 5 -- 5 5 5 5
Appendix I.............................. I-1 -- -- -- -- -- -- -- --
Appendix II............................. II-1 -- -- -- -- -- -- -- --
</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 fourteen separate series: the Connecticut Money
Market Series, the Florida Series, the Hawaii Income Series, the Maryland
Series, the Massachusetts Series, the Massachusetts Money Market Series, the
Michigan 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 fifteenth 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 Hawaii Income Series, the New York Income Series and the
money market series, other than the New York Money Market Series. There can be
no assurance that any series 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 Hawaii Income 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 Hawaii Income Series, the New York
Income Series and the money market series, other than the New York Money Market
Series.
B-2
<PAGE>
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 Hawaii Income 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.
Each series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and any premiums on the refunded bonds and a verification
report prepared by a party acceptable to a nationally recognized statistical
rating agency, or counsel to the holders of the refunded bonds, so verifies,
(iv) the escrow agreement provides that the issuer of the refunded bonds grants
and assigns to the escrow agent, for the equal and ratable benefit of the
holders of the refunded bonds, an express first lien on, pledge of and perfected
security interest in the escrowed securities and the interest income thereon,
(v) the escrow agent had no lien of any type with respect to the escrowed
securities for payment of its fees or expenses except to the extent there are
excess securities, as described in (ii) above, and (vi) except with respect to
the Florida Series, the Hawaii Income Series, the New York Income Series and the
money market series other than the New York Money Market Series, the series will
not invest more than 25% of its total assets in pre-refunded bonds of the same
municipal issuer.
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
B-3
<PAGE>
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 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.
B-4
<PAGE>
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.
CONNECTICUT
Connecticut, which experienced very strong economic growth throughout the
mid-to-late 1980s, is a wealthy state. During Connecticut's period of strong
growth, the State's personal income growth exceeded that of the United States,
its per capita income was the highest in the nation, and the rate of
unemployment was below the national average. Beginning in 1988, however, these
trends began to reverse as the Northeast entered into recession in advance of
the rest of the nation. The recession in the Northeast 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 remaining somewhat below the national average.
Connecticut's economic difficulties resulted in severe fiscal stress,
culminating in 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 acted to reduce the volatility of its budgetary operations by raising
revenues, reducing expenditures and establishing a broader revenue base. Chief
among these actions were (i) the implementation of a 4.5% personal income tax
and (ii) the broadening of the sales tax base, which was coupled with a decrease
in the sales tax rate from 8% to 6%. These actions, along with conservative
revenue projections, permitted the State to achieve modest surpluses for fiscal
years 1992, 1993 and 1994. A portion of such surplus will be used to retire some
of the outstanding Economic Recovery Notes issued to fund the cumulative deficit
of fiscal year 1990-1991.
In June 1992, the Manufacturing Recovery Act of 1992, which is directed
primarily toward providing incentives to manufacturers, was enacted in
Connecticut. The legislation provides credits for establishing new manufacturing
and increasing new employee training. In addition, property tax exemption and
sales tax exemptions were expanded for purchases of certain manufacturing
machinery and production materials.
The adopted budget for fiscal 1995-96 anticipates General Fund revenues of
$8,837.0 million and General Fund expenditures of $8,836.8 million, resulting in
a projected surplus of $0.2 million. The State Comptroller's monthly report as
of October 1995, however, estimates a General Fund shortfall of approximately
$34.4 million. For fiscal 1996-97, the adopted budget anticipates General Fund
revenues of $9,158.0 million and General Fund expenditures of $9,157.8 million,
resulting in a projected surplus of $0.2 million.
The adopted budget reflects implementation of significant tax changes aimed
at increasing overall disposable income and encouraging economic expansion in
the State. A phase down in the personal income tax rate was enacted, pursuant to
which the tax rate on the first $4,500 of taxable income for joint filers is
dropped 33% from 4.5% to 3% for the income year commencing January 1, 1996. For
income years commencing on or after January 1, 1997, the application of the 3%
rate is further expanded to the first $9,000 of taxable income for joint filers.
In addition, a new personal income tax credit, limited to no more than $100 per
filer, has been added for the income years commencing on or after January 1,
1995. To improve the business climate in the State and stimulate long-term job
growth, legislation was also enacted to reduce Connecticut's corporate tax rate
from the current rate of 11.25% to 7.5% by January 1, 2000.
The adopted budget also reflects significant reductions in expenditures from
current service levels. Some of these changes, which are expected to result in
significant long-term savings to the State, including restructuring the General
Assistance program to limit benefits, reform of the Aid to Families with
Dependent Children program to place time limits on benefits, reduction of
long-term care costs by creating a system of capitated rates, merging of mental
health and substance abuse services, consolidating the State's mental health
hospitals and moving the State toward a 40 hour work week for State employees.
FLORIDA
In 1980, Florida ranked seventh in population among the fifty states, having
a population of 9.7 million people. The State has grown dramatically since 1980
and, as of April 1, 1994, Florida ranked fourth in the
B-5
<PAGE>
nation, with an estimated population of 13.9 million. The service sector is
Florida's largest employment sector, currently accounting for 86.4% of total
non-farm employment. Florida's manufacturing jobs exist in the high-tech and
value-added sectors, such as electrical and electronic equipment, as well as
printing and publishing. Since 1980, the job creation rate for the State is
greater than two times the nation's rate; however, since 1989, Florida's
unemployment rate has risen faster than the national average. The average rate
of unemployment for Florida since 1985 is 6.3%, while the national average is
6.4%.
South Florida, because of its location and involvement with foreign trade,
tourism and investment capital, is particularly susceptible to international
trade and currency imbalances and economic dislocations in Central and South
America. The Central and northern portions of the State are effected by problems
in the agricultural sector, particularly in the citrus and sugar industries.
Short-term adverse economic conditions may be experienced by the Central and
northern section of Florida, and in the State as a whole, due to crop failures,
severe weather conditions or other agriculture-related problems. In addition,
the State economy has historically been somewhat dependent on the tourism and
construction industries and is therefore 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 plus Working Capital and Budget Stabilization funds available
total $14,682.9 million for 1994-1995, an increase of 6.1% over revenues for
1993-1994. This amount reflects a transfer of $159 million in non-recurring
revenue due to Hurricane Andrew, to a hurricane relief trust fund. Estimated
Revenue of $13,702.1 million (excluding the Hurricane Andrew impacts) for fiscal
1994-1995 represents an increase of 6.6% over 1993-1994.
At the November 1994 general election, voters approved an amendment to the
State Constitution that limits 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.
Growth is defined as the amount equal to the average annual rate of growth in
Florida personal income over the most recent twenty quarters times the State
revenues allowed for the prior fiscal year. The revenues allowed for any fiscal
year can be increased by a two-thirds vote of the Legislature. The limit will be
effective starting with fiscal year 1995-1996. Any excess revenues generated
will be deposited in the Budget Stabilization fund until it is fully funded and
then refunded to taxpayers. Included among the categories of revenues which are
exempt from the proposed revenue limitation are revenues pledged to State bonds.
Many factors, including national, economic, social and environmental
policies and conditions, most which are not within the control of the State or
local government, could affect or adversely impact on the State's financial
condition.
HAWAII
Hawaii's separation from the mainland and dependence upon tourism make it
unique among the states. Tourism dominates Hawaii's economy, with six out of ten
jobs in the economy related to tourism. Other major sectors of the Hawaiian
economy include construction, retail trade, agriculture, and military
operations, all of which have been adversely affected by recent recessions in
the United States (particularly California) and Japan, and cutbacks in military
spending. Hawaii's economy experienced strong growth during that late 1980s, but
since 1990 the rate of growth has slowed considerably, marked by a decrease in
Japanese investment and construction and increased foreign competition in the
production of pineapples and sugar.
Over the years, financial operations in the State have been sound, with
consistently favorable budget performance. Surpluses in excess of 5% of revenues
have regularly triggered constitutionally provided tax credits, even during
fiscal years 1992 and 1993 when revenue growth had slowed due to the recession.
The 1995-97 biennium budget submitted by the prior administration in December
1994, has undergone substantial adjustments and the new administration has made
extensive labor reductions. Despite these reductions, however, the available
General Fund balance is expected to decline from $290.9 million at the end of
fiscal 1994 to $53.9 million at the end of fiscal 1996.
Hawaii's economy remains vulnerable to the lingering recessions of both
California and Japan and the State government cutbacks may also adversely affect
economic growth. Reported improvement in the tourism
B-6
<PAGE>
industry has not yet been reflected in State revenues, and has lagged early
estimates. Employment has continued to decline, with job growth the slowest of
all fifty states in 1994. These factors, combined with the decline in
construction, suggest that continued stagnation in the near future is probable
for Hawaii's economy.
MARYLAND
Maryland, one of the wealthiest states in the nation, experienced rapid
growth during the 1980s. Maryland's total personal income and per capita income
outperformed the national averages until 1990. The economy is well 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. Government employment has
served to insulate the regional economy from more volatile economic swings,
making the Maryland unemployment rate historically below the national average.
For the same reason, Maryland employment may be more affected by federal layoffs
or budget reductions than employment in other states.
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's assumption of school construction costs several
years ago. The State, concerned over its debt levels, followed the
recommendation of a debt affordability committee and restrained its borrowing.
Resources have also expanded and ratios have stabilized. Capital borrowing plans
are reasonable and designed not to increase debt levels substantially.
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 and
closed fiscal year 1994 with a $60 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, 1993 to a positive balance of $113.9 million on June 30,
1994. Financial operations continued to improve in fiscal year 1995, with
revenues exceeding estimate by $217 million and expenditures at $184 million
above budget. At fiscal year-end, the General Fund recorded an undesignated fund
balance of $26.5 million (after reservation of $106 million for fiscal year 1996
expenses). An additional $286.1 million was on deposit in the Revenue
Stabilization Account of the State Reserve Fund. The 1996 budget continues the
trend of increased budgetary reserves. The operating budget assumes moderate
revenue growth and expenditures of $14.428 billion, a 6.6% increase over the
actual expenditures in fiscal year 1995. The State projects a year-end General
Fund balance of $34.3 million and an additional $518 million in the Revenue
Stabilization Account of the State Reserve Fund.
The State and its various political subdivisions issue a number of different
kinds of municipal obligations, including general obligation bonds supported by
tax collections, revenue bonds payable from certain identified tax levies or
revenue streams, conduit revenue bonds payable from the repayment of certain
loans to authorized entities such as hospitals, universities and other private
entities, and certificates of participation in tax-exempt municipal leases.
These obligations are subject to various economic risks and uncertainties, and
the credit quality of the securities issued by them varies with the financial
strengths of the respective borrowers.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on the financial condition of Maryland
issuers generally, will not adversely affect the market value of Maryland
Obligations held by the Maryland Series or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.
MASSACHUSETTS
Massachusetts is an urban, densely populated, and wealthy state with a fully
developed industrial economy. Massachusetts' industrial economy has experienced
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 the most of the decade. But, as the economy
slowed, unemployment rates rose in 1988, 1989 and 1990. Unemployment climbed
above the national figure to 9.0% in 1991, placing Massachusetts among those
states with the highest unemployment rates in the nation. The construction and
manufacturing sectors were particularly hard hit by job losses. 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
B-7
<PAGE>
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. Such restraint
has resulted in the achievement of balanced budgets in both fiscal year
1991-1992 and fiscal year 1992-1993. Fiscal year 1995 tax collections, which
were projected at $11.151 billion, exceeded estimates by $13 million.
Despite concerted efforts to control Massachusetts' financial operations,
and some progress in that regard, substantial risks to the Commonwealth's
financial stability remain. Economic growth is not likely to return, in the near
future, to the vigorous pace evident in the 1980s. It is uncertain whether
improved communication and efforts towards cooperation between the Commonwealth
legislature and executive will continue. 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 was 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. As property taxes
are the only local source revenue available, such tax limitation may lead to
adverse financial consequences for some 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. The Proposition limited the amount by which the total
property taxes assessed by all cities and towns may increase from year to year.
MICHIGAN
Michigan is a highly industrialized state with an economy principally
dependent upon three sectors: manufacturing (particularly durable goods,
automotive products and office equipment), tourism and agriculture. Legislation
requires that the administration prepare two economic forecasts each year, which
are presented each January and May of a given year. The State's economic
forecast for calendar 1995 projects modest growth. Real gross domestic product
is projected to grow 2.9% in 1995 on a calendar year basis. Car and light truck
sales are expected to total 14.9 million units in 1995. The forecast assumes
moderate inflation, accompanied by steady interest rates. Ninety-day U.S.
Treasury rates are expected to average 5.7% for 1995.
The State's forecast for the Michigan economy reflects the national outlook.
Total wage and salary employment is projected to grow 2.9% in 1995. This slight
growth reflects the ongoing diversification of the Michigan economy. The
unemployment rate is projected to average 5.9% in 1995, continuing the recent
trend of Michigan's unemployment rate being near the national average, compared
to a 15-year prior history of having higher than average unemployment.
The principal revenue sources for the State's General Fund are taxes from
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
directed towards education, public protection, mental and public health, and
social services. The State's fiscal year ended September 30, 1993, marked a
turning point in the financial condition of the State budget. Improvements in
the Michigan economy have resulted in increased revenue collections, which,
together with restraint on the expenditure side of the budget, produced General
Fund surpluses of $280.1 million in fiscal year 1992-93 and $602.9 million in
fiscal year 1993-94, and a projected surplus of $85.1 million for fiscal year
1994-95. The
B-8
<PAGE>
State's general fund budget for fiscal year 1995-96 was passed by the
Legislature in June 1995, and totalled $8,438.6 million of revenues and
expenditures. The Governor has since vetoed approximately $40 million of
appropriations passed by the Legislature and has other appropriation bills
before him awaiting signature.
The State Constitution limits the amount of total State revenues that can be
raised from taxes and certain other sources. State revenues (excluding federal
aid and revenues for payment of principal and interest on general obligation
bonds) in any fiscal year are limited to a fixed percentage of State personal
income in the prior calendar year or average of the prior three calendar years,
whichever is greater, and this fixed percentage equals the ratio of the 1978-79
fiscal year revenues to total calendar 1977 State personal income.
In August 1993, the Governor signed into law a measure that has
significantly impacted the financing of primary and secondary school operations
in the State and has resulted in additional property tax and school finance
reform legislation. This legislation exempts all property in the State from
millage levied for local and intermediate school district operating purposes,
other than millages levied for community colleges. In order to replace local
property tax revenues lost as a result of this legislation, the Legislature
enacted several laws in December 1993 which address property tax and school
finance reform, including a ballot proposal that was approved by Michigan voters
in March 1994. Under this proposal, effective May 1, 1994, the State sales and
use tax was increased from 4% to 6%, the State income tax was decreased from
4.6% to 4.4%, the cigarette tax was increased from $0.25 to $0.75 per pack and
an additional tax of 16% of the wholesale price began to be imposed on certain
other tobacco products. A 0.75% real estate transfer tax became effective
January 1, 1995, and a State property tax of 6 mills began to be imposed in 1994
on all real and personal property currently subject to the general property tax.
The total effect of these school finance reforms is to shift significant
portions of the cost of local school operations from local school districts to
the State and raise additional State revenues to fund these additional State
expenses. These additional revenues will be included within the State's
constitutional revenue limitations and may impact the State's ability to raise
additional revenues in the future.
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 will not adversely affect the
market value of municipal obligations held in the portfolio of the Michigan
Series or the ability of the respective obligors to make required payments on
such obligations.
NEW JERSEY
New Jersey has a highly diversified economy. While once heavily dependent
upon manufacturing, New Jersey's economy is now increasingly based on trade and
services. The State fully participated in the national economic recovery and did
not experience the brunt of the Northeast recession until much later than many
other states. The rate of unemployment was consistently below the national
average through 1991. In 1992, however, the unemployment rate 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 United States.
The principal sources of State revenue 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 revenue and surpluses: from fiscal year 1984 to 1988
revenues grew almost 40%. Economic slowdown translated revenue shortfalls and
operating deficits in fiscal years 1989 and 1990. Surplus balances, which peaked
at $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. In fiscal
year 1991, however, a $1.4 billion tax program was required to balance the
budget.
For the last three fiscal years, the State has resorted to a number of
non-recurring revenues and expenditure deferrals to balance its budget. In
addition, balancing the budget was made difficult by a tax revolt in the 1991
elections that resulted in a reduction of the sales tax by 1%, from 7% to 6%. A
balanced budget was achieved by
delaying a $1.1 billion contribution to the State employees' pension fund. This
move, in addition to heavy
B-9
<PAGE>
borrowing by the previous administration, has caused concern that the State bond
rating may be adversely affected. Despite certain reservations regarding the New
Jersey economy, however, S&P recently announced that New Jersey will retain its
AA+ bond rating.
The fiscal 1995 ending balances were $966 million, up from $455 originally
budgeted. The fiscal 1996 budget plans a $549 million ending balance, prior to
inclusion of any lapsed appropriations. Furthermore, the fiscal 1996 budget
enacts the third and final phase of the administration's multi-year 30% personal
income tax reduction, which is effective in January 1996.
Spending reductions in current and future years rely on savings from reduced
costs of the State's employee workforce. The State has reached agreements with
two of its unions, but major agreements with some of the largest unions still
have to be reached. Furthermore, a 1994 State Supreme Court decision regarding
the State's system of funding of education required that the State achieve
substantial equivalence in spending between wealthy and poor districts by fiscal
1998.
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. A
declining proportion of the State's work force in engaged in manufacturing and
an increasing proportion of its work force is 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. In 1993, the
economy grew faster than in 1992, but at a very modest rate as compared to other
recoveries. In contrast with the strength of the national economy in 1994 and
into 1995, New York's economic recovery weakened by mid-1994. The State's
delayed economic recovery is 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 State currently forecasts an anticipated employment growth of
0.4% for calendar 1996.
The recommended budget for fiscal 1995-1996 seeks to (i) close the gap based
on growth of current services, (ii) implement the next phase of delayed personal
income tax cuts and (iii) further reduce personal income and business taxes over
a multi-year period.
The State's General Fund budgets for fiscal years 1992-1993 and 1993-1994
produced cash surpluses for the first time since fiscal year 1987-1988. The
1994-1995 General Fund budget finished with an actual deficit of $241 million.
The State's projections for the fiscal year 1995-1996 General Fund budget call
for a surplus of $55 million. There is no assurance 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. The
State, in addressing any potential budgetary imbalance, 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, are 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 6,657,106 as reported by the 1990
federal census. The State's estimate of population as of June 30, 1994 is
7,064,470. Although North Carolina is the tenth largest state in population, it
is primarily a rural state, having only five municipalities with
B-10
<PAGE>
populations in excess of 100,000. The State, once largely an agriculturally
based economy, is now a service and goods producing economy. From 1980 to 1994,
the State labor force increased by approximately 26% (from 2,855,200 to
3,609,000) and during the period 1980-1993, per capita income grew from $7,999
to $18,702, an increase of 133.8%.
The North Carolina State Constitution requires that the State's total
expenditures 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 budgetary projections.
The General Assembly responded by enacting new taxes and fees to generate
additional revenue and reduce allowable department operating expenditures and
continuation funding.
The State, like the nation, has experienced economic recovery since 1991.
Due to both increased tax and fee revenues and the previously enacted spending
reductions, the State had a budget surplus of approximately $865 million at the
end of fiscal 1993-1994. After review of the 1994-1995 continuation budget
adopted in 1993, the General Assembly approved spending expansion funds, in part
to restore certain employee salaries to budgeted levels, which amounts had been
deferred to balance the budgets in 1989-1993, and to authorize funding for new
initiatives in economic, social and environmental programs. Because of growth in
State tax and fee revenues, the General Fund balance at the end of the 1994-1995
fiscal year was reported at approximately $300 million.
In April 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning on or after January 1, 1995, the tax levied on various
forms of intangible personal property. The intangibles tax revenues receivable
by counties and municipalities will no longer be received. Instead, the
legislature has provided for specific appropriations to counties and
muncipalities.
The State is involved in certain litigation; however, none of the cases, in
the reported opinion of the Department of the Treasurer, would have a material
adverse effect on the State's ability to meet its obligations.
Both the nation and the State have experienced a modest economic recovery in
the past year. It is unclear, however, 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 services and other
non-manufacturing areas, continues to rely in part on durable goods
manufacturing, although largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, the general
economic activity in Ohio, as in other industrially developed states, is more
cyclical than some other states and the nation overall. Agriculture is an
important segment of the State's economy. More than half of the State's land is
devoted to farming. An estimated 15% of total Ohio employment is in
agribusiness.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund, for which the personal income and
sales-use taxes are the major sources.
The biennium of 1992-93 presented significant challenges to State finances,
which were successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included General Revenue Fund debt service and lease rental appropriations
for the entire biennium, while continuing most other appropriations for a month.
The general appropriations act for the entire biennium was passed on July 11,
1991. Pursuant to it, $200 million was transferred from the Budget Stabilization
Fund to the General Revenue Fund in fiscal year 1992.
Based on updated results and forecasts in the course of fiscal year 1992,
both in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed, a fiscal year 1992 imbalance in General
Revenue Fund resources and expenditures. General Revenue Fund receipts
significantly below original forecasts resulted primarily from lower collections
of certain taxes, particularly sales-use and
B-11
<PAGE>
personal income taxes. Higher expenditure levels were in certain areas,
particularly human services including Medicaid. In response, the Governor
ordered most State agencies to reduce General Revenue Fund spending in the last
six months of fiscal year 1992 by a total of approximately $184 million; the
$100.4 million Budget Stabilization Fund balance and additional amounts from
certain other funds were transferred late in the fiscal year to the General
Revenue Fund, and adjustments were made in the timing of certain tax payments.
A significant General Revenue Fund shortfall (approximately $520 million)
was then projected for the next year, fiscal year 1993. It was addressed by
appropriate legislative and administrative actions, including the Governor's
ordering of $300 million in selected General Revenue Fund spending reductions
and subsequent executive and legislative action (a combination of tax revisions
and additional spending reduction). The June 30, 1993 ending General Revenue
Fund balance was approximately $111 million, of which, as a first step to Budget
Stabilization Fund replenishment, $21 million was deposited in the Budget
Stabilization Fund.
The 1994-95 biennium presented a more affirmative financial picture for the
State. Based on June 30, 1994 balances, an additional $260 million was deposited
in the Budget Stabilization Fund. The biennium ended June 30, 1995 with a
General Revenue Fund ending fund balance of $928 million, of which $535.2
million has been transferred into the Budget Stabilization Fund (which had an
October 3, 1995 balance of over $828 million).
The General Revenue Fund appropriations act for the 1995-96 biennium was
passed on June 28, 1995 and promptly signed (after selective vetoes) by the
Governor. All necessary General Revenue Fund appropriations for State debt
service and lease rental payments then projected for the biennium were included
in that act. In accordance with the appropriations act, the significant June 30,
1995 General Revenue Fund balance, after leaving in the General Revenue Fund an
unreserved and undesignated balance of $70 million, has been transferred to a
variety of funds, including $535.2 million to the Budget Stabilization Fund.
$322.8 million was transferred to other funds, including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
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, failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000 plus debt incurred to repel invasion, suppress insurrection, or
defend the State in war. The State is expressly precluded from assuming any
local government debt or corporation debt, except for debt incurred to repel
invasion, suppress insurrection, or defend the State in war.
Although the State's revenue obligations 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 heavily industrial state,
although that reputation has recently changed due to the decline in the coal,
steel and railroad industries. Education, financial institutions, and the
service sector, which includes trade, medical, and health services, provide the
major sources of revenue growth for Pennsylvania.
The five-year period from fiscal 1990 through fiscal 1994 was marked by
public health and welfare costs growing at a rate double the growth rate for all
of the Commonwealth's expenditures. Rising caseloads, increased services
utilization, and rising prices combined to produce the rapid rise of public
health and welfare costs at a time when the national recession caused tax
revenues to stagnate and decline. During the period from fiscal 1990 through
fiscal 1994, public health and welfare costs rose by an average annual rate of
9.4%. Consequently, spending on other budgeted programs was restrained to a
growth rate below 5%, and sources of revenues other than taxes became larger
components of fund revenues.
The General Fund, the Commonwealth's largest fund, receives all tax
receipts, revenues, federal grants and reimbursements that are not specified by
law to be deposited elsewhere. The General Fund is the principal
B-12
<PAGE>
operating fund for the majority of the Commonwealth's governmental activities.
Debt service on all obligations, except those issued for highway purposes or for
the benefit of other special revenue funds, is payable from the General Fund.
The 1994 fiscal year closed with revenues of $15,210.7 million (on a
budgetary basis), $38.6 million above the fiscal year estimate and 3.9% over
Commonwealth revenues during the previous fiscal year. Additional revenues were
provided by higher than anticipated sales tax revenues and a reduction in tax
refund reserve resulting from a favorable decision in a pending tax litigation.
Personal income tax revenues, however, were below estimate. Expenditures (net of
certain pooled financing expenditures and appropriation lapses) totaled
$14,934.4 million, representing a 7.2% increase over fiscal 1993 expenditures.
The 1995 fiscal year closed with revenues of $16,224.6 million and exceeded
the estimate of revenues used at the time the budget was enacted. The higher
than estimated revenues from tax sources were due to faster economic growth in
the national and State economy than had been projected when the budget was
adopted. Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) including $65.5 million of supplemental appropriations enacted at
the close of the 1995 fiscal year, totalled $15,674.7 million, representing an
increase of 5% over spending during fiscal 1994.
The enacted fiscal 1996 budget provides for expenditures from Commonwealth
revenues of $16.161.7 million, a 2.7% increase over total appropriations from
Commonwealth revenues in fiscal 1995. The fiscal 1996 budget is based on
anticipated Commonwealth revenues, net of enacted tax changes but prior to tax
refunds, of $16,268.7 million, an increase over actual fiscal 1995 Commonwealth
revenues of .3%. Excluding the estimated effects of tax changes enacted in 1994
and 1995, Commonwealth revenues for fiscal 1996 are estimated to increase by
approximately 2.9%. Tax changes (reductions) enacted with the fiscal 1996 budget
totalled $282.9 million, representing an approximate 1.7% of base revenues.
The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate approved debt, (iii)
debt for capital projects subject to an aggregate debt limit of 1.75 times the
annual average tax revenue of the preceding five fiscal years and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts. As of
June 30, 1995, the Commonwealth had $5,045.4 million of general obligation debt
outstanding.
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 the inhabitants of Guam
citizens of the United States.
The economy of Guam is based, in large part, upon the significant U.S.
military presence on the island. The federal government is the largest employer
on the island: in 1991, there were 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. Over the past twenty
years, the tourist industry has grown rapidly, creating a construction boom for
new hotels and the expansion of older hotels. With visitors coming mainly from
Japan, tourist arrivals rose by more than 16% annually between 1985 and 1990. In
1992, there were approximately 900,000 tourists. Nevertheless, recent
earthquakes, typhoons and the economic slowdown in Japan have had adverse
effects on Guam's economy. Furthermore, in 1994, Guam was faced with the problem
of offsetting the impact of military downsizing. Guam's economy is also based on
the export of fish and handicrafts. Approximately 60% of the labor force works
for the private sector, and the remaining 40% (approximately) work for the
government. Guam is a duty-free port and an important distribution point for
goods destined for Micronesia. Unemployment, which has been historically low,
was 2% in 1992.
B-13
<PAGE>
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. Puerto Rico, which was at one time a poor, agrarian economy with
a densely populated environment, is now a urbanized society with an economy
based on manufacturing and services. Despite its long-term economic progress,
unemployment and poverty continue to be significant problems. The island's 1994
unemployment rate of 16% 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 improvements registered during good economic times and deterioration
during slowdown. In the mid-1980s, 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.
In fiscal year 1995, year-to-date General Fund reserve growth has exceeded
expectations. Original budget projections called for revenue growth of 4.6% over
fiscal year 1994 to $4,878 million. Revenue growth in fiscal year 1995 is
primarily driven by individual income tax receipts, as a result of continued
evasion control measures and increased excise taxes, reflecting continued
economic growth.
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 from
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 Virgin Islands are heavily dependent on links with the U.S. mainland.
More than 90% of the trade is conducted with Puerto Rico and the United States.
Tourism is the predominant source of employment and income for the Islands.
Specifically, the visiting cruise ship business and the advantages of duty-free
purchases are attractive to American visitors. Although tourism in the Virgin
Islands declined in 1992, in 1993 occupancy rates at hotels and on cruise ships
increased, with 18% more American tourists and 30% more European tourists.
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 an unusually large public sector.
In 1993, 26.8% of total employment resulted from Territorial Government
employment. The manufacturing sector consists of textiles, electronics,
pharmaceuticals, and watch assembly plants. International business and financial
services are a small but growing component of the economy. The level of
unemployment has been consistently low, but rose to 3.1% in May 1993.
B-14
<PAGE>
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.
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.
B-15
<PAGE>
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.
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
B-16
<PAGE>
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
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
B-17
<PAGE>
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 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.
B-18
<PAGE>
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, 1995, the portfolio
turnover rate of each series, other than the money market series, was as
follows:
<TABLE>
<CAPTION>
Portfolio
Series Turnover Rate
- ----------------------------------------------------------------------------- --------------
<S> <C>
Florida...................................................................... 65%
Hawaii Income................................................................ 75%
Maryland..................................................................... 49%
Massachusetts................................................................ 36%
Michigan..................................................................... 33%
New Jersey................................................................... 37%
New York..................................................................... 57%
North Carolina............................................................... 28%
Ohio......................................................................... 38%
Pennsylvania................................................................. 19%
</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
B-19
<PAGE>
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 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).
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
B-20
<PAGE>
New Jersey Money Market Series) and obligations of the Fund to Trustees
pursuant to deferred compensation arrangements, are not deemed to be a
pledge of assets or the issuance of a senior security. The Fund will not
purchase portfolio securities if its borrowings exceed 5% of the assets.
4. Purchase any security if as a result, with respect to 75% of a
series' total assets (except with respect to the Connecticut Money Market
Series, the Florida Series, the Hawaii Income Series, the Massachusetts
Money Market Series, the New Jersey Money Market Series and the New York
Income Series), more than 5% of the total assets of any series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and
interest either by the U.S. Government or its agencies or
instrumentalities).
5. Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, although it may purchase and sell financial
futures contracts and related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series),
securities which are secured by real estate and securities of companies
which invest or deal in real estate.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
7. Invest in interests in oil, gas or other mineral exploration or
development programs.
8. Make loans, except through repurchase agreements.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or programs.
2. Purchase warrants if as a result the Fund would then have more than
5% of its net assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange
or American Stock Exchange will be limited to 2% of the Fund's net assets
(determined at the time of investment). For the purpose of this limitation,
warrants acquired in units or attached to securities are deemed to be
without value.
3. Purchase any interests in real estate limited partnerships which are
not readily marketable.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
5. Purchase the securities of any one issuer if any officer or trustee
of the Fund or the Manager or Subadviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
6. Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years and equity securities of issuers which are not readily
marketable.
B-21
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position with Fund During Past 5 Years
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach(70)................ Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; previously, 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 Member of the Board of Trustees of Mars Hill College;
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 Total
Return Fund, Inc.
Eugene C. Dorsey(68)............... 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(57)........... Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr.(74)........... 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 Total Return Fund, Inc.;
Trustee of the Trudeau Institute.
<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, Address and Age Position with Fund During Past 5 Years
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney(53)........ Trustee President of the Greater Rochester Metro Chamber
c/o Prudential Mutual Fund of Commerce; formerly Rochester City Manager;
Management, Inc. Trustee of Center for Governmental Research,
One Seaport Plaza Inc.; Director of Monroe County Water Authority,
New York, NY Rochester Jobs, Inc., Blue Cross of Rochester,
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 Total Return Fund, Inc. and The
High Yield Plus Fund, Inc.
Thomas H. O'Brien(70)....... Trustee President of O'Brien Associates (Financial and
c/o Prudential Mutual Fund Management Consultants) (since April 1984);
Management, Inc. formerly President of Jamaica Water Securities
One Seaport Plaza Corp. (holding company) (February 1989-August
New York, NY 1990); Director (September 1987-April 1991) and
Chairman of the Board and Chief Executive
Officer (September 1987-February 1989) of
Jamaica Water Supply Company; Director of
Ridgewood Savings Bank and Yankee Energy System,
Inc.; Trustee of Hofstra University.
*Richard A. Redeker(52)...... President and President, Chief Executive Officer and Director
One Seaport Plaza Trustee (since October 1993) of 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.; Executive
Vice President, The Prudential Investment
Corporation (since January 1994); formerly
Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September
1978-September 1993); President and Director of
The Global Government Plus Fund, Inc., The
Global Total Return Fund Inc. and The High Yield
Income Fund, Inc.
- --------------
*"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, Address and Age Position with Fund During Past 5 Years
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Nancy H. Teeters(65)........ 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 Director of Inland Steel Industries (since July
New York, NY 1991), First Financial Fund, Inc. and The Global
Total Return Fund, Inc.
Robert F. Gunia(48)......... 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(49)............ 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.
Grace Torres(36)............ Treasurer and First Vice President (since March 1994) of PMF;
One Seaport Plaza Principal First Vice President (since March 1994) of
New York, NY Financial and Prudential Securities; prior thereto, Vice
Accounting President of Bankers Trust Corporation.
Officer
Ronald Amblard(37).......... Assistant First Vice President (since January 1994) and
One Seaport Plaza Secretary Associate General Counsel (since January 1992) of
New York, NY PMF; Vice President 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(37)......... Assistant Vice President and Associate General Counsel
One Seaport Plaza Secretary (since January 1993) of PMF; Vice President and
New York, NY Associate General Counsel (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>
B-24
<PAGE>
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.
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. Mr. Dorsey receives his 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, pursuant to an SEC
Exemptive order, 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.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72 except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Jacobs and
O'Brien are scheduled to retire on December 31, 1999, 1998 and 1999,
respectively.
Pursuant to the terms of 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 following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended August 31, 1995 to the Trustees who are not affiliated
with the Manager and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PMF (Fund Complex) for the calendar year ended December 31, 1994.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Trustees
- ------------------------------------------ -------------- ----------------- --------------------- --------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee.................. $ 9,000 None N/A $ 159,000(20/39)**
Eugene C. Dorsey, Trustee................. $ 9,000 None N/A $ 61,000*(7/34)**
Delayne Dedrick Gold, Trustee............. $ 9,000 None N/A $ 185,000(24/43)**
Thomas T. Mooney, Trustee................. $ 9,000 None N/A $ 126,000(15/36)**
Thomas H. O'Brien, Trustee................ $ 9,000 None N/A $ 44,000(6/24)**
Nancy H. Teeters, Trustee................. $ 9,000 None N/A $ 95,000(12/28)**
</TABLE>
- --------------
* All compensation for the calendar year ended December 31, 1994 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended August 31, 1995, including accrued interest, amounted to $10,075.
Aggregate compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1994, including accrued interest, amounted
to approximately $61,000.
** Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
As of October 13, 1995, 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.
As of October 13, 1995, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Randall E.L. Falck, revocable trust DTD 12/03/91, FBO
B-25
<PAGE>
Randall E.L. Falck, Randall E.L. Falck Trustee, 8049 Whisper Lake Lane W., Ponte
Vedra, FL 32082 3115, who held 50,921 Class C shares of Florida Series (5.8%);
Joseph R. Rainwater Trustee, Brown V Rainwater Living Trust #1, UA DTD 06/21/86,
P.O. Box 10875, Pensacola, FL 32524-0875, who held 45,997 Class C shares of the
Florida Series (5.2%); Prudential Mutual Fund Management, Inc., Attn. Dennis
Annarumma, One Seaport Plaza, New York, NY 10038-3526, who held 171,851 Class A
shares of Hawaii Income Series (62.5%); Evelyn J. Gerner, Trustee, Amended and
Restated Self Trusted TR UA DTD 09/03/87, 619 Hunakai St., Honolulu, HI
96816-4909, who held 60,986 Class A shares of Hawaii Income Series (22.2%);
Evelyn J. Gerner, Trustee, Amended and Restated Self Trusted TR UA DTD 09/05/87,
619 Hunakai St., Honolulu, HI 96816-4909, who held 60,987 Class B shares of
Hawaii Income Series (8.2%); Erica K. Hsiao, Trustee, C. Hsiao & Erica Hsiao TR
DTD 9/27/83, 1434 Punahou St., Honolulu, Hawaii 96822-4754, who held 43,520
Class B shares of Hawaii Income Series (5.8%); Desmond K. Brooks and Pauline M.
Brooks and Sharon M. Wong, JTWROS C/O INS INC, 210 Ward Ave. #216, Honolulu, HI
96814-4008, who held 4,750 Class C shares of Hawaii Income Series (6.8%); Ralph
S. Tawata & Betty Y. Tawata, JT TEN, 3150 Oahu Ave., Honolulu, HI 96822-1246,
who held 6,274 Class C shares of Hawaii Income Series (9.0%); Saundra Gay
Lormand, Trustee, The Mildred Evelyn Metzler Kraynik RLT UA DTD 1/2/92, FBO
Mildred E. M. Kraynik, 1641 Vancouver Way, Livermore, CA 94550-6133, who held
4,514 Class C shares of Hawaii Income Series (6.4%); Thomas K. Tsubota and
Miyako I. Isubota, Trustees FBO, Thomas K. & Miyuako I. Tsubota REV Living Trust
DTD 04/19/90, 911 11th Ave., Honolulu, HI 96816-2240, who held 10,670 Class C
shares of Hawaii Income Series (15.2%); Miyoko Goto, Trustee FBO Miyoko Goto REV
Living Trust DTD 2/05/83, 2320 Liliha St., Honolulu, HI 96817-1648, who held
5,465 Class C shares of Hawaii Income Series (7.8%); and Trish D. Eustace, 1930
Alaeloa St., Honolulu, HI 96821-1019, who held 6,550 Class C shares of Hawaii
Income Series (9.4%); Henry Nathan II & Elaine T. Nathan, JT TEN, 6222 Roblynn
Road, Laurel, MD 20707-2635, who held 1,416 Class C shares of the Maryland
Series (24.0%); Elbertha S. Cassedy, 506 S. Newkirk St., Baltimore, MD
21224-4429, who held 1,308 Class C shares of Maryland Series (22.1%); Prudential
Securities, Inc., FA Erma N. Ruble, who held 1,025 Class C shares of Maryland
Series (17.3%); Milton Bryant Jr., c/o Universal Systems, Inc., 14585 Avion Pky,
Chantilly, VA 22021-1132, who held 2,153 Class C shares of Maryland Series
(36.4%); Ellen D. Rothberg, 102 West Emerson St., Melrose, MA 02176-3129, who
held 280 Class C shares of Massachusetts Series (22.6%); Penny Boyce, P.O. Box
392, Bolton, MA 01740-0392, who held 94 Class C shares of Massachusetts Series
(7.5%); George Cares & Hope Cares, JT TEN, 356 Maryland Ave., N.E., Grand
Rapids, MI 49503-3940, who held 5,765 Class C shares of Michigan Series (6.8%);
Lester I. Fall, Jr., Cynthia D. Fall, JT TEN, 12460 Lincoln, Burt, MI
48417-9746, who held 1,365 Class C shares of Michigan Series (16.2%); David D.
Verdier, Trustee, The David D. Verdier Trust, UA DTD 06/02/90, 3043 Mary Ave.,
East Grand Rapids, MI 49506-3150, who held 1,291 Class C shares of Michigan
Series (15.3%); Leu Lasevich & Larisa Lasevich, JT TEN, 167 Nathan Drive, North
Brunswick, NJ 08902-1234, who held 7,283 Class C shares of New Jersey Series
(5.3%); Renaldo Sigismondi, 579 Lloyd Road, Aberdeen, NJ 07747-1330, who held
15,061 Class C shares of New Jersey Series (10.0%); Edward J. Thran & Mary Ann
Thran, JT TEN, Lions Head South, 7 Marta Ct., Brick, NJ 08723-7830, who held
16,993 Class C shares of New Jersey Series (12.4%); Richard A. Sperling MD, 25
Sparrowbush Road, Upper Saddle River, NJ 07458-1411, who held 7,818 Class C
shares of New Jersey Series (5.7%); James J. Castello & Frances N. Castello, JT
TEN, 6 Pine Tree Road, Ramsey, NJ 07496-2118, who held 10,298 Class C shares of
New Jersey Series (7.5%); Dolores Truex, 126 Mayetta Landing Road, West Creek,
NJ 08092-3100, who held 19,770 Class C shares of New Jersey Series (19.4%);
Prudential Securities Inc., FA Arsenio Stadile, who held 14,229 Class C shares
of New Jersey Series (10.4%); Kandala K. Chary MD & Vaidehi Chary, JT TEN, 99
Roxbury Pk, East Amherst, NY 14051-1769, who held 3,161 Class C shares of New
York Series (7.1%); Henry Hocker & Gloria Hocker, JT TEN, 15 West Suffolk Ave.,
Central Islip, NY 11722-2142, who held 11,684 Class C shares of New York Series
(26.2%); Shelley Fehrenbach, 2 Cherry Lane, Kings Point, NY 11024-1122, who held
4,683 Class C shares of New York Series (10.5%); Suzanne E. Tyo & Carol Ann Tyo,
JT TEN, 14 Maple Ave., Shortsville, NY 14548-9316, who held 2,717 Class C shares
of New York Series (6.1%); Hannah B. Falk, Parklane Apts., 33 Gates Circle,
Buffalo, NY 14209-1197, who held 2,635 Class C shares of New York Series (5.9%);
Mark A. Pieczonka & Catherine A. Pieczonka, JT TEN, 18 Monett Pl., Greenlawn, NY
11740-1910, who held 9,438 Class C shares of New York Series (21.1%); Steven J.
Sybert, Rosalie B. Sybert, JT TEN, 4509 Coburn Ct., Charlotte, NC 28277-2551,
who held 2,797 Class C shares of North Carolina Series (48.3%); Howard G.
Hochrian, 1200 Dwire Pl., Durham, NC 27706-2515, who held 955 Class C shares of
North Carolina Series (16.5%); S. J. Black and Son, Inc., P.O. Box 1105, Monroe,
NC 28111-1105, who held 838 Class C shares of North Carolina Series (19.5%);
Janet M. Kean,
B-26
<PAGE>
Thomas J. Kean, Co-Trustees, Janet H. Kean Revocable Living Trust, UA DTD
10/30/91, 17404 Randalls Ferry Road, Norwood, NC 28128-7460, who held 978 Class
C shares of North Carolina Series (16.9%); Prudential Securities, Inc., FA
William A. Arthur, who held 1,218 Class C shares of Ohio Series (11.1%); Agnes
M. Jones & Sara J. Warner, JT TEN, 42 Carr St., Jackson, OH 45640-2106, who held
8,846 Class C shares of Ohio Series (80.6%); Dale R. Innan & Diane S. Innan, JT
TEN, 300 High St., Troy, PA 16947-1114, who held 5,074 Class C shares of
Pennsylvania Series (14.8%); Thomas E. Flack & Dorothy E. Flack, JT TEN, 2604
Radcliffe Road, Brodmall, PA 19008-2115, who held 4,775 Class C shares of
Pennsylvania Series (13.9%); Barry L. Joel & Tammy L. Joel, JT TEN, 7386 Beacon
Hill Dr., Pittsburgh, PA 15221-2569, who held 4,056 Class C shares of
Pennsylvania Series (11.8%); Virginia N. Long, 504 Lombard St., Tamaqua, PA
18252-1006, who held 2,514 Class C shares of Pennsylvania Series (7.3%); Henry
E. Hollander & Anita R. Hollander, JT TEN, 149 Autumn Drive, Level Green, PA
15085-1424, who held 3,037 Class C shares of Pennsylvania Series (8.8%).
As of October 13, 1995, 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 Class C
------------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Florida.................. 9,872,943 (84%) 759,014 (88%) 799,595 (91%)
Hawaii Income............ 102,518 (37%) 677,110 (91%) 69,084 (89%)
Maryland................. 956,435 (59%) 1,104,579 (55%) 4,594 (78%)
Massachusetts............ 1,296,831 (56%) 1,226,002 (51%) 1,222 (98%)
Michigan................. 1,102,448 (50%) 1,815,895 (53%) 7,055 (84%)
New Jersey............... 3,638,309 (82%) 17,894,009 (81%) 120,750 (88%)
New York................. 8,354,938 (61%) 9,085,277 (67%) 43,833 (98%)
North Carolina........... 1,566,363 (67%) 2,710,667 (78%) 2,966 (51%)
Ohio..................... 2,221,331 (53%) 2,677,455 (51%) 10,063 (92%)
Pennsylvania............. 2,305,740 (49%) 8,665,614 (45%) 16,333 (78%)
</TABLE>
As of October 13, 1995, Prudential Securities was the record holder for
other beneficial owners of 67,482,240 shares (or 99% of those outstanding) of
the Connecticut Money Market Series, 59,998,344 shares (or 99% of those
outstanding) of the Massachusetts Money Market Series, 217,127,616 shares (or
99% of those outstanding) of the New Jersey Money Market Series and 315,379,244
shares (or 99% 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 September 30, 1995,
PMF managed and/or administered open-end and closed-end management investment
companies with assets of approximately $51 billion. According to the Investment
Company Institute, as of September 30, 1995, the Prudential Mutual Funds were
the 13th largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). PMF has three wholly-owned subsidiaries:
Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent) and Prudential Mutual Fund Investment Management,
Inc. PMFS serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
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
B-27
<PAGE>
are not being furnished by State Street Bank and Trust Company (the Custodian),
the Fund's custodian, and PMFS, 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 will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended August 31, 1995. 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 share
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
B-28
<PAGE>
Investment Company Act, on May 5, 1995 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, by the
shareholders of the Connecticut Money Market Series and the Massachusetts Money
Market Series on November 10, 1992 and by the sole shareholder of the Hawaii
Income Series on September 19, 1994.
The amount of the management fee paid by each series of the Fund to PMF for
the fiscal years ended August 31, 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona*............................................................... $ 286,344 $ 313,334 $ 268,246(a)
Connecticut Money Market............................................... -- (b) 63,440(b) 71,379(b)
Florida................................................................ 247,845(c) 311,558(c) 231,778(c)
Georgia*............................................................... 94,559 108,130 86,901(d)
Hawaii Income.......................................................... N/A N/A 41,133(e)
Maryland............................................................... 279,241 290,509 210,311(f)
Massachusetts.......................................................... 286,520 310,614 258,040(g)
Massachusetts Money Market............................................. -- (h) 44,800(h) 53,649(h)
Michigan............................................................... 319,163 383,005 323,133(i)
Minnesota*............................................................. 130,014 136,463 108,549(j)
New Jersey............................................................. 1,236,812(k) 1,347,284(k) 1,047,300(k)
New Jersey Money Market................................................ 523,804(l) 634,767(l) 642,087(l)
New York............................................................... 1,697,889 1,820,106 1,518,552(m)
New York Money Market.................................................. 1,378,198 1,402,462 1,463,815
North Carolina......................................................... 346,561 378,373 313,847(n)
Ohio................................................................... 564,784 630,490 538,657(o)
Pennsylvania........................................................... 1,186,546 1,384,548 1,182,799(p)
</TABLE>
- ------------------------
* No shares of this Series currently are outstanding.
(a) PMF voluntarily waived a portion of its management fee of $19,126.
(b) PMF voluntarily waived all or a portion of its management fee of $265,760,
$243,395 and $214,138, respectively.
(c) PMF voluntarily waived a portion of its management fee of $371,767,
$467,337 and $464,337, respectively.
(d) PMF voluntarily waived a portion of its management fee of $6,103.
(e) PMF voluntarily waived a portion of its management fee of $3,651.
(f) PMF voluntarily waived a portion of its management fee of $14,170.
(g) PMF voluntarily waived a portion of its management fee of $18,492.
(h) PMF voluntarily waived all or a portion of its management fee of $161,228,
$167,335 and $160,946, respectively.
(i) PMF voluntarily waived a portion of its management fee of $22,911.
(j) PMF voluntarily waived a portion of its management fee of $7,592.
(k) PMF voluntarily waived a portion of its management fee of $412,271,
$449,095 and $483,073, respectively.
(l) PMF voluntarily waived a portion of its management fee of $323,145,
$211,404 and $214,029, respectively.
(m) PMF voluntarily waived a portion of its management fee of $108,361.
(n) PMF voluntarily waived a portion of its management fee of $22,350.
(o) PMF voluntarily waived a portion of its management fee of $38,218.
(p) PMF voluntarily waived a portion of its management fee of $84,187.
B-29
<PAGE>
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 unit of PIC which provides investment advisory
services to the Fund is known as Prudential Mutual Fund Investment Management.
Peter Allegrini oversees the municipal bond team at the Subadviser. He also
serves as the portfolio manager of the High Yield Series of Prudential Municipal
Bond Fund and the Pennsylvania Series of the Fund. He has been in the investment
business since 1978.
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 5,
1995, 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, by shareholders of the Connecticut Money Market
Series and the Massachusetts Money Market Series on November 10, 1992 and by the
sole shareholder of the Hawaii Income Series on September 19, 1994.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specified projects and to evaluate the progress of construction or the
operation of a facility.
The Manager and the Subadviser are subsidiaries of Prudential, which is one
of the largest diversified financial services institutions in the world and,
based on total assets, the largest insurance company in the North America as of
December 31, 1994. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs for
employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons worldwide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more than
50 million worldwide--to more than one of every five people in the United
States. Prudential is a major issuer of annuities, including variable annuities.
Prudential seeks to develop innovative products and services to meet consumer
needs in each of its business areas. Prudential has been engaged in the
insurance business since 1875. In July 1995, 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, 1994. As
of December 31, 1994, Prudential through it subsidiaries provided automobile
insurance for more than 1.8 million cars and insured more than 1.5 million
homes. For the year ended December 31, 1994, The Prudential Bank, a subsidiary
of Prudential,
B-30
<PAGE>
served 940,000 customers in 50 states providing credit card services and loans
totaling more than $1.2 billion. Assets held by PSI for its clients totaled
approximately $150 billion at December 31, 1994. During 1994, over 28,000 new
customer accounts were opened each month at PSI. The Prudential Real Estate
Affiliates, the fourth largest real estate brokerage network in the United
States, has more than 34,000 brokers and agents and more than 1,100 offices in
the United States.
Based on data for the year ended December 31, 1994 for the Prudential Mutual
Funds, on an average day, there are approximately $80 million in common stock
transactions, over $100 million in bond transactions and over $4.1 billion in
money market transactions. In 1994, the Prudential Mutual Funds effected more
than 57,000 trades in money market securities and held on average $21 billion of
money market securities. Based on complex-wide data for the year ended December
31, 1994, on an average day, 7,168 shareholders telephoned PMFS, the Transfer
Agent of the Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free
number. On an annual basis, that represents approximately 1.8 million telephone
calls and approximately 1.1 million fund transactions.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
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 and of the shares of the money market
series and of the shares of the New York Income Series (which are not divided
into 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 non-money market series of 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 accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .50 of 1% (including the service fee) of the average daily net assets
of the Class B shares (asset-based sales charge) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares. 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
B-31
<PAGE>
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 5, 1995. 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 and the Class C Plan was approved by the Class C
shareholders on July 19, 1994. The Florida Series' Class C Plan was approved by
the sole shareholder of the Class C shares of the Florida Series on June 30,
1993. The Class B Plan was approved by the sole shareholder of the Florida
Series' Class B shares on August 1, 1994. The Class A Plan and Class B Plan were
approved by the sole shareholder of Class A and Class B shares of the Hawaii
Income Series on September 19, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares of the Hawaii Income Series on September 19, 1994
and of the other series having Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended August 31, 1995, PMFD received the
following payments under the Class A Plan from the series currently in
existence:
<TABLE>
<CAPTION>
Series
- ----------------------------------------------------------------------------------
<S> <C>
Florida........................................................................... $ 82,514
Hawaii Income..................................................................... 2,641
Maryland.......................................................................... 11,341
Massachusetts..................................................................... 15,837
Michigan.......................................................................... 16,932
New Jersey........................................................................ 30,290
New York.......................................................................... 95,024
North Carolina.................................................................... 15,244
Ohio.............................................................................. 29,904
Pennsylvania...................................................................... 30,092
</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, 1995, PMFD also received approximate initial sales charges
with respect to the sale of Class A shares of the currently existing series as
follows:
<TABLE>
<CAPTION>
Series
- --------------------------------------------------------------------------------
<S> <C>
Florida......................................................................... $ 170,300
Hawaii Income................................................................... 19,600
Maryland........................................................................ 3,000
Massachusetts................................................................... 6,800
Michigan........................................................................ 8,100
New Jersey...................................................................... 16,200
New York........................................................................ 39,400
North Carolina.................................................................. 112,600
Ohio............................................................................ 14,300
Pennsylvania.................................................................... 32,000
</TABLE>
B-32
<PAGE>
Class B Plan. For the fiscal year ended August 31, 1995, 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 Class B shares of each currently existing series as set forth
below:
<TABLE>
<CAPTION>
Approximate
Contingent
Deferred
Series Amount of Fee Sales Charges
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Florida........................................................ $ 23,495 $ 7,500
Hawaii Income.................................................. 2,641 12,700
Maryland....................................................... 167,486 134,200
Massachusetts.................................................. 197,277 69,000
Michigan....................................................... 261,080 127,100
New Jersey..................................................... 1,374,973 665,400
New York....................................................... 1,150,164 360,200
North Carolina................................................. 259,815 97,900
Ohio........................................................... 427,051 165,700
Pennsylvania................................................... 1,115,411 427,000
</TABLE>
For the fiscal year ended August 31, 1995, it is estimated that Prudential
Securities spent approximately the following amounts on behalf of the currently
existing series of the Fund:
<TABLE>
<CAPTION>
Compensation Approximate
Printing and Commission to Prusec* for Total
Mailing Payments to Commission Amount
Prospectuses Financial Payments to Spent By
to Other Advisers of Overhead Costs Representatives Distributor
Than Current Prudential of Prudential and Other on Behalf of
Series Shareholders Securities Securities** Expenses** Series
- -------------------- ------------ ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Florida............. $ 4,700 $ 36,200 $ 318,600 $ 16,400 $ 375,900
Hawaii Income....... 6,400 95,700 142,500 500 245,100
Maryland............ 8,800 53,700 15,000 13,400 90,900
Massachusetts....... 11,700 57,300 32,800 20,500 122,300
Michigan............ 8,600 82,600 49,200 30,100 170,500
New Jersey.......... 15,100 393,400 200,300 64,400 673,200
New York............ 10,400 397,700 176,000 110,000 694,200
North Carolina...... 8,500 77,100 43,000 15,500 144,100
Ohio................ 9,900 119,700 58,000 93,000 280,600
Pennsylvania........ 12,400 327,600 171,300 215,000 726,300
<FN>
- ------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
</TABLE>
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Prusec in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communication costs and
the costs of stationery and supplies, (b) the cost of client sales seminars, (c)
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (d) other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by 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.
B-33
<PAGE>
Class C Plan. For the fiscal year ended August 31, 1995, Prudential
Securities received the distribution fees paid by the following series of the
Fund under the Class C Plan and the proceeds of contingent deferred sales
charges paid by investors on the redemption of shares of each currently existing
series as set forth below:
<TABLE>
<CAPTION>
Approximate
Contingent
Deferred
Sales
Series Amount of Fee Charges
- -------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Florida....................................................... $ 76,991 $ 1,000
Hawaii Income................................................. 29,804 100
Maryland...................................................... 437 --
Massachusetts................................................. 104 --
Michigan...................................................... 458 --
New Jersey.................................................... 5,924 100
New York...................................................... 2,439 --
North Carolina................................................ 241 100
Ohio.......................................................... 458 --
Pennsylvania.................................................. 1,672 600
</TABLE>
Distribution fees were expended primarily for payment of account servicing
fees.
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 5, 1995.
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 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 5, 1995.
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 5, 1995. 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, 1995,
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................................................................. $ 71,379
Massachusetts Money Market............................................................... 53,649
New Jersey Money Market.................................................................. 214,029
New York Money Market.................................................................... 365,954
</TABLE>
On October 21, 1993, Prudential Securities (PSI) entered into an omnibus
settlement with the SEC, state securities regulators in 51 jurisdictions and the
NASD to resolve allegations that PSI sold interests in more than 700 limited
partnerships (and a limited number of other types of securities) from January 1,
1980 through December 31, 1990, in violation of securities laws to persons for
whom such securities were not suitable in light of the individuals' financial
condition or investment objectives. It was also alleged that the safety,
potential
B-34
<PAGE>
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a series 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.
B-35
<PAGE>
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.
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-36
<PAGE>
During the fiscal years ended August 31, 1995, 1994 and 1993, 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 1995 1994 1993
- ------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Connecticut Money Market...................................................... 0 0 0
Florida....................................................................... $ 10,973 $ 4,113 $ 2,013
Hawaii Income................................................................. 1,680 N/A N/A
Maryland...................................................................... 5,513 613 437
Massachusetts................................................................. 1,820 263 613
Massachusetts Money Market.................................................... 0 0 0
Michigan...................................................................... 4,550 2,030 3,623
New Jersey.................................................................... 17,098 875 0
New Jersey Money Market....................................................... 0 0 0
New York...................................................................... 13,581 0 2,415
New York Money Market......................................................... 0 0 0
North Carolina................................................................ 20,213 175 875
Ohio.......................................................................... 15,698 4,953 1,418
Pennsylvania.................................................................. 22,033 875 2,468
</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.
B-37
<PAGE>
Specimen Price Make-Up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B* and Class C* shares are sold at net asset value. Using the net asset value at
August 31, 1995 of each series currently 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 FL HI MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value and redemption price per
Class A share.......................... $10.06 $12.13 $10.66 $11.63 $11.89 $10.98 $11.91 $11.19 $11.92 $10.55
Maximum sales charge (3% of offering
price)................................. .31 .38 .33 .36 .37 .34 .37 .35 .37 .33
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Offering price to public................ $10.37 $12.51 $10.99 $11.99 $12.26 $11.32 $12.28 $11.54 $12.29 $10.88
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
Class B FL HI MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class B
share*................................. $10.06 $12.13 $10.67 $11.62 $11.88 $10.98 $11.91 $11.19 $11.93 $10.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
Class C FL HI MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class C
share*................................. $10.06 $12.13 $10.67 $11.62 $11.88 $10.98 $11.91 $11.19 $11.93 $10.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<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.
</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-38
<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. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
B-39
<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.
</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 a series 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 a series 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 a series 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 a series 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.
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
B-40
<PAGE>
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 (Short-Intermediate Term
Series) and shares of the money market funds specified below. No fee or sales
load will be imposed upon the exchange. Shareholders of money market funds who
acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
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 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
B-41
<PAGE>
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.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
Period of
Monthly Investments: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.......................................... $ 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 and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(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>
B-42
<PAGE>
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.
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
B-43
<PAGE>
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.
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.
Mutual Fund Programs
From time to time, the Fund (or a portfolio of the Fund) may be included in
a mutual fund program with other Prudential Mutual Funds. Under such a program,
a group of portfolios will be selected and thereafter promoted collectively.
Typically, these programs are created with an investment theme, E.G., to seek
greater diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning
B-44
<PAGE>
the appropriate blend of portfolios for them. If investors elect to purchase the
individual mutual funds that constitute the program in an investment ratio
different from that offered by the program, the standard minimum investment
requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share 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. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time (with respect to shares of the non-money market
series of the Fund) and between such closing and 4:30 P.M., New York time (with
respect to the money market series of the Fund).
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 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
B-45
<PAGE>
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 August 31,
1995 and the yield without the management subsidies and waivers were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
--------------------------- --------------------------- ---------------------------
Yield Subsidy/ Yield Subsidy/ Yield Subsidy/
Series Yield Waiver Adjusted Yield Waiver Adjusted Yield Waiver Adjusted
- -------------------- ------- ----------------- ------- ----------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Florida............. 5.6% 4.6% 5.3% 4.3% 5.1% 4.1%
Hawaii Income....... 5.2 5.1 5.0 4.9 4.7 4.6
Maryland............ 3.7 3.7 3.5 3.4 3.2 3.1
Massachusetts....... 4.6 4.6 4.4 4.3 4.1 4.1
Michigan............ 4.7 4.6 4.4 4.4 4.2 4.1
New Jersey.......... 5.0 4.9 4.8 4.6 4.5 4.4
New York............ 4.8 4.8 4.6 4.5 4.3 4.3
North Carolina...... 4.7 4.6 4.4 4.4 4.2 4.1
Ohio................ 4.6 4.5 4.3 4.3 4.1 4.0
Pennsylvania........ 4.8 4.7 4.5 4.5 4.3 4.2
</TABLE>
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 portion of the yield will then be divided by one minus the state
tax rate times one minus the federal tax rate and
B-46
<PAGE>
then added to the portion of the yield that is attributable to other securities.
For the 30 days ended August 31, 1995, 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 Class C
----------------------------------- ----------------------------------- -----------------------------------
Tax Equivalent Tax Equivalent Tax Equivalent
Tax Equivalent Yield Subsidy/ Tax Equivalent Yield Subsidy/ Tax Equivalent Yield Subsidy/
Series Yield Waiver Adjusted Yield Waiver Adjusted Yield Waiver Adjusted
- -------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Florida....... 8.7% 7.1% 8.3% 6.7% 7.9% 6.4%
Hawaii
Income....... 9.0 8.9 8.6 8.5 8.2 8.0
Maryland...... 6.2 6.1 5.7 5.7 5.3 5.2
Massachusetts... 8.2 8.1 7.7 7.7 7.3 7.2
Michigan...... 7.6 7.5 7.2 7.1 6.8 6.7
New Jersey.... 8.4 8.1 8.0 7.7 7.6 7.3
New York...... 8.2 8.1 7.8 7.7 7.3 7.3
North
Carolina..... 7.9 7.8 7.5 7.4 7.1 7.0
Ohio.......... 7.7 7.7 7.3 7.2 6.9 6.8
Pennsylvania... 7.7 7.6 7.3 7.2 6.9 6.8
</TABLE>
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.
The average annual total return and subsidy/waiver adjusted average annual
total return for the currently existing series (other than the money market
series) for the periods ended August 31, 1995 were as follows:
<TABLE>
<CAPTION>
Class B
---------------------------------------
Class A Subsidy/Waiver
------------------------------------------------------------- Adjusted
Subsidy/Waiver ------
Adjusted Ten
----------------------------- Years
One Five From One Five From One Five or From One
Series Year Years Inception Year Years Inception Year Years Inception Year
- --------------- ------ ------ ----------- ------ ------ ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida........ 4.6% N/A 7.5% 4.2% N/A 7.0% 2.4% N/A 3.1% 2.0%
Hawaii Income.. N/A N/A 6.1 N/A N/A 4.6 N/A N/A 4.0 N/A
Maryland....... 3.1 6.8% 6.3 3.1 6.8% 6.3 0.9 6.9% 7.2 0.9
Massachusetts... 5.1 7.9 7.3 5.1 7.9 7.3 2.9 8.0 8.1 2.9
Michigan....... 4.0 7.5 7.0 4.0 7.5 7.0 1.6 7.6 8.6 1.6
New Jersey..... 4.3 7.8 7.5 4.0 7.6 7.2 2.1 7.9 8.0 1.8
New York....... 4.5 7.9 7.4 4.5 7.9 7.4 2.3 8.0 8.6 2.3
North
Carolina...... 3.7 7.1 6.7 3.7 7.1 6.7 1.4 7.2 7.6 1.4
Ohio........... 4.4 7.7 7.3 4.4 7.7 7.3 2.2 7.8 8.3 2.2
Pennsylvania... 4.1 7.8 7.2 4.1 7.8 7.1 2.0 7.8 7.0 2.0
<CAPTION>
Class C
-----------------------------------------------
Subsidy/
Waiver
Ten Adjusted
Years ----------------------
Five or From One From One From
Series Years Inception Year Inception Year Inception
- --------------- -------- ------------ ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Florida........ N/A 1.0% 6.1% 3.7% 5.7% 3.5%
Hawaii Income.. N/A 2.5 N/A 7.8 N/A 6.2%
Maryland....... 6.9% 7.1 4.6 5.3 4.6 5.3%
Massachusetts.. 8.0 8.0 6.6 6.9 6.6 6.9%
Michigan....... 7.6 8.6 5.3 5.9 5.3 5.9%
New Jersey..... 7.6 7.8 5.9 6.5 5.7 6.3%
New York....... 8.0 8.6 6.0 6.5 6.0 6.5%
North
Carolina...... 7.2 7.5 5.1 5.7 5.1 5.7%
Ohio........... 7.8 8.3 5.9 6.5 5.9 6.5%
Pennsylvania... 7.8 7.0 5.7 6.3 5.7 6.3%
</TABLE>
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.
B-47
<PAGE>
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.
The aggregate total return for each series for the one year, five year and
ten year (or since inception) periods ended August 31, 1995 for the Class A,
Class B and Class C shares of each currently existing series were as follows:
<TABLE>
<CAPTION>
Class B
------------------------------------------
Class A Class C
------------------------------------------ -----------------
Aggregate Total
Aggregate Total Return Aggregate Total
Return ------------------------- Return
------------------------- 10 yr. or -----------------
Since Since Since
Series 1 yr. 5 yr. Inception Inception Date 1 yr. 5 yr. Inception Inception Date 1 yr. Inception
- -------------------- ----- ----- --------- -------------- ----- ----- --------- -------------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida............. 7.9% N/A 44.8% 12/27/90 7.4% N/A 7.3 % 8/1/94 7.1% 7.8%
Hawaii Income....... N/A N/A 9.4 9/19/94 N/A N/A 9.0 9/19/94 N/A 8.8
Maryland............ 6.3 43.0% 45.4 1/22/90 5.9 40.3 108.3 1/22/85 5.6 5.7
Massachusetts....... 8.3 50.9 53.0 1/22/90 7.9 47.7 135.0 9/19/84 7.6 7.5
Michigan............ 7.2 48.1 50.8 1/22/90 6.6 45.0 147.4 9/19/84 6.3 6.4
New Jersey.......... 7.6 50.3 54.4 1/22/90 7.1 47.4 78.2 3/1/88 6.9 7.0
New York............ 7.7 51.0 54.1 1/22/90 7.3 48.0 145.6 9/27/84 7.0 7.1
North Carolina...... 6.9 45.1 48.1 1/22/90 6.4 42.2 116.9 2/13/85 6.2 6.2
Ohio................ 7.6 49.0 52.9 1/22/90 7.2 46.2 139.6 9/19/84 6.9 7.1
Pennsylvania........ 7.4 49.0 51.9 1/22/90 6.9 46.8 76.7 3/6/87 6.7 6.8
<CAPTION>
Series Inception Date
- -------------------- --------------
<S> <C>
Florida............. 8/1/94
Hawaii Income....... 9/19/94
Maryland............ 8/1/94
Massachusetts....... 8/1/94
Michigan............ 8/1/94
New Jersey.......... 8/1/94
New York............ 8/1/94
North Carolina...... 8/1/94
Ohio................ 8/1/94
Pennsylvania........ 8/1/94
</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 August 31, 1995 was 5.5%, 5.9%, 5.2%
and 5.1%, respectively.
B-48
<PAGE>
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., IBC/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.
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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
A Look At Performance Over the Long-Term
<S> <C> <C> <C>
(1926-1992)
Common Stocks Long-Term Government Bonds Inflation
Average Annual Return 10.3% 4.8% 3.1%
</TABLE>
(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.
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
B-49
<PAGE>
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).
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
B-50
<PAGE>
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, 1995, the following series had capital loss
carryforwards for federal tax purposes as follows:
<TABLE>
<CAPTION>
Capital Loss
Series Carryforward Expires
- -------------------------------------------------------------------- ------------- ---------
<S> <C> <C>
Florida............................................................. $ 2,726,000 2003
New Jersey.......................................................... $ 1,683,700 2003
New York............................................................ $ 15,700 1999
$ 1,026,100 2003
Pennsylvania........................................................ $ 1,452,100 2003
</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 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. Moreover,
exempt-interest dividends, whether or not on private activity bonds, that are
held by corporations will be taken into account (i) in determining the
alternative minimum tax imposed on 75% of the excess of adjusted current
earnings over alternative minimum taxable income, (ii) in calculating the
environmental tax equal to 0.12 percent of a corporation's modified alternative
minimum taxable income in excess of $2 million, and (iii) in determining the
foreign branch profits tax imposed on the effectively connected earnings and
profits (with adjustments) of United States branches of foreign corporations
B-51
<PAGE>
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 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
B-52
<PAGE>
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.
CONNECTICUT. Distributions from the Connecticut Money Market Series (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) 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.
B-53
<PAGE>
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 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.
Shareholders of the Florida Series should consult their tax advisers about
other state and local tax consequences of their investments in the Florida
Series.
HAWAII. In the opinion of Hawaii tax counsel, distributions from the Hawaii
Series to Hawaii residents will not be subject to Hawaii income tax to the
extent that such distributions constitute exempt interest dividends under
Section 852(b)(5) of the Internal Revenue Code and are derived from income
received by the Series from obligations which pay interest excludable from
Hawaii income tax under Hawaii law. Other distributions, including capital gains
distributions, exempt interest dividends derived from obligations of states
other than Hawaii and their political subdivisions, and distributions that are
taxable as dividends for federal income tax purposes are not exempt from Hawaii
income tax.
Distributions from the Hawaii Series are not exempt from the Hawaii
Franchise Tax. This tax applies to banks, building and loan associations,
financial services loan companies, financial corporations, and small business
investment companies.
Persons or entities who are not Hawaii residents should generally not be
subject to Hawaiian income taxation on dividends and distributions made by the
Series but may be subject to other state and local taxes.
B-54
<PAGE>
MARYLAND. In the opinion of Maryland tax counsel, individual shareholders
of the Maryland Series resident in Maryland, corporate shareholders (other than
financial institutions such as banks) 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. Up to 50 percent of dividends attributable to exempt-interest
income received by the Maryland Series from obligations that are "specified
private activity bonds" within the meaning of Section 57(a)(5)(C) of the
Internal Revenue Code could be subject to Maryland individual income tax.
In addition, distributions received from the Maryland Series which are
attributable to (i) gains realized on the sale or exchange of bonds issued by
the State of Maryland or its political subdivisions and (ii) interest received
by the Maryland Series on U.S. Government obligations 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.
Entities subject to the Maryland financial institution franchise tax will
generally be subject to tax on all distributions from the Maryland Series.
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 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.
B-55
<PAGE>
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.
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
B-56
<PAGE>
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 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 an intangibles
tax in North Carolina.
B-57
<PAGE>
The Series has obtained a ruling signed by the Director of and an
Information Release issued by the Individual Income Tax Division of the North
Carolina Department of Revenue which form the basis of the opinion of North
Carolina tax counsel regarding the North Carolina income 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, distributions with respect to
shares of the Ohio Series ("Distributions") that are properly attributable to
interest on, or profit made on the sale, exchange, or other disposition of, Ohio
Obligations are exempt from the Ohio personal income tax and municipal and
school district income taxes in Ohio, 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 Obligations, or similar obligations of other states or
their subdivisions (but not including, for this purpose, obligations of United
States territories or possessions). For purposes of this discussion of Ohio
taxes, (i) "Ohio Obligations" means 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 and (ii) it is assumed that the
regulated investment company and 50% requirements described above are satisfied.
Distributions are excluded from the net income base of the Ohio corporation
franchise tax to the extent that such Distributions are either excluded from
gross income for federal income tax purposes or are properly attributable to
interest on, or profit made on the sale, exchange or other disposition of, Ohio
Obligations. However, shares of the Ohio Series will be includable in the
computation of net worth for purposes of such tax.
Distributions that are properly attributable to 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 and municipal and school district income taxes in Ohio,
and are excluded from the net income base of the Ohio corporation franchise tax.
Other Distributions 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 provided that such distributions are not included in federal taxable
income determined before net operating loss deductions and special deductions.
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 portfolio
securities owned by the Pennsylvania Series on the annual assessment date would
not be subject to such taxation if owned by a resident of Pennsylvania. Because
the Pennsylvania
B-58
<PAGE>
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, 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
B-59
<PAGE>
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. On October 16, 1995,
shareholders of the Arizona, Georgia and Minnesota Series approved a plan of
reorganization whereby the assets of such series were to be acquired by
Prudential National Municipals Fund, Inc. in tax-free transactions, which
occurred on October 27, 1995.
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 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
B-60
<PAGE>
postage, stationery, printing, allocable communication and other costs. For the
fiscal year ended August 31, 1995, the Fund incurred fees for the services of
PMFS in the following amounts with respect to each currently existing series:
<TABLE>
<CAPTION>
Transfer Agency
Series Fees
- ---------------------------------------------------- ----------------
<S> <C>
Connecticut Money Market............................ $ 31,000
Florida............................................. 41,700
Hawaii Income....................................... 2,500
Maryland............................................ 25,900
Massachusetts....................................... 24,500
Massachusetts Money Market.......................... 24,000
Michigan............................................ 39,000
New Jersey.......................................... 110,100
New Jersey Money Market............................. 82,000
New York............................................ 134,300
New York Money Market............................... 126,000
North Carolina...................................... 28,400
Ohio................................................ 53,100
Pennsylvania........................................ 129,000
</TABLE>
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
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.
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
B-61
<PAGE>
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.
Prime-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have
a strong 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 S&P'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
An S&P 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
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
B-62
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--101.0%
- ------------------------------------------------------------------------------------------------------------------------------
City of New Haven, Ser. 95 Aaa 5.00% 2/15/96 $ 1,250 $ 1,252,182
Connecticut St. Economic Recovery, Ser. A Aa 5.40 12/15/95 2,000 2,006,947
Connecticut St. Dev. Auth., Ctrl. Rev.,
Conco Proj. Ser. 85, F.R.W.D. P1 3.50 9/07/95 1,700 1,700,000
Jewish Cmnty. Ctr. of New Haven, Ser. 92, F.R.M.D. A-1* 3.90 9/01/95 650 650,000
Lt. & Pwr. Co. Proj., Ser. 93B, F.R.W.D. VMIG1 3.70 9/06/95 4,400 4,400,000
Rand Whitney Container Bd., Ser. 93, F.R.W.D. P1 3.15 9/06/95 1,000 1,000,000
SHW Inc. Proj., Ser. 90, F.R.W.D. NR 3.65 9/06/95 3,600 3,600,000
Water Facs. Rev. Bridgeport Hydrolic
Company Project., Ser. 95, F.R.W.D. P1 3.10 9/06/95 2,000 2,000,000
Connecticut St. Hlth. & Edl. Facs. Auth. Rev.,
Bridgeport Hospital, Series B, F.R.W.D. VMIG1 3.35 9/06/95 1,300 1,300,000
Charlotte-Hungerford Ser. B, F.R.W.D. VMIG1 3.70 9/07/95 1,200 1,200,000
Pomfret School Issue, Series A, F.R.W.D. VMIG1 3.50 9/06/95 1,000 1,000,000
Yale Univ., Ser. L, T.E.C.P. VMIG1 3.50 11/09/95 1,100 1,100,000
Yale Univ., Ser. N, T.E.C.P. VMIG1 3.50 11/09/95 1,500 1,500,000
Connecticut St. Hsg. Fin. Auth., Mtg. Fin. Prog. Ser.
93E-2, A.M.T. VMIG1 4.50 11/15/95 1,000 1,000,000
Connecticut St. Mun. Elec. Engy., Pwr. Supply
Sys. Rev., Ser. 95A, T.E.C.P. P1 3.55 12/08/95 1,600 1,600,000
Connecticut St. Spec. Assmt.,
Unemployment Comp. Ser. 93C, A.M.T. VMIG1 3.90 7/01/96 2,500 2,500,000
Unemployment Comp. Ser. 93B, F.R.W.D. VMIG1 3.60 9/06/95 3,500 3,500,000
Connecticut St. Spec. Tax Oblig., Trans. Infrastructure
Rev.,
Ser. 90I, F.R.W.D. VMIG1 3.65 9/06/95 2,000 2,000,000
Davies Cnty. Solid Wst. Disp. Fac. Rev., Scott Paper Co.
Proj., Ser. 93B, F.R.D.D. VMIG1 3.70 9/01/95 700 700,000
Dist. of Columbia Rev.,
Gen. Oblig., Rev., Ser. 92A-1, F.R.D.D. VMIG1 3.70 9/01/95 300 300,000
Gen. Oblig., Rev., Ser. 92A-3, F.R.D.D. VMIG1 3.70 9/01/95 1,000 1,000,000
Gen. Oblig., Rev., Ser. 92A-6, F.R.D.D. VMIG1 3.70 9/01/95 1,500 1,500,000
Fairfield Connecticut, B.A.N., NR 5.25 1/16/96 1,000 1,001,321
Gulf Coast Ind. Dev. Auth., Citgo Petroleum, Ser. 94,
F.R.D.D. VMIG1 3.70 9/01/95 500 500,000
Harris County Texas Ind. Dev. Co., Exxon Corp., Ser. 87,
F.R.D.D. P1 3.65 9/01/95 600 600,000
Hartford Connecticut Redevelopment Agency MultiFamily
Mortgage,
Ser. 90, F.R.W.D. NR 3.60 9/07/95 2,800 2,800,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-63
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
King George County Virginia Ind. Dev. Auth.,
Birchwood Pwr. Proj., Ser. 94, F.R.D.D NR 3.75% 9/01/95 $ 500 $ 500,000
Birchwood Pwr. Proj., Ser. 94B, F.R.D.D NR 3.75 9/01/95 1,000 1,000,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 2,600 2,600,000
Puerto Rico Comnwlth. Hwy. & Trans. Auth. Rev., Ser. 85,
F.R.W.D. VMIG1 3.20 9/06/95 2,300 2,300,000
Puerto Rico Hsg. Fin. Corp., MultiFamily Mtge. Rev.,
Portfolio A, Ser. 901, M.T.H.O.T. Aa 3.70 9/15/95 2,165 2,165,000
Puerto Rico Ind. Med. & Environ. Facs.,
Ana G. Mendez Ed. Fndtn., Ser. 85, F.R.W.D. A-1* 3.60 9/06/95 1,500 1,500,000
Inter Amer. Proj., Ser. 88, T.E.C.P. VMIG1 3.45 10/11/95 1,800 1,800,000
Reynolds Metal Co. Proj., Ser. 83, A.O.T. P1 3.75 9/01/96 3,000 2,997,327
Schering-Plough Corp., Ser. 83A, A.O.T. AAA* 4.35 12/01/95 2,500 2,497,588
Puerto Rico Public Bldgs. Auth. Rev., Ser. SG34, F.R.W.D. NR 3.60 9/07/95 3,000 3,000,000
Stamford Connecticut Housing Authority Revenue Morgan
Street Project, Ser. 94, F.R.W.D VMIG1 3.55 9/06/95 1,400 1,400,000
-----------
Total Investments--101.0%
(amortized cost--$63,470,365(c)) 63,470,365
Liabilities in excess of other assets--(1.0)% (603,580)
-----------
Net Assets--100% $62,866,785
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.T.--Annual Mandatory Tender.
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.M.D.--Floating Rate (Monthly) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
M.T.H.O.T.--Monthly Optional Tender.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate
of interest is adjusted.
(c) The cost of securities for federal income tax purposes is substantially
the same as for financial reporting purposes.
* 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-64
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $ 63,470,365
Cash......................................................................................................... 38,027
Receivable for Fund shares sold.............................................................................. 1,163,721
Interest receivable.......................................................................................... 359,529
Receivable for investments sold.............................................................................. 25,000
Deferred expenses............................................................................................ 14,976
------------
Total assets.............................................................................................. 65,071,618
------------
Liabilities
Payable for investments purchased............................................................................ 1,097,327
Payable for Fund shares reacquired........................................................................... 1,003,145
Accrued expenses............................................................................................. 67,968
Dividends payable............................................................................................ 24,177
Management fee payable....................................................................................... 6,889
Distribution fee payable..................................................................................... 3,727
Deferred Trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 2,204,833
------------
Net Assets................................................................................................... $ 62,866,785
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 628,668
Paid-in capital in excess of par.......................................................................... 62,238,117
------------
Net assets, August 31, 1995.................................................................................. $ 62,866,785
------------
------------
Net asset value, offering price and redemption price per share ($62,866,785 / 62,866,785 shares of beneficial
interest issued and outstanding; unlimited number of shares authorized)................................... $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-65
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest and discount earned............... $ 2,111,441
---------------
Expenses
Management fee, net of waiver of
$214,138................................ 71,379
Distribution fee........................... 71,379
Custodian's fees and expenses.............. 62,000
Transfer agent's fees and expenses......... 35,000
Registration fees.......................... 28,000
Reports to shareholders.................... 20,900
Amortization of organization expense....... 15,133
Audit fee.................................. 10,500
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 4,532
---------------
Total expenses.......................... 332,023
Less: custodian fee credit.................... (33,213)
---------------
Net expenses............................ 298,810
---------------
Net investment income......................... 1,812,631
---------------
Realized Gain on Investments
Net realized gain on investment
transactions............................... 714
---------------
Net Increase in Net Assets Resulting from
Operations.................................... $ 1,813,345
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income.......... $ 1,812,631 $ 1,208,289
Net realized gain (loss) on
investment transactions..... 714 (4,743)
------------ ------------
Net increase in net assets
resulting from operations... 1,813,345 1,203,546
------------ ------------
Dividends and distributions to
shareholders................... (1,813,345) (1,203,546)
------------ ------------
Series share transactions (at $1
per share)
Net proceeds from shares
sold........................ 234,075,262 210,712,023
Net asset value of shares
issued to shareholders in
reinvestment of dividends... 1,751,916 1,156,043
Cost of shares reacquired...... (227,262,566) (215,359,425)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ 8,564,612 (3,491,359)
------------ ------------
Total increase (decrease)......... 8,564,612 (3,491,359)
Net Assets
Beginning of year................. 54,302,173 57,793,532
------------ ------------
End of year....................... $ 62,866,785 $ 54,302,173
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 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.
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.
Custody Fee Credits: The Series has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
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. For the fiscal
year ended August 31, 1995, PMF voluntarily waived 75% of its management fee.
The amount of fees waived for the fiscal year ended August 31, 1995 amounted to
$214,138 ($.003 per share; .375% of average net assets, as 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.
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-67
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $31,000 for the services of PMFS. As
of August 31, 1995, approximately $2,500 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.
- --------------------------------------------------------------------------------
B-68
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 5,
1991(a)
Year Ended August 31, through
------------------------------------------------ August 31,
1995 1994 1993 1992 1991
------ ------- ------- ------- ----------
<S> <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
Net investment income and realized gains(c)... .032 .020 .022 .034 .003
Dividends and distributions to shareholders... (.032) (.020) (.022) (.034) (.003)
------ ------- ------- ------- ----------
Net asset value, end of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------- ------- ------- ----------
------ ------- ------- ------- ----------
TOTAL RETURN(d):.............................. 3.16% 2.02% 2.20% 3.42% .30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 62,867 $54,302 $57,794 $40,480 $ 10,904
Average net assets (000)...................... $ 57,103 $60,594 $53,152 $33,964 $ 6,730
Ratios to average net assets(c):
Expenses, including distribution fee........ .581% .542% .387% .125% .125%(b)
Expenses, excluding distribution fee........ .456% .417% .262% .00% .00%(b)
Net investment income....................... 3.17% 1.99% 2.17% 3.20% 4.42%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of management fee waiver and/or expense subsidy.
(d) Total return 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-69
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Connecticut Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Connecticut
Money Market Series, as of August 31, 1995, 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 four
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, 1995 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, Connecticut Money Market Series, as of August 31, 1995, the results
of its operations, the changes in net assets, and its financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-70
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--93.6%
- ------------------------------------------------------------------------------------------------------------------------------
Alachua Cnty. Hlth. Facs. Auth. Rev.,
Santa Fe Healthcare Facs. Proj. Baa 7.60% 11/15/13 $ 1,750 $ 1,870,697
Alachua Cnty. Ind. Dev. Rev., HB Fuller Co. Proj. NR 7.75 11/01/16 3,000 3,146,130
Brevard Cnty. Edl. Facs. Auth. Rev.,
Florida Inst. of Tech. BBB(g) 6.875 11/01/22 1,500 1,517,565
Wuesthoff Mem. Hosp., Ser. A, M.B.I.A. Aaa 6.625 4/01/13 1,000 1,066,920
Brevard Cnty. Sch. Brd. Ctfs. of Part., Ser. A,
A.M.B.A.C. Aaa 6.50 7/01/12 3,500 3,716,790
Broward Cnty. Edl. Facs. Auth. Rev.,
Nova Univ. Dorm. Proj., Ser. A BBB(g) 7.50 4/01/17 1,500 (c) 1,732,020
Broward Cnty. Hlth. Facs Auth., North Beach Hosp.,
M.B.I.A. Aaa 6.75 8/15/06 1,000 1,103,500
Broward Cnty. Wtr. & Swr. Rev., A.M.B.A.C. Aaa 5.125 10/01/15 1,000 920,480
Cape Canaveral Hosp. Dist. Rev., Ctfs. of Part.,
A.M.B.A.C. Aaa 6.875 1/01/21 1,000 1,067,610
City of Cocoa Wtr. & Swr. Rev., A.M.B.A.C. Aaa 5.00 10/01/23 1,000 874,730
City of Miami Beach Wtr. & Swr. Rev., F.S.A. Aaa 5.375 9/01/15 3,000 2,833,260
Clay Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. A, G.N.M.A. Aaa 7.45 9/01/23 375 399,394
Coral Springs Impvt. Dist., Wtr. & Swr. Rev., M.B.I.A. Aaa 6.00 6/01/10 1,000 1,058,280
Dade Cnty. Aviation Dept. Rev., Aaa 6.60 10/01/22 1,500 1,562,205
Ser. E, A.M.B.A.C. Aaa 5.50 10/01/10 1,000 993,870
Dade Cnty. Hlth. Facs. Auth. Rev.,
Baptist Hosp. of Miami Proj., Ser. A, M.B.I.A. Aaa 6.75 5/01/08 500 534,260
Dade Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., G.N.M.A., Ser. B Aaa 7.25 9/01/23 360 (d) 380,189
Sngl. Fam. Mtge., G.N.M.A., Ser. C Aaa 7.75 9/01/22 915 980,495
Dade Cnty. Pub. Facs. Rev., Jackson Mem. Hosp., Ser. A,
M.B.I.A. Aaa 4.875 6/01/15 3,000 2,621,640
Dade Cnty. Pub. Impvt. Rev., J & K Seaport, A.M.B.A.C. Aaa 6.50 10/01/26 5,500 5,739,140
Dade Cnty. Sch. Dist.,
Gen. Oblig. M.B.I.A. Aaa 5.00 8/01/11 1,235 1,147,710
Gen. Oblig. M.B.I.A. Aaa 5.00 8/01/13 1,500 1,365,750
Dade Cnty. Wtr. & Swr. Sys. Rev., F.G.I.C. Aaa 5.00 10/01/13 1,500 1,365,030
Duval Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge.,
G.N.M.A. AAA(g) 8.375 12/01/14 630 672,853
Enterprise Cmnty. Dev. Dist., Osceola Co. Spl. Assmnt.,
M.B.I.A. Aaa 6.00 5/01/10 2,320 2,427,973
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-71
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Inc., Ser. A BBB+(g) 8.70% 10/01/14 $ 1,830 $ 2,053,681
Escambia Cnty. Poll. Ctrl. Rev., Champion Int'l. Corp.
Proj. Baa1 6.90 8/01/22 3,500 3,663,695
Florida St. Brd. of Ed., Cap. Outlay Aa 5.125 6/01/22 1,000 887,700
Florida St. Dept. of Trans., Ser. A, A.M.B.A.C. Aaa 7.20 7/01/11 1,000(c)(e) 1,154,750
Florida St. Gen. Oblig., Ref. Dade Cnty. Rd. Aa 5.125 7/01/13 1,500 1,391,415
Gainesville Utils. Sys. Rev., Ser. A Aa 6.50 10/01/22 2,150 2,251,867
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj., Ser. 9 Aa2 8.00 5/01/22 1,750 2,080,995
Hillsborough Cnty. Solid Wst. & Res. Rec., M.B.I.A. Aaa 5.70 10/01/08 1,000 1,033,250
Jacksonville Elec. Auth. Rev.,
Elec. Sys. 3-B Aa1 5.20 10/01/13 1,000 920,670
St. Johns Rvr. Pwr. Park Aa1 Zero 10/01/10 3,000 1,264,560
Jacksonville Hlth. Facs. Auth. Hosp. Rev.,
Daughters Of Charity, Ser. A Aa 5.00 11/15/15 1,000 877,330
Nat'l. Ben. Assoc. Baa1 7.00 12/01/22 1,825 1,842,009
St. Lukes Hosp. Assoc. Proj. AA+(g) 7.125 11/15/20 1,000 1,077,790
Jacksonville Wtr. & Swr. Dev. Rev.,
United Water Florida Proj., A.M.B.A.C. Aaa 6.35 8/01/25 1,500 1,533,885
Suburban Utils. A3 6.75 6/01/22 1,000 1,066,470
Lake Cnty. Res. Rec. Ind. Dev. Rev., Ser. A Baa 5.95 10/01/13 1,035 971,751
Lee Cnty. Trans. Facs. Rev., A.M.B.A.C. Aaa 6.75 10/01/11 1,000 1,084,680
Leon Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. A, G.N.M.A. Aaa 7.30 4/01/21 445 470,917
Martin Cnty., A.M.B.A.C. Aaa 4.50 2/01/09 1,575 1,400,679
Martin Cnty. Ind. Dev. Auth. Rev., Indiantown Cogen
Proj. Baa3 7.875 12/15/25 1,200 1,329,444
Miami Hlth. Facs. Auth. Hosp. Rev., Mercy Hosp. A 8.125 8/01/11 1,000 1,098,500
Miami Spec. Oblig.,
Admin. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/16 1,500 1,507,515
Admin. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/25 500 502,925
Miramar Wstwtr. Impvt. Assmt., F.G.I.C. Aaa 6.75 10/01/16 2,500 2,683,150
Ocala Cap. Impvt. Rev., A.M.B.A.C. Aaa 5.00 10/01/18 3,000 2,654,880
Okaloosa Cnty. Cap. Impvt. Rev., M.B.I.A. Aaa Zero 12/01/06 450 252,023
Orange Cnty. Hlth. Facs. Auth., Adventist Hlth. Sys.,
A.M.B.A.C. Aaa 5.25 11/15/20 3,000 2,716,380
Orange Cnty. Hsg. Fin. Auth. Mtge. Rev.,
Ser. A, G.N.M.A. AAA(g) 7.375 9/01/24 420 448,505
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-72
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Orange Cnty. Hsg. Fin. Auth. Mtge. Rev.,
MultiFam. Ashley Point Apts. BBB+(g) 6.85% 10/01/16 $ 1,200 $ 1,228,896
MultiFam. Ashley Point Apts. BBB+(g) 7.10 10/01/24 855 878,812
Orange Cnty. Sales Tax Rev., Ser. B A1 5.375 1/01/24 2,000 1,833,020
Orlando & Orange Cnty. Expwy. Auth. Rev.,
Sr. Lein, A.M.B.A.C. Aaa 5.25 7/01/14 1,000 933,040
Jr. Lein A-(g) 5.95 7/01/23 1,750 1,687,665
Orlando Utils. Comn.,
Wtr. & Elec. Rev. Aa1 5.125 10/01/19 1,500 1,339,080
Wtr. & Elec. Rev. Aa 5.25 10/01/23 1,690 1,525,124
Wtr. & Elec. Rev., Ser. D Aa 6.75 10/01/17 4,200 (d) 4,738,314
Palm Beach Cnty. Arpt. Sys. Rev., M.B.I.A. Aaa 7.75 10/01/10 1,000 1,162,050
Palm Beach Cnty. Hlth. Facs. Auth. Rev.,
Good Samaritan Hlth. Sys. A+(g) 6.30 10/01/22 1,000 1,008,820
Pasco Cnty. Sch. Brd. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.40 8/01/06 1,000 1,067,120
Pensacola Hlth. Facs. Auth.,
Daughters of Charity, M.B.I.A. Aaa 5.25 1/01/11 1,600 1,520,624
Polk Cnty. Hsg. Fin. Auth.,
Sngle. Fam. Mtge., Ser. A, G.N.M.A Aaa 7.875 9/01/22 1,330 1,425,427
Polk Cnty. Sch. Brd., Ctfs. of Part., F.S.A. Aaa 4.875 1/01/18 1,000 864,680
Puerto Rico Gen. Oblig.,
M.B.I.A. Aaa 5.00 7/01/21 1,750 1,550,762
F.S.A. Aaa 7.723 7/01/20 3,000 (d)(f) 2,936,250
Puerto Rico Elec. Pwr. Auth. Rev., Ser. R Baa1 6.25 7/01/17 2,500 2,533,525
Puerto Rico Ind. Tour. Edl. Hosp. Auxil.,
Mut. Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/24 2,635 2,692,654
Puerto Rico Pub. Bldgs. Auth., A.M.B.A.C. Aaa 5.50 7/01/21 1,905 1,814,112
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.763 1/16/15 2,250 (f) 2,041,875
St Lucie Cnty. Sales Tax Rev., F.G.I.C. Aaa 5.00 10/01/19 2,500 2,206,650
St. Petersburg Hlth. Facs. Auth. Rev.,
Allegheny Hlth. Prog., M.B.I.A. Aaa 7.00 12/01/15 1,000 1,095,330
Tampa Allegheny Hlth. Sys. Rev., St. Mary's Hosp.,
M.B.I.A. Aaa 5.125 12/01/23 1,000 881,510
Tampa Gtd. Entitlement Rev., A.M.B.A.C. Aaa 7.05 10/01/07 2,000 2,263,680
Venice Hlth. Facs. Rev., Venice Hosp. Proj. A 5.75 12/01/24 1,250 1,163,213
Virgin Islands Pub. Fin. Auth. Rev.,
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 900 949,464
Virgin Islands Territory., Hugo Ins. Claims Fund Proj.,
Ser. 91 NR 7.75 10/01/06 1,335 1,454,723
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-73
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Volusia Cnty. Edl. Facs. Auth. Rev., AAA(g) 6.625% 10/15/22 $ 1,000 $ 1,049,770
Volusia Cnty. Hlth. Facs. Auth. Rev., Mem. Hlth. Sys.
Proj. BBB+(g) 8.25 6/01/20 2,000(c)(d) 2,331,900
------------
Total long-term investments (cost $124,734,361) 129,497,997
------------
SHORT-TERM INVESTMENTS--4.6%
Dade Cnty. Hlth. Facs. Auth. Rev., Miami Children's
Hosp. Proj., F.R.D.D. VMIG1 3.60% 9/01/95 1,100 1,100,000
Jacksonville Hlth. Facs. Auth. Rev., Baptist Med. Ctr.,
M.B.I.A., F.R.D.D. VMIG1 3.55 9/01/95 1,500 1,500,000
Pinellas Cnty. Hlth. Facs. Auth. Rev., Pooled Hosp. Loan
Proj., F.R.D.D. VMIG1 3.55 9/01/95 1,100 1,100,000
St Lucie Cnty. Pwr. & Lt. Rev., T.E.C.P. VMIG1 3.60 10/30/95 2,700 2,700,000
------------
Total short-term investments (cost $6,400,000) 6,400,000
------------
Total Investments--98.2%
(cost $131,134,361; Note 5) 135,897,997
Other assets in excess of liabilities--1.8% 2,418,946
------------
Net Assets--100% $138,316,943
------------
------------
</TABLE>
- ---------------
<TABLE>
<C> <S>
(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.(b)
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of
the next date on which the security can be redeemed at par or the next date on which the rate of interest is adjusted.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(d) Indicates a when-issued security.
(e) Pledged as initial margin on financial futures contracts.
(f) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
(g) Standard & Poor's rating.
N.R.--Not Rated by Moody's or Standard & Poor's.
</TABLE>
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-74
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $131,134,361).................................................................... $135,897,997
Cash......................................................................................................... 102,822
Interest receivable.......................................................................................... 2,329,970
Receivable for investments sold.............................................................................. 1,044,814
Due from Manager............................................................................................. 201,510
Receivable for Fund shares sold.............................................................................. 72,952
Due from Distributors........................................................................................ 13,827
Prepaid expenses............................................................................................. 2,745
------------
Total assets.............................................................................................. 139,666,637
------------
Liabilities
Payable for Fund shares reacquired........................................................................... 1,101,410
Accrued expenses and other liabilities....................................................................... 173,277
Dividends payable............................................................................................ 44,501
Due to broker - variation margin payable..................................................................... 28,906
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 1,349,694
------------
Net Assets................................................................................................... $138,316,943
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 137,510
Paid-in capital in excess of par.......................................................................... 138,281,465
------------
138,418,975
Accumulated net realized loss on investments.............................................................. (4,818,793)
Net unrealized appreciation on investments................................................................ 4,716,761
------------
Net assets, August 31, 1995.................................................................................. $138,316,943
------------
------------
Class A:
Net asset value and redemption price per share
($120,962,492 / 12,025,745 shares of beneficial interest issued and outstanding)....................... $10.06
Maximum sales charge (3.0% of offering price)............................................................. .31
------------
Maximum offering price to public.......................................................................... $10.37
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($8,326,253 / 827,698 shares of beneficial interest issued and outstanding)............................ $10.06
------------
------------
Class C:
Net asset value, offer price and redemption price per share
($9,028,198 / 897,559 shares of beneficial interest issued and outstanding)............................ $10.06
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-75
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 8,710,600
---------------
Expenses
Management fee, net waiver of $464,337... 231,778
Distribution fee--Class A, net waiver of
$41,745............................... 82,514
Distribution fee--Class B................ 23,495
Distribution fee--Class C................ 76,991
Custodian's fees and expenses............ 135,000
Transfer agent's fees and expenses....... 65,000
Reports to shareholders.................. 60,000
Registration fees........................ 42,000
Audit fee................................ 11,000
Legal fees............................... 16,000
Trustees' fees........................... 3,200
Miscellaneous............................ 17,037
---------------
Total expenses........................ 764,015
Less: expense subsidy (Note 4)........... (349,237)
Less: custodian fee credit............... (17,642)
---------------
Net expenses.......................... 397,136
---------------
Net investment income....................... 8,313,464
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions.................. (3,626,120)
Financial futures contracts.............. (529,354)
---------------
(4,155,474)
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 6,157,898
Financial futures contracts.............. (132,656)
---------------
6,025,242
---------------
Net gain on investments..................... 1,869,768
---------------
Net Increase in Net Assets
Resulting from Operations................... $10,183,232
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income.......... $ 8,313,464 $ 8,768,570
Net realized loss on investment
transactions................ (4,155,474) (8,676)
Net change in unrealized
appreciation (depreciation)
of investments.............. 6,025,242 (11,870,836)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 10,183,232 (3,110,942)
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A..................... (7,502,100) (8,305,093)
Class B..................... (262,158) (582)
Class C..................... (549,206) (462,895)
------------ ------------
(8,313,464) (8,768,570)
------------ ------------
Distributions to shareholders
from net realized gains
Class A..................... -- (2,821,851)
Class B..................... -- --
Class C..................... -- (142,331)
------------ ------------
-- (2,964,182)
------------ ------------
Series share transactions (Note 6)
Net proceeds from shares
sold........................ 26,011,068 35,379,732
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 3,653,143 5,323,495
Cost of shares reacquired...... (39,832,414) (31,275,509)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (10,168,203) 9,427,718
------------ ------------
Total decrease.................... (8,298,435) (5,415,976)
Net Assets
Beginning of year................. 146,615,378 152,031,354
------------ ------------
End of year....................... $138,316,943 $146,615,378
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-76
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Options: The Series may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Series currently owns or intends to purchase.
When the Series purchases an option, it pays a premium and an amount equal to
that premium is recorded as an investment. When the Series writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Series
realizes a gain or loss to the extent of the premium received or paid. If an
option is exercised, the premium received or paid is an adjustment to the
proceeds from the sale or the cost basis of the purchase in determining whether
the Series has realized a gain or loss. The difference between the premium and
the amount received or paid on effecting a closing purchase or sale transaction
is also treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Series, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Series bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Series, as purchaser of
an option, bears the risk of the potential inability of the counterparties to
meet the terms of their contracts.
- --------------------------------------------------------------------------------
B-77
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
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.
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
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. For the four
months ended December 31, 1994, PMF waived 60% of its management fee. For the
eight months ended August 31, 1995, PMF waived 70% of its management fee. The
amount of fees waived during the year ended August 31, 1995 amounted to $464,337
($.03 per share for Class A, B and C shares; .33% of average net assets). The
Series is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and .75 of 1%, of the average daily net assets of the Class A, B and C
shares, respectively. With respect to the Class A Plan, PMFD voluntarily agreed
to waive its distribution fee, currently limited to .10 of 1% of average net
assets, for the period September 1, 1994 through December 31, 1994. Effective
January 1, 1995, PMFD eliminated its waiver. The amount of distribution fees
waived by PMFD was $41,745 ($.003 per share for Class A shares; .03% of Class A
average net assets) for the fiscal year ended August 31, 1995. Such expenses
under the Class A, B and C Plans were .07 of 1%, .50 of 1% and .75 of 1% of the
average daily net assets, respectively, for the fiscal year ended August 31,
1995.
PMFD has advised the Series that it has received approximately $170,300 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $7,500 and $1,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
- --------------------------------------------------------------------------------
B-78
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $41,700 for the services of PMFS. As
of August 31, 1995, approximately $3,200 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Expense Subsidy
PMF voluntarily subsidized all operating expenses (except management and
distribution fees) of the Class A, Class B and Class C shares of the Series
until further notice. For the year ended August 31, 1995, PMF subsidized
$349,237 ($.03 per share for Class A, B and C shares; .25% of average net
assets) of the Series' expenses. The Series is not required to reimburse PMF for
such subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended August 31, 1995 were $86,432,314 and $102,993,871,
respectively.
The cost basis of investments for federal income tax purposes as of August 31,
1995 was $131,135,611 and, accordingly, net unrealized appreciation was
$4,762,386 (gross unrealized appreciation--$6,087,823; gross unrealized
depreciation--$1,325,437).
The Series has a capital loss carryforward of $2,726,000, which expires in 2003.
The Series will elect to treat net realized capital losses of approximately
$2,138,200 incurred in the ten month period ended August 31, 1995 as having been
incurred in the following fiscal year.
At August 31, 1995 the Series sold 55 financial futures contracts on the
Municipal Bond Index expiring in September 1995. The value at disposition of
such contracts was $6,202,344. The value of such contracts on August 31, 1995
was $6,249,219, thereby resulting in an unrealized loss of $46,875.
- ------------------------------------------------------------
Note 6. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares, which prior to August
1, 1994 were known as D shares, are sold with a contingent deferred sales charge
of 1% during the first year. Class B shares will automatically convert to Class
A shares on a quarterly basis approximately seven years after purchase.
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, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 1,647,106 $ 15,829,864
Shares issued in reinvestment of
dividends......................... 327,990 3,198,613
Shares reacquired................... (3,554,066) (34,407,990)
---------- ------------
Net decrease in shares
outstanding....................... (1,578,970) $(15,379,513)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 2,274,149 $ 24,062,897
Shares issued in reinvestment of
dividends and distributions....... 475,125 4,935,129
Shares reacquired................... (2,838,050) (29,205,030)
---------- ------------
Net decrease in shares
outstanding....................... (88,776) $ (207,004)
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 945,274 $ 9,166,110
Shares issued in reinvestment of
dividends......................... 11,460 113,360
Shares reacquired................... (187,734) (1,825,550)
---------- ------------
Net increase in shares
outstanding....................... 769,000 $ 7,453,920
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold......................... 58,689 $ 579,300
Shares issued in reinvestment of
dividends......................... 24 235
Shares reacquired................... (15) (150)
---------- ------------
Net increase in shares
outstanding....................... 58,698 $ 579,385
---------- ------------
---------- ------------
</TABLE>
- ------------------
* Commencement of offering of Class B shares.
- --------------------------------------------------------------------------------
B-79
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 104,420 $ 1,015,094
Shares issued in reinvestment of
dividends......................... 34,986 341,170
Shares reacquired................... (370,059) (3,598,874)
---------- ------------
Net decrease in shares
outstanding....................... (230,653) $ (2,242,610)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 1,004,802 $ 10,737,535
Shares issued in reinvestment of
dividends and distributions....... 37,628 388,131
Shares reacquired................... (202,212) (2,070,329)
---------- ------------
Net increase in shares
outstanding....................... 840,218 $ 9,055,337
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-80
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------------------- -----------
December 28,
1990(a)
Years Ended August 31, through Year Ended
----------------------------------------------- August 31, August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 9.55 $ 9.91
-------- -------- -------- -------- --------- -----------
Income from investment operations
Net investment income(c)................ .59 .59 .57 .65 .44 .55
Net realized and unrealized gain (loss)
on investment transactions........... .15 (.76) .73 .51 .21 .15
-------- -------- -------- -------- --------- -----------
Total from investment operations..... .74 (.17) 1.30 1.16 .65 .70
-------- -------- -------- -------- --------- -----------
Less distributions
Dividends from net investment income.... (.59) (.59) (.57) (.65) (.44) (.55)
Distributions from net realized gains... -- (.20) (.13) -- -- --
-------- -------- -------- -------- --------- -----------
Total distributions.................. (.59) (.79) (.70) (.65) (.44) (.55)
-------- -------- -------- -------- --------- -----------
Net asset value, end of period.......... $ 10.06 $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 10.06
-------- -------- -------- -------- --------- -----------
-------- -------- -------- -------- --------- -----------
TOTAL RETURN(f):........................ 7.85% (1.69)% 13.78% 12.26% 6.90% 7.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $120,963 $134,849 $148,900 $104,335 $63,929 $8,326
Average net assets (000)................ $124,259 $146,489 $123,820 $ 82,893 $41,528 $4,699
Ratios to average net assets(c):
Expenses, including distribution
fees.............................. .24% .20% .20% .09% 0 .67%
Expenses, excluding distribution
fees.............................. .17% .20% .20% .09% 0 .17%
Net investment income................ 6.04% 5.67% 5.94% 6.41% 6.68%(b) 5.56%
Portfolio turnover rate................. 65% 75% 68% 56% 39% 65%
<CAPTION>
Class B Class C
------------ -----------------------------------
<S> <C> <C> <C> <C>
August 1, July 26,
1994(e) Years Ended August 1993(d)
through 31, through
August 31, ------------------- August 31,
1994 1995 1994 1993
---------- ------- ------- -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.95 $ 9.91 $ 10.87 $ 10.58
-------- ------- ------- -----------
Income from investment operations
Net investment income(c)................ .04 .53 .48 .03
Net realized and unrealized gain (loss)
on investment transactions........... (.04) .15 (.76) .29
-------- ------- ------- -----------
Total from investment operations..... -- .68 (.28) .32
-------- ------- ------- -----------
Less distributions
Dividends from net investment income.... (.04) (.53) (.48) (.03)
Distributions from net realized gains... -- -- (.20) --
-------- ------- ------- -----------
Total distributions.................. (.04) (.53) (.68) (.03)
-------- ------- ------- -----------
Net asset value, end of period.......... $ 9.91 $ 10.06 $ 9.91 $ 10.87
-------- ------- ------- -----------
-------- ------- ------- -----------
TOTAL RETURN(f):........................ (0.05)% 7.12% (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $582 $9,028 $11,185 $3,132
Average net assets (000)................ $118 $10,265 $ 9,280 $1,038
Ratios to average net assets(c):
Expenses, including distribution
fees.............................. .70%(b) .92% .95% .95%(b)
Expenses, excluding distribution
fees.............................. .20%(b) .17% .20% .20%(b)
Net investment income................ 6.21%(b) 5.35% 4.99% 5.19%(b)
Portfolio turnover rate................. 75% 65% 75% 68%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and fee waiver.
(d) Commencement of offering of Class C shares. Prior to August 1, 1994, Class C shares were called Class D shares.
(e) Commencement of offering of Class B shares.
(f) 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-81
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report FLORIDA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Florida Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Florida
Series, as of August 31, 1995, 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 four 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, 1995 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, Florida Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-82
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.3%
- ------------------------------------------------------------------------------------------------------------------------------
Guam Gov't., Ser. A BBB(e) 5.90% 9/01/05 $ 500 $496,650
Guam Pwr. Auth. Rev.,
Ser. A BBB(e) 6.625 10/01/14 250 256,192
Ser. A BBB(e) 6.75 10/01/24 525 536,046
Hawaii St. Arpt. Sys. Rev. A 7.00 7/01/18 365 382,630
Hawaii St. Arpt. Sys. Rev., 2nd Ser. 90, F.G.I.C. Aaa 7.50 7/01/20 500 551,370
Hawaii St. Dept. Budget & Fin.,
Kapiolani Hlth. Care Sys. A 6.30 7/01/08 500 511,340
Mtg. Rev., Hawaiian Elec. Co., Ser. C, M.B.I.A. Aaa 7.375 12/01/20 500 554,055
Queens Med. Ctr. Proj., F.G.I.C. Aaa 5.90 7/01/07 230 238,627
Hawaii St. Harbor Cap. Impvt. Rev.,
F.G.I.C. Aaa 6.25 7/01/10 250 (d) 260,972
F.G.I.C. Aaa 6.25 7/01/15 500 509,800
Hawaii St. Hsg. Fin. & Dev. Corp., Sngl. Fam. Mtge. Rev.,
Ser. B, F.N.M.A. Aa 5.85 7/01/17 500 486,740
Hawaii St., Gen. Oblig., Ser. CJ Aa 6.25 1/01/15 650 667,017
Honolulu Hawaii City & Cnty., Ser. D Aaa 6.70 12/01/02 450 (c) 500,463
Maui Cnty., Ref., F.G.I.C. Aaa 5.125 12/15/10 500 478,740
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.45 7/01/17 500 516,875
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O,
(Frmly. Puerto Rico Comnwlth.Wtr. Res. Auth.) Baa1 5.00 7/01/12 600 536,910
Puerto Rico Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev.,
G.N.M.A. Aaa 6.40 10/15/06 750 797,205
Puerto Rico Hwy. & Trans. Auth. Rev. Baa1 6.375 7/01/08 500 526,305
Puerto Rico Ind., Tourist, Edu., Med. & Envir. Ctrl. Facs.,
Doctor Pila Hosp. Proj., F.H.A. AAA(e) 6.125 8/01/25 500 (b) 501,855
Hosp. Auxilio Mutuo Oblig. Grp. Proj.,
M.B.I.A. Aaa 6.25 7/01/16 500 515,305
M.B.I.A. Aaa 6.25 7/01/24 250 255,470
Puerto Rico Mun. Fin. Agcy., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 253,553
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 5.449 1/16/15 1,000 953,940
Puerto Rico Univ. Rev., Ser. M, M.B.I.A. Aaa 5.25 6/01/25 750 685,853
Univ. of Hawaii Sys. Rev., Ser. G, A.M.B.A.C. Aaa 5.45 10/01/06 280 287,039
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-83
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Virgin Islands Pub. Fin. Auth. Rev.,
Gov't. Dev. Proj., Ser. B BBB-(e) 7.375% 10/01/10 $ 300 $ 327,402
Hwy. Trans. Trust Fund, Ser. A NR 7.25 10/01/18 250 263,740
-----------
Total long-term investments (cost $12,356,446) 12,852,094
SHORT-TERM INVESTMENTS--6.1%
Hawaii St. Dept. Budget & Fin., Adventist Hlth. Sys/West,
Ser. 94, F.R.W.D. VMIG1 3.35 9/06/95 100 100,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 700 700,000
-----------
Total short-term investments (cost $800,000) 800,000
Total Investments--104.4%
(cost $13,156,446; Note 5) 13,652,094
Liabilities in excess of other assets--(4.4)% (572,880)
-----------
Net Assets--100% $13,079,214
-----------
-----------
</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.N.M.A.--Federal National Mortgage Association.
F.R.W.D.--Floating Rate Weekly Demand Note(f).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Indicates a when-issued security.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Pledged as initial margin on financial futures contracts.
(e) Standard & Poor's rating.
(f) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-84
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $13,156,446)...................................................................... $13,652,094
Cash.......................................................................................................... 62,256
Interest receivable........................................................................................... 177,528
Receivable for Fund shares sold............................................................................... 36,768
Due from Manager.............................................................................................. 1,635
Other assets.................................................................................................. 84,982
-----------
Total assets............................................................................................... 14,015,263
-----------
Liabilities
Payable for investments purchased............................................................................. 497,347
Payable for Fund shares reacquired............................................................................ 379,881
Accrued expenses.............................................................................................. 43,028
Dividends payable............................................................................................. 7,696
Distribution fee payable...................................................................................... 4,528
Due to broker - variation margin payable...................................................................... 2,969
Deferred trustees' fees....................................................................................... 600
-----------
Total liabilities.......................................................................................... 936,049
-----------
Net Assets.................................................................................................... $13,079,214
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 10,784
Paid-in capital in excess of par........................................................................... 12,492,346
-----------
12,503,130
Accumulated net realized gain on investments............................................................... 94,967
Net unrealized appreciation on investments................................................................. 481,117
-----------
Net assets, August 31, 1995................................................................................... $13,079,214
-----------
-----------
Class A:
Net asset value and redemption price per share
($3,333,130 / 274,820 shares of beneficial interest issued and outstanding)............................. $12.13
Maximum sales charge (3.0% of offering price).............................................................. .38
Maximum offering price to public........................................................................... $12.51
Class B:
Net asset value, offering price and redemption price per share
($8,948,854 / 737,840 shares of beneficial interest issued and outstanding)............................. $12.13
Class C:
Net asset value, offer price and redemption price per share
($797,230 / 65,733 shares of beneficial interest issued and outstanding)................................ $12.13
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-85
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PRUDENTIAL MUNICIPAL SERIES FUND
HAWAII INCOME SERIES HAWAII INCOME SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
September 19, 1994D
through
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................ $ 524,323
---------------
Expenses
Management fee, net of waiver of
$3,651............................... 41,133
Distribution fee--Class A............... 2,641
Distribution fee--Class B............... 29,804
Distribution fee--Class C............... 2,659
Custodian's fees and expenses........... 58,000
Reports to shareholders................. 33,000
Registration fees....................... 26,000
Legal fees.............................. 17,000
Amortization of organization expenses... 13,935
Audit fee............................... 11,000
Transfer agent's fees and expenses...... 3,600
Trustees' fees.......................... 3,200
Miscellaneous........................... 4,398
---------------
Total expenses....................... 246,370
---------------
Less: expense subsidy (Note 4).......... (179,090)
---------------
Net expenses......................... 67,280
---------------
Net investment income...................... 457,043
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................. 100,147
Financial futures contract
transactions......................... (5,180)
---------------
94,967
---------------
Net change in unrealized appreciation/depreciation on:
Investments............................. 495,648
Financial futures contracts............. (14,531)
---------------
481,117
---------------
Net gain on investments.................... 576,084
---------------
Net Increase in Net Assets
Resulting from Operations.................. $ 1,033,127
---------------
---------------
</TABLE>
- ------------
D Commencement of investment operations.
<TABLE>
<CAPTION>
Increase (Decrease) September 19, 1994D
in Net Assets August 31, 1995
<S> <C>
Operations
Net investment income..................... $ 457,043
Net realized gain on investment
transactions........................... 94,967
Net change in unrealized appreciation of
investments............................ 481,117
---------------
Net increase in net assets resulting from
operations............................. 1,033,127
---------------
Dividends from net investment income
(Note 1):
Class A................................ (140,503)
Class B................................ (299,569)
Class C................................ (16,971)
---------------
(457,043)
---------------
Series share transactions (net of share
conversions) (Note 6):
Net proceeds from shares sold............. 13,508,423
Net asset value of shares issued
in reinvestment of dividends........... 199,822
Cost of shares reacquired................. (1,205,115)
---------------
Net increase in net assets from Series
share transactions..................... 12,503,130
---------------
Total increase............................... 13,079,214
Net Assets
Beginning of period.......................... 0
---------------
End of period................................ $13,079,214
---------------
---------------
</TABLE>
- ------------
D Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-86
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
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
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Hawaii Income Series (the ``Series'')
commenced investment operations on September 19, 1994. The Series is
non-diversified and seeks to provide the maximum amount of income that is exempt
from Hawaii State and federal income taxes consistent with the preservation of
capital by investing in investment grade municipal obligations but may also
invest a portion of its assets in lower-quality municipal obligations or in
non-rated securities which, in the opinion of the Fund's investment adviser, are
of comparable quality. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic or political
developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain(loss) on
financial futures contracts. The Series invests in financial futures contracts
in order to hedge its existing portfolio securities or securities the Series
intends to purchase, against fluctuations in value caused by changes in
prevailing interest rates. Should interest rates move unexpectedly, the Series
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts, interest
rates and the underlying hedged assets.
Securities Transactions and 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.
Deferred Organization Expenses: The Series incurred $98,700 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending September 1999.
- -------------------------------------------------------------------------------
B-87
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $3,651
($0.004 per share for Class A, B, and C shares; .04% of average net assets). The
Series is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the period ended August 31, 1995.
PMFD has advised the Series that it has received approximately $19,600 in
front-end sales charges resulting from sales of Class A shares during the period
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the period ended August 31, 1995, it
received approximately $12,700 and $100 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended August 31,
1995, the Series incurred fees of approximately $2,500 for the services of PMFS.
As of August 31, 1995, approximately $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. Expense Subsidy
PMF has agreed to subsidize expenses so that total operating expenses do not
exceed .50%, .90% and 1.15% of the average net assets of the Class A shares,
Class B shares and Class C shares, respectively until further notice. For the
period ended August 31, 1995, PMF subsidized $179,090 ($.22 per share for Class
A, B and C shares; 2.00% of average net assets) of the Series' expenses. The
Series is not required to reimburse PMF for such subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the period ended August 31, 1995 were $16,927,504 and
$4,671,596, respectively.
At August 31, 1995, the Fund sold 5 financial futures contracts on the U.S.
Treasury Index which expire in September 1995. The value at disposition of such
contracts is $565,781. The value of such contracts on August 31, 1995 was
$551,250, thereby resulting in an unrealized loss of $14,531.
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,
1995, net unrealized appreciation for federal income tax purposes was $495,648
(gross unrealized appreciation--$507,204; gross unrealized
depreciation--$11,556).
- --------------------------------------------------------------------------------
B-88
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 6. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Of the 1,078,393 shares of beneficial
interest issued and outstanding at August 31, 1995, PMF owned 171,851 shares.
Transactions in shares of beneficial interest for the period ended August 31,
1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------------- -------- ----------
<S> <C> <C>
September 19, 1994* through
August 31, 1995:
Shares sold............................ 279,870 $3,255,106
Shares issued in reinvestment of
dividends and distributions.......... 1,566 18,665
Shares reacquired...................... (10,702) (123,633)
-------- ----------
Net increase in shares outstanding
before conversion.................... 270,734 $3,150,138
Shares issued upon conversion from
Class B.............................. 4,086 49,084
-------- ----------
Net increase in shares outstanding..... 274,820 $3,199,222
-------- ----------
-------- ----------
<CAPTION>
Class B
- ---------------------------------------
<S> <C> <C>
September 19, 1994* through
August 31, 1995:
Shares sold............................ 816,861 $9,471,988
Shares issued in reinvestment of
dividends and distributions.......... 14,410 171,145
Shares reacquired...................... (89,345) (1,066,264)
-------- ----------
Net decrease in shares outstanding
before conversion.................... 741,926 8,576,869
Shares reacquired upon conversion into
Class A.............................. (4,086) (49,084)
-------- ----------
Net decrease in shares outstanding..... 737,840 $8,527,785
-------- ----------
-------- ----------
<CAPTION>
Class C Shares Amount
- --------------------------------------- -------- ----------
<S> <C> <C>
September 19, 1994* through
August 31, 1995:
Shares sold............................ 66,136 $ 781,329
Shares issued in reinvestment of
dividends............................ 845 10,012
Shares reacquired...................... (1,248) (15,218)
-------- ----------
Net increase in shares outstanding..... 65,733 $ 776,123
-------- ----------
-------- ----------
</TABLE>
- ---------------
* Commencement of investment operations.
- --------------------------------------------------------------------------------
B-89
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 19, 1994(b) through August 31, 1995
-----------------------------------------------------
Class A Class B Class C
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 11.64 $ 11.64 $ 11.64
----- ----- -----
Income from investment operations
Net investment income(d)................................................. .58 .54 .51
Net realized and unrealized gain (loss) on investment transactions....... .49 .49 .49
----- ----- -----
Total from investment operations...................................... 1.07 1.03 1.00
----- ----- -----
Less distributions
Dividends from net investment income..................................... (.58) (.54) (.51)
----- ----- -----
Net asset value, end of period........................................... $ 12.13 $ 12.13 $ 12.13
----- ----- -----
----- ----- -----
TOTAL RETURN(c):......................................................... 9.42% 9.03% 8.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 3,333 $ 8,949 $ 797
Average net assets (000)................................................. $ 2,778 $ 6,270 $ 373
Ratios to average net assets:(a)/(d)
Expenses, including distribution fees................................. .46% .86% 1.11%
Expenses, excluding distribution fees................................. .36% .36% .36%
Net investment income................................................. 5.32% 5.03% 4.79%
Portfolio turnover rate.................................................. 75% 75% 75%
</TABLE>
- ---------------
(a) Annualized.
(b) Commencement of investment operations.
(c) 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. Total return is not annualized.
(d) Net of expense subsidy and management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-90
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Hawaii Income Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Hawaii Income
Series as of August 31, 1995, the related statements of operations and of
changes in net assets and the financial highlights for the period September 19,
1994 (Commencement of investment operations) to August 31, 1995. 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 audit.
We conducted our audit 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, 1995
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 audit provides 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, Hawaii Income Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
above stated period in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-91
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--93.7%
- ------------------------------------------------------------------------------------------------------------------------------
Baltimore Conv. Ctr. Rev., F.G.I.C. Aaa 5.75% 9/01/08 $ 1,075 $ 1,103,853
Baltimore Econ. Dev. Lease Rev., Armistead Partnership BBB+(c) 7.00 8/01/11 1,000 1,044,210
Gaithersburg Econ. Dev. Rev., Asbury Methodist NR 5.50 1/01/20 1,000 874,080
Gaithersburg Hosp. Facs. Rev., Ref. Impvt., Shady Grove
Adventist Hosp., F.S.A. Aaa 5.50 9/01/15 1,000 955,650
Gaithersburg Nursing Home Rev., Ref., Shady Grove
Adventist, F.S.A Aaa 5.50 9/01/15 1,000 955,650
Howard Cnty., Met. Dist.,
Ser. B Aa1 6.00 8/15/03 1,000 1,085,430
Ser. B Aa1 Zero 8/15/09 2,115 995,932
Kent Cnty., Coll. Rev. Proj. & Ref., Washington Coll. Proj. Baa1 7.70 7/01/18 750 822,788
Maryland St. Econ. Dev. Co., Hilton Street Facility, Ser. A AA(c) 7.00 1/01/10 600 654,234
Maryland St. Hlth. & Higher Edl. Facs., Auth. Rev.,
Doctor's Comn. Hosp. Baa 5.50 7/01/24 1,000 806,730
Howard Cnty. Gen. Hosp. Baa1 5.50 7/01/21 1,000 834,770
Sinai Hosp. of Baltimore, A.M.B.A.C. Aaa 5.25 7/01/19 500 456,265
Sinai Hosp. of Baltimore, A.M.B.A.C. Aaa 5.25 7/01/23 350 315,966
Univ. of Md. Med. Ctr., F.G.I.C. Aaa 5.00 7/01/20 1,000 875,140
Maryland St. Hsg. & Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev. Proj., Fourth Ser. Aa 7.70 4/01/15 920 974,547
Sngl. Fam. Mtge. Rev. Proj., Sixth Ser. Aa 7.125 4/01/14 835 879,547
Sngl. Fam. Mtge. Rev. Proj., Third Ser. Aa 8.00 4/01/18 750 798,773
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. For
Physics BBB(c) 6.625 1/01/17 1,000 1,007,120
Maryland Wtr. Quality Fin. Admin.,
Revolving Loan Fund Rev. Aa 5.40 9/01/13 250 239,188
Revolving Loan Fund Rev., Ser. A Aa 5.90 9/01/04 565 606,143
Montgomery Cnty. Hsg. Opportunities Comn., Sngl. Fam. Mtge.
Rev., F.H.A. AAA(c) 6.25 7/01/25 850 849,898
Montgomery Cnty.,
Cons. Pub. Impvt. Aaa 9.75 6/01/01 450 569,245
Cons. Pub. Impvt., Ser. A Aaa 5.75 10/01/07 1,300 1,374,191
Northeast Waste Disp. Auth.,
Baltimore City Sludge Proj. NR 7.25 7/01/07 957 985,595
Montgomery Cnty. Proj. A 6.30 7/01/16 2,200 2,202,948
Prince Georges Cnty.,
Cons. Pub. Impvt., M.B.I.A. Aaa 5.25 1/01/15 750 708,188
Hosp. Rev., Dimensions Hlth. Corp. A 5.30 7/01/24 1,250 1,058,437
Ref. Cons. Pub. Impvt. A1 5.25 10/01/11 1,000 964,170
Stormwater Mgmt. Aa 6.50 3/15/03 1,140 1,265,913
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-92
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Comnwlth.,
Aqueduct & Swr. Auth. Rev. Aaa 10.25% 7/01/09 $ 225 $ 316,368
Gen. Oblig., F.S.A. Aaa 7.683 7/01/20 1,000 (d) 978,750
Puerto Rico Elec. Pwr. Auth. Pwr. Rev. Baa1 6.125 7/01/09 785 813,542
Puerto Rico Ind. Tourist, Edl. Med. & Envir. Hosp.,
M.B.I.A. Aaa 6.25 7/01/24 1,250 1,277,350
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.763 1/16/15 1,000 (d) 907,500
Takoma Park Hosp. Facs. Rev., Ref. Impvt., Washington
Adventist Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,080,670
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund, Ser. A NR 7.25 10/01/18 600 632,976
Washington Cnty. Public Impvt., F.G.I.C. Aaa 4.875 1/01/14 1,450 (e) 1,286,208
Washington Suburban San. Dist.,
Gen. Construction Aa1 5.25 6/01/12 1,500 1,436,970
Water Supply Aa1 5.25 6/01/14 950 891,689
Water Supply Aa1 5.25 6/01/13 875 829,439
-----------
Total long-term investments (cost $35,547,405) 36,716,063
-----------
SHORT-TERM INVESTMENTS--6.6%
Maryland St. Energy Fin. Auth., Baltimore Proj., F.R.D.D.,
Ser. 91 VMIG1 3.55 9/01/95 700 700,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., F.R.W.D., Ser. 85 VMIG1 3.20 9/06/95 1,900 1,900,000
-----------
Total short-term investments (cost $2,600,000) 2,600,000
-----------
Total Investments--100.3%
(cost $38,147,405; Note 4) 39,316,063
Liabilities in excess of other assets--(0.3)% (124,391)
-----------
Net Assets--100% $39,191,672
-----------
-----------
</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 (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) 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-93
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $38,147,405)..................................................................... $ 39,316,063
Cash......................................................................................................... 502,086
Interest receivable.......................................................................................... 557,284
Receivable for investments sold.............................................................................. 10,297
Receivable for Fund shares sold.............................................................................. 1,570
Other assets................................................................................................. 1,484
------------
Total assets............................................................................................... 40,388,784
------------
Liabilities
Payable for investments purchased............................................................................ 986,738
Payable for Fund shares reacquired........................................................................... 94,943
Accrued expenses............................................................................................. 62,300
Management fee payable....................................................................................... 14,951
Dividends payable............................................................................................ 13,896
Due to broker-variation margin............................................................................... 12,031
Distribution fee payable..................................................................................... 10,653
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities.......................................................................................... 1,197,112
------------
Net Assets................................................................................................... $ 39,191,672
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 36,754
Paid-in capital in excess of par........................................................................... 38,549,190
------------
38,585,944
Accumulated net realized loss on investments............................................................... (558,711)
Net unrealized appreciation on investments................................................................. 1,164,439
------------
Net assets, August 31, 1995.................................................................................. $ 39,191,672
------------
------------
Class A:
Net asset value and redemption price per share
($17,725,981 / 1,663,449 shares of beneficial interest issued and outstanding).......................... $10.66
Maximum sales charge (3.0% of offering price).............................................................. .33
Maximum offering price to public........................................................................... $10.99
Class B:
Net asset value, offering price and redemption price per share
($21,413,564 / 2,007,101 shares of beneficial interest issued and outstanding).......................... $10.67
Class C:
Net asset value, offering price and redemption price per share
($52,127 / 4,886 shares of beneficial interest issued and outstanding).................................. $10.67
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-94
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................... $ 2,833,827
---------------
Expenses
Management fee, net of waiver of $14,170... 210,311
Distribution fee--Class A.................. 11,341
Distribution fee--Class B.................. 167,486
Distribution fee--Class C.................. 437
Reports to shareholders.................... 82,000
Custodian's fees and expenses.............. 79,000
Registration fees.......................... 45,000
Transfer agent's fees and expenses......... 36,000
Audit fee.................................. 11,000
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 11,429
---------------
Total expenses.......................... 667,204
Less: custodian fee credit................. (19,273)
---------------
Net expenses............................ 647,931
---------------
Net investment income......................... 2,185,896
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on:
Investment transactions.................... (48,440)
Financial futures contract transactions.... (381,131)
---------------
(429,571)
---------------
Net change in unrealized
appreciation/depreciation of:
Investments................................ 481,333
Financial futures contracts................ (38,532)
---------------
442,801
---------------
Net gain on investments....................... 13,230
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,199,126
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income............ $ 2,185,896 $ 2,785,557
Net realized gain (loss) on
investment transactions....... (429,571) 658,135
Net change in unrealized
appreciation/depreciation of
investments................... 442,801 (4,715,895)
----------- -----------
Net increase (decrease) in net
assets resulting from
operations.................... 2,199,126 (1,272,203)
----------- -----------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A....................... (561,997) (149,002)
Class B....................... (1,621,246) (2,636,439)
Class C....................... (2,653) (116)
----------- -----------
(2,185,896) (2,785,557)
----------- -----------
Distributions from net realized
gains
Class A....................... (21,234) (53,117)
Class B....................... (419,138) (1,057,112)
Class C....................... (255) --
----------- -----------
(440,627) (1,110,229)
----------- -----------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares sold.... 2,121,739 5,404,805
Net asset value of shares issued
in reinvestment of dividends
and distributions............. 1,744,018 2,685,739
Cost of shares reacquired........ (18,256,314) (9,441,263)
----------- -----------
Net decrease in net assets from
Series share transactions..... (14,390,557) (1,350,719)
----------- -----------
Total decrease...................... (14,817,954) (6,518,708)
Net Assets
Beginning of year................... 54,009,626 60,528,334
----------- -----------
End of year......................... $39,191,672 $54,009,626
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-95
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
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. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net
realized gain (loss) on financial futures contracts. The Series invests in
financial futures contracts in order to hedge its existing portfolio securities
or securities the Series intends to purchase, against fluctuations in value
caused by changes in prevailing interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and 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
- --------------------------------------------------------------------------------
B-96
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $14,170
($0.004 per share for Class A, B and C shares; .03% of average net assets). The
Series' is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $3,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $134,200 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
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 With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $25,900 for the services of PMFS. As
of August 31, 1995, approximately $2,100 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 Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $20,811,030 and
$35,356,008, respectively.
At August 31, 1995, the Fund sold 25 financial futures contracts on the
Municipal Bond Index expiring in 1995. The value at disposition of such
contracts is $2,843,906. The value of such contracts on August 31, 1995 was
$2,848,125, thereby resulting in an unrealized loss of $4,219.
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,
1995, net unrealized appreciation of investments for federal income tax purposes
is $1,168,658 (gross unrealized appreciation--$1,478,098; gross unrealized
depreciation $309,440).
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
- --------------------------------------------------------------------------------
B-97
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
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, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 30,696 $ 321,277
Shares issued in reinvestment of
dividends and distributions...... 36,276 380,528
Shares reacquired.................. (516,337) (5,397,762)
---------- ------------
Net decrease in shares outstanding
before conversion................ (449,365) (4,695,957)
Shares issued upon conversion from
Class B.......................... 1,858,567 19,167,920
---------- ------------
Net increase in shares
outstanding...................... 1,409,202 $ 14,471,963
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 74,702 $ 830,474
Shares issued in reinvestment of
dividends and distributions...... 12,858 143,277
Shares reacquired.................. (85,098) (937,854)
---------- ------------
Net increase in shares
outstanding...................... 2,462 $ 35,897
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 168,521 $ 1,765,335
Shares issued in reinvestment of
dividends and distributions...... 133,516 1,361,503
Shares reacquired.................. (1,235,993) (12,775,937)
---------- ------------
Net decrease in shares outstanding
before conversion................ (933,956) (9,649,099)
Shares reacquired upon conversion
into Class A..................... (1,856,766) (19,167,920)
---------- ------------
Net decrease in shares
outstanding...................... (2,790,722) $(28,817,019)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 399,067 $ 4,473,113
Shares issued in reinvestment of
dividends and distributions...... 228,006 2,542,431
Shares reacquired.................. (772,159) (8,503,409)
---------- ------------
Net decrease in shares
outstanding...................... (145,086) $ (1,487,865)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Amount
- ----------------------------------------- ------ --------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold.............................. 3,361 $35,127
Shares issued in reinvestment of
dividends and distributions............ 194 1,987
Shares reacquired........................ (8,221) (82,615 )
------ --------
Net decrease in shares outstanding....... (4,666) $(45,501)
------ --------
------ --------
August 1, 1994* through
August 31, 1994:
Shares sold.............................. 9,549 $101,218
Shares issued in reinvestment of
dividends.............................. 3 31
------ --------
Net increase in shares outstanding....... 9,552 $101,249
------ --------
------ --------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-98
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
Year Ended August 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............. $ 10.66 $ 11.64 $11.11 $10.67 $10.23
------- ------- ------ ------ ------
Income from investment operations
Net investment income.......................... .53(a) .57 .62 .63 .67
Net realized and unrealized gain (loss) on
investment transactions..................... .10 (.77) .65 .44 .44
------- ------- ------ ------ ------
Total from investment operations............ .63 (.20) 1.27 1.07 1.11
------- ------- ------ ------ ------
Less distributions
Dividends from net investment income........... (.53) (.57) (.62) (.63) (.67)
Distributions from net realized gains.......... (.10) (.21) (.12) -- --
------- ------- ------ ------ ------
Total distributions......................... (.63) (.78) (.74) (.63) (.67)
------- ------- ------ ------ ------
Net asset value, end of year................... $ 10.66 $ 10.66 $11.64 $11.11 $10.67
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):............................... 6.32% (1.75)% 11.89% 10.35% 10.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................. $17,726 $2,709 $2,930 $1,335 $804
Average net assets (000)....................... $11,341 $2,877 $2,068 $1,080 $518
Ratios to average net assets:
Expenses, including distribution fees....... 1.30%(a) .95% .96% .96% 1.10%
Expenses, excluding distribution fees....... 1.20%(a) .85% .86% .86% 1.00%
Net investment income....................... 4.96%(a) 5.18% 5.51% 5.80% 6.07%
Portfolio turnover rate........................ 49% 40% 41% 34% 18%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment of dividends
and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-99
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
------------------------------------------------------- Year
Year Ended August 31, Ended
------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
<S> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.67
------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income.......................... .49(a) .53 .58 .59 .63 .47(a)
Net realized and unrealized gain (loss) on
investment transactions..................... .10 (.77) .65 .44 .45 .10
------- ------- ------- ------- ------- ------
Total from investment operations............ .59 (.24) 1.23 1.03 1.08 .57
------- ------- ------- ------- ------- ------
Less distributions
Dividends from net investment income........... (.49) (.53) (.58) (.59) (.63) (.47)
Distributions from net realized gains.......... (.10) (.21) (.12) -- -- (.10)
------- ------- ------- ------- ------- ------
Total distributions......................... (.59) (.74) (.70) (.59) (.63) (.57)
------- ------- ------- ------- ------- ------
Net asset value, end of period................. $ 10.67 $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.67
------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------
TOTAL RETURN(b):............................... 5.88% (2.13)% 11.43% 9.90% 10.49% 5.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $21,414 $51,198 $57,598 $51,313 $51,110 $52
Average net assets (000)....................... $33,497 $55,223 $53,780 $50,970 $48,422 $58
Ratios to average net assets:
Expenses, including distribution fees....... 1.55%(a) 1.35% 1.36% 1.37% 1.49% 1.82%(a)
Expenses, excluding distribution fees....... 1.05%(a) .85% .86% .87% .99% 1.07%(a)
Net investment income....................... 4.84%(a) 4.77% 5.11% 5.42% 5.70% 4.55%(a)
Portfolio turnover rate........................ 49% 40% 41% 34% 18% 49%
<CAPTION>
August 1,
through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 10.70
----------
Income from investment operations
Net investment income.......................... .05
Net realized and unrealized gain (loss) on
investment transactions..................... (.03)
----------
Total from investment operations............ .02
----------
Less distributions
Dividends from net investment income........... (.05)
Distributions from net realized gains.......... --
----------
Total distributions......................... (.05)
----------
Net asset value, end of period................. $ 10.67
----------
----------
TOTAL RETURN(b):............................... .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $102
Average net assets (000)....................... $31
Ratios to average net assets:
Expenses, including distribution fees....... 2.21%(c)
Expenses, excluding distribution fees....... 1.47%(c)
Net investment income....................... 4.75%(c)
Portfolio turnover rate........................ 40%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-100
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MARYLAND SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Maryland Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Maryland
Series as of August 31, 1995, 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, 1995 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, Maryland Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-101
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--94.4%
- ------------------------------------------------------------------------------------------------------------------------------
Boston Ind. Dev. Fin. Auth., Swr. Fac. Rev., Harbor Elec.
Energy Co. Proj. Baa1 7.375% 5/15/15 $ 1,500 $ 1,576,500
Boston Mass., Gen. Oblig., Ser. A, A.M.B.A.C. Aaa 7.375 2/01/10 2,000 2,263,320
Boston Mass. Rev., Boston City Hosp., FHA Aa 5.75 2/15/23 2,000 1,874,400
Brockton Mass. Baa 6.125 6/15/18 1,030 1,029,876
Gloucester Mass., Gen. Oblig., F.S.A. Aaa 5.50 11/15/13 2,000 1,930,700
Holyoke, Gen. Oblig., Sch. Proj., M.B.I.A. Aaa 8.10 6/15/05 700 839,006
Lowell, Gen. Oblig. Aaa 7.625 2/15/10 750(d) 877,485
Lynn Wtr. & Swr. Comn., Gen. Rev., Ser. A, M.B.I.A. Aaa 7.25 12/01/10 2,100(d) 2,403,597
Mass. St. Gen. Oblig., Ser. A A1 Zero 8/01/06 665 381,717
Ser. C, F.G.I.C. Aaa 6.00 8/01/09 1,500 1,590,195
Gen. Oblig., A.M.B.A.C. Aaa 5.00 7/01/12 1,000 920,720
Mass. St. Hlth. & Edl. Fac. Auth. Rev.,
Beth Israel Hosp. A.M.B.A.C Aaa 8.218 7/01/25 1,500(e) 1,477,500
Dana Farber Cancer Project Series G/1 A1 6.25 12/01/22 625 617,663
Faulkner Hosp., Ser. C Baa1 6.00 7/01/23 1,500 1,317,105
Holyoke Hosp. Rev. Baa1 6.50 7/01/15 1,500 1,430,835
Jordan Hosp. A-(c) 6.875 10/01/22 1,850 1,894,345
Lahey Clinic, Ser. B, M.B.I.A. Aaa 5.375 7/01/23 450 413,829
Med Academic Scientific A A-(c) 6.625 1/01/15 1,000 1,013,800
New England Med. Ctr., Ser. E A1 7.875 7/01/11 1,175 1,308,656
Newton-Wellesley Hosp., M.B.I.A. Aaa 5.875 7/01/15 1,000 985,520
Newton-Wellesley Hosp., M.B.I.A. Aaa 6.00 7/01/18 1,000 994,980
Newton-Wellesley Hosp., Ser. C, B.I.G. Aaa 8.00 7/01/18 2,000 2,233,540
Tufts Univ., Ser. C Aaa 7.40 8/01/18 1,235(d) 1,367,478
Valley Regl. Hlth. Sys., Ser. B Aaa 8.00 7/01/18 1,000(d) 1,167,980
Valley Regl. Hlth. Sys. AAA(c) 7.00 7/01/10 825 930,435
Winchester Hosp. AAA(c) 5.75 7/01/24 2,000 1,877,040
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-102
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Mass. St. Hsg. Fin. Agcy. Rev.,
Sngl. Fam. Mtge., Ser. 1985A Aa 9.50% 12/01/16 $ 415 $ 429,508
Sngl. Fam. Mtge., Ser. 6 Aa 8.10 12/01/14 1,755 1,896,699
Mass. St. Ind. Fin. Agcy. Rev.,
Brooks Sch. A 5.95 7/01/23 640 632,211
Cape Cod Hlth. Sys. Aaa 8.50 11/15/20 2,000 2,402,200
Springfield College Baa1 5.625 9/15/10 900 829,152
Mass. St. Industrial Fin. Agcy. Rev. Phillips Academy Aa1 5.375 9/01/23 1,000 920,800
Mass. St. Indl. Fin. Agcy., Poll. Ctrl. Rev., Eastern
Edison Co. Proj. Baa2 5.875 8/01/08 1,000 991,470
Mass. St. Port Auth. Rev. Aa 5.00 7/01/18 1,000 884,380
Mass. St. Mun. Wholesale Ele. Co. Pwr. Supply Sys. Rev. Aaa 5.00 7/01/14 1,500 1,349,175
Mass. St. Water Poll. Abatement Trust Water Poll. Rev. Aa 6.375 2/01/15 1,000 1,028,670
Palmer, Gen. Oblig., Ser. F, A.M.B.A.C. Aaa 7.30 3/01/10 500 (d) 565,295
Plymouth Cnty. Corr. Facs. Proj., Cert. of Part., Ser. A A-(c) 7.00 4/01/22 500 544,430
Puerto Rico Aqueduct & Swr. Auth. Rev., E.T.M. Aaa 10.25 7/01/09 400 562,432
Puerto Rico Comnwlth.,
Gen. Oblig. Baa1 5.25 7/01/18 1,000 899,290
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 1,000 1,160,650
Gen. Oblig., F.S.A. Aaa 7.723 7/01/20 1,250 (e) 1,223,437
Pub. Impvt. Ref. Aaa 7.00 7/01/10 250 290,163
Puerto Rico Elec. Pwr. Auth. Rev. Ser. S Baa1 7.00 7/01/06 450 507,632
Puerto Rico Ele. Pwr. Auth. Rev. (Formerly Puerto Rico
Comnwlth. Water Res. Auth. Pwr. Rev.) Baa1 6.125 7/01/09 500 518,180
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund, Ser. A NR 7.25 10/01/18 400 421,984
-----------
Total long-term investments (cost $48,941,217) 52,775,980
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-103
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--8.2%
Mass. Comnwlth., Ded. Inc.Tax, F.R.D.D., Ser. 90B VMIG1 3.20% 9/01/95 $ 2,900 $ 2,900,000
Mass. Ind. Fin. Agcy. Ind. Rev., Showa Womens Inst. Inc.,
F.R.D.D.,
Ser. 94 VMIG1 3.40 9/01/95 1,000 1,000,000
Puerto Rico Comnwlth., Dev. Bank., F.R.W.D., Ser. 85 VMIG1 3.20 9/06/95 700 700,000
-----------
Total short-term investments (cost $4,600,000) 4,600,000
-----------
Total Investments--102.6%
(cost $53,541,217; Note 4) 57,375,980
Other assets in excess of liabilities--(2.6)% (1,470,047)
-----------
Net Assets--100% $55,905,933
-----------
-----------
</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.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.H.A.--Federal Housing Administration.
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity date of these securities are considered to be the later of the next
date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted.
(c) Standard & Poor's rating.
(d) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
</TABLE>
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
Statement of Assets and Liabilities MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $53,541,217)...................................................................... $57,375,980
Interest receivable........................................................................................... 684,875
Deferred expenses and other assets............................................................................ 2,214
-----------
Total assets............................................................................................... 58,063,069
-----------
Liabilities
Bank overdraft................................................................................................ 103,004
Payable for investments purchased............................................................................. 1,951,233
Payable for Fund shares reacquired............................................................................ 30,015
Dividends payable............................................................................................. 29,425
Due to Manager................................................................................................ 21,155
Due to Distributors........................................................................................... 14,341
Accrued expenses.............................................................................................. 6,363
Deferred trustees' fees....................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 2,157,136
-----------
Net Assets.................................................................................................... $55,905,933
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 48,077
Paid-in capital in excess of par........................................................................... 52,152,628
-----------
52,200,705
Accumulated net realized loss on investments............................................................... (129,535)
Net unrealized appreciation on investments................................................................. 3,834,763
-----------
Net assets, August 31, 1995................................................................................... $55,905,933
-----------
-----------
Class A:
Net asset value and redemption price per share
($27,524,632 / 2,366,271 shares of beneficial interest issued and outstanding).......................... $11.63
Maximum sales charge (3% of offering price)................................................................ .36
-----------
Maximum offering price to public........................................................................... $11.99
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($28,366,921 / 2,440,169 shares of beneficial interest issued and outstanding).......................... $11.62
-----------
-----------
Class C:
Net asset value, offer price and redemption price per share
($14,380 / 1,237 shares of beneficial interest issued and outstanding).................................. $11.62
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-105
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 3,685,338
---------------
Expenses
Management fee, net of waiver of
$18,492............................... 258,040
Distribution fee--Class A................ 15,837
Distribution fee--Class B................ 197,277
Distribution fee--Class C................ 104
Custodian's fees and expenses............ 85,000
Transfer agent's fees and expenses....... 38,000
Reports to shareholders.................. 27,400
Registration fees........................ 20,500
Audit fee................................ 11,000
Legal fees............................... 21,000
Trustees' fees........................... 3,200
Miscellaneous............................ 8,867
---------------
Total expenses........................ 686,225
Less: custodian fee credit............ (3,722)
---------------
Net expenses.......................... 682,503
---------------
Net investment income....................... 3,002,835
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 327,609
Financial futures contract
transactions.......................... (20,626)
Options purchased........................ (12,625)
---------------
294,358
---------------
Net change in unrealized appreciation on:
Investments.............................. 871,511
---------------
Net gain on investments..................... 1,165,869
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,168,704
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------- -------
<S> <C> <C>
Operations
Net investment income............ $ 3,002,835 $ 3,240,965
Net realized gain (loss) on
investment transactions....... 294,358 (262,240)
Net change in unrealized
appreciation/depreciation of
investments................... 871,511 (3,647,136)
----------- -----------
Net increase (decrease) in net
assets resulting from
operations.................... 4,168,704 (668,411)
----------- -----------
Dividends and distributions (Note 1):
Dividends from net investment
income
Class A....................... (884,881) (144,412)
Class B....................... (2,117,251) (3,096,493)
Class C....................... (703) (60)
----------- -----------
(3,002,835) (3,240,965)
----------- -----------
Distributions from net realized
gains
Class A....................... -- (16,934)
Class B....................... -- (376,754)
----------- -----------
-- (393,688)
----------- -----------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares sold.... 3,105,413 7,355,596
Net asset value of shares issued
in reinvestment of
dividends..................... 1,755,219 2,173,313
Cost of shares reacquired........ (7,833,814) (10,958,113)
----------- -----------
Net decrease in net assets from
Series share transactions..... (2,973,182) (1,429,204)
----------- -----------
Total decrease...................... (1,807,313) (5,732,268)
Net Assets
Beginning of year................... 57,713,246 63,445,514
----------- -----------
End of year......................... $55,905,933 $57,713,246
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-106
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of 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.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from securities or currencies based upon the type of option
written. The difference between the premium and the amount paid on effecting a
closing purchase transaction, including brokerage commissions, is also treated
as a realized gain, or if the premium received is less than the amount paid for
the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities or currencies purchased by the Fund. The Fund as writer of an option
may have no control over whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an unfavorable change
in the price of the security underlying the written option. There were no
written options outstanding at August 31, 1995.
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
- --------------------------------------------------------------------------------
B-107
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
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 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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $18,492
($0.003 per share; .03% of average net assets). The Series is not required to
reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $6,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $69,000 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
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 With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended August 31,
1995, the Series incurred fees of approximately $24,500 for the services of
PMFS. As of August 31, 1995, 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.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995, were $19,262,334 and
$23,901,769, respectively.
The cost basis of investments for federal income tax purposes, at August 31,
1995, was $53,650,045 and, accordingly, net unrealized appreciation of
investments, including short-term investments for federal income tax purposes
was $3,725,935 (gross unrealized appreciation--$3,855,820, gross unrealized
depreciation--$129,885).
- --------------------------------------------------------------------------------
B-108
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
The Fund will elect to treat net capital losses of approximately $975,100
incurred in the ten month period ended August 31, 1995 as having been incurred
in the following fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 32,229 $ 365,268
Shares issued in reinvestment of
dividends......................... 44,959 516,523
Shares reacquired................... (153,318) (1,754,945)
---------- ------------
Net decrease in shares outstanding
before conversion................. (76,130) (873,154)
Shares issued upon conversion from
Class B........................... 2,240,731 25,201,555
---------- ------------
Net increase in shares
outstanding....................... 2,164,601 $ 24,328,401
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 79,658 $ 955,193
Shares issued in reinvestment of
dividends and distributions....... 7,338 86,177
Shares reacquired................... (76,352) (888,834)
---------- ------------
Net increase in shares
outstanding....................... 10,644 $ 152,536
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 241,751 $ 2,725,137
Shares issued in reinvestment of
dividends......................... 111,056 1,237,961
Shares reacquired................... (546,923) (6,076,741)
---------- ------------
Net decrease in shares outstanding
before conversion................. (194,116) (2,113,643)
Shares reacquired upon conversion
into Class A...................... (2,242,679) (25,201,555)
---------- ------------
Net decrease in shares
outstanding....................... (2,436,795) $(27,315,198)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 533,589 $ 6,293,496
Shares issued in reinvestment of
dividends and distributions....... 177,548 2,087,119
Shares reacquired................... (857,454) (9,963,041)
---------- ------------
Net decrease in shares
outstanding....................... (146,317) $ (1,582,426)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 1,340 $ 15,008
Shares issued in reinvestment of
dividends......................... 65 735
Shares reacquired................... (187) (2,128)
---------- ------------
Net increase in shares
outstanding....................... 1,218 $ 13,615
---------- ------------
---------- ------------
August 1, 1994* through August 31,
1994:
Shares sold......................... 9,403 $ 106,907
Shares issued in reinvestment of
dividends......................... 1 17
Shares reacquired................... (9,385) (106,238)
---------- ------------
Net increase in shares
outstanding....................... 19 $ 686
---------- ------------
---------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-109
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.............. $ 11.37 $12.17 $11.50 $10.94 $10.44
------- ------ ------ ------ ------
Income from investment operations
Net investment income........................... .65(a) .67 .68 .69 .70
Net realized and unrealized gain (loss) on
investment transactions...................... .26 (.73) .67 .56 .50
------- ------ ------ ------ ------
Total from investment operations............. .91 (.06) 1.35 1.25 1.20
------- ------ ------ ------ ------
Less distributions
Dividends from net investment income............ (.65) (.67) (.68) (.69) (.70)
Distributions from net realized gains........... -- (.07) -- -- --
------- ------ ------ ------ ------
Total distributions.......................... (.65) (.74) (.68) (.69) (.70)
------- ------ ------ ------ ------
Net asset value, end of year.................... $ 11.63 $11.37 $12.17 $11.50 $10.94
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):................................ 8.33% (.58)% 12.10% 11.76% 11.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................... $27,525 $2,293 $2,325 $ 903 $ 665
Average net assets (000)........................ $15,837 $2,578 $1,336 $ 770 $ 344
Ratios to average net assets:
Expenses, including distribution fees........ .97%(a) .87% .95% .99% 1.05%
Expenses, excluding distribution fees........ .87%(a) .77% .85% .89% .95%
Net investment income........................ 5.59%(a) 5.60% 5.79% 6.14% 6.53%
Portfolio turnover rate......................... 36% 33% 56% 32% 34%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-110
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------
Class B Year Ended
------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 11.36 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $11.36
------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income........................... .60(a) .61 .63 .64 .65 .57(a)
Net realized and unrealized gain (loss) on
investment transactions...................... .26 (.74) .68 .55 .50 .26
------- ------- ------- ------- ------- -------
Total from investment operations............. .86 (.13) 1.31 1.19 1.15 .83
------- ------- ------- ------- ------- -------
Less distributions
Dividends from net investment income............ (.60) (.61) (.63) (.64) (.65) (.57)
Distributions from net realized gains........... -- (.07) -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions.......................... (.60) (.68) (.63) (.64) (.65) (.57)
------- ------- ------- ------- ------- -------
Net asset value, end of period.................. $ 11.62 $ 11.36 $ 12.17 $ 11.49 $ 10.94 $11.62
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL RETURN(b):................................ 7.90% (1.15)% 11.77% 11.23% 11.38% 7.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................. $28,367 $55,420 $61,121 $53,449 $49,641 $ 14
Average net assets (000)........................ $39,455 $59,544 $55,965 $50,607 $49,083 $ 14
Ratios to average net assets:
Expenses, including distribution fees........ 1.34%(a) 1.27% 1.35% 1.39% 1.45% 1.60%(a)
Expenses, excluding distribution fees........ .84%(a) .77% .85% .89% .95% .85%(a)
Net investment income........................ 5.37%(a) 5.20% 5.39% 5.74% 6.13% 5.07%(a)
Portfolio turnover rate......................... 36% 33% 56% 32% 34% 36%
<CAPTION>
August 1,
1994(d)
through
August 31,
1994
<S> <C>
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $11.41
-----
Income from investment operations
Net investment income........................... .04
Net realized and unrealized gain (loss) on
investment transactions...................... (.05)
-----
Total from investment operations............. (.01)
-----
Less distributions
Dividends from net investment income............ (.04)
Distributions from net realized gains........... --
-----
Total distributions.......................... (.04)
-----
Net asset value, end of period.................. $11.36
-----
-----
TOTAL RETURN(b):................................ (0.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................. $ 216(e)
Average net assets (000)........................ $ 15(e)
Ratios to average net assets:
Expenses, including distribution fees........ 1.57%(c)
Expenses, excluding distribution fees........ .82%(c)
Net investment income........................ 5.06%(c)
Portfolio turnover rate......................... 33%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Amounts are actual and not rounded to the nearest thousand.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-111
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Massachusetts
Series, as of August 31, 1995, 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, 1995 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, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-112
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--102.4%
- ------------------------------------------------------------------------------------------------------------------------------
Boston Wtr. & Swr. Comn.,
Ser. 85A, F.R.W.D. VMIG1 3.40% 9/06/95 $ 400 $ 400,000
Ser. 94A, F.R.W.D. VMIG1 3.45 9/07/95 2,400 2,400,000
Dist. of Columbia, Gen. Oblig., Ser. 92A-3, F.R.D.D. VMIG1 3.70 9/01/95 600 600,000
Greenfield Mass. Unlimited Tax Gen. Oblig., Ser. 91 Aaa 8.00 10/15/95 725 727,578
Gulf Coast Ind. Dev. Auth., Citgo Petroleum, Ser. 95,
F.R.D.D. VMIG1 3.70 9/01/95 400 400,000
Holyoke Poll. Ctrl. Rev., Ser. 88, F.R.W.D. A-1+* 3.40 9/06/95 700 700,000
Jackson County Miss. Ind. Swg. Facs. Rev., Chevron Inc.
Project, Ser. 94, F.R.D>D. P1 3.65 9/01/95 2,200 2,200,000
Marlborough Mass., B.A.N NR 3.75 2/29/96 2,000 2,002,336
Mass. Bay Trans. Auth.,
Ser. A, T.E.C.P. P1 3.75 9/15/95 1,500 1,500,000
Ser. B, Notes MIG2 5.00 9/08/95 250 250,050
Ser. C, T.E.C.P. A-1+* 3.85 10/13/95 1,000 1,000,000
Ser. 84A, S.E.M.O.T. VMIG1 3.75 3/01/96 1,000 1,000,000
Mass. Comnwlth., Ded. Inc.Tax, Ser., 90B, F.R.D.D. VMIG1 3.20 9/01/95 1,350 1,350,000
Mass. Edl. Loan & Auth., Ser. 95A, F.R.W.D. NR 3.15 9/06/95 1,500 1,500,000
Mass. Hlth. & Edl. Facs. Auth. Rev.,
Boston Univ. Ser. 85H, T.E.C.P. VMIG1 3.70 9/07/95 2,000 2,000,000
Cap. Asset Prog., Ser. D, F.R.W.D. VMIG1 3.35 9/06/95 2,000 2,000,000
Cap. Asset Prog., Ser. 85B, F.R.D.D. VMIG1 3.35 9/01/95 500 500,000
Cap. Asset Prog., Ser. 85C, F.R.D.D. VMIG1 3.35 9/01/95 1,500 1,500,000
Harvard Univ., Ser. 85 Aaa 8.75 12/01/95 1,000(d) 1,013,003
Harvard Univ., Ser. 89L, T.E.C.P. VMIG1 3.50 10/20/95 1,000 1,000,000
Mass. Hsg. Fin. Agcy. Rev.,
Ser. 94A, F.R.W.D. NR 3.65 9/07/95 1,000 1,000,000
Sngl. Fam. Hsg. Rev. Bds., Ser. 5, Q.T.R.O.T. Aaa 3.80 12/01/95 975 975,000
Sngl. Fam. Hsg. Rev. Bds., F.R.W.D. NR 3.65 9/07/95 960 960,000
Mass. Ind. Fin. Agcy. Ind. Rev.,
Riverdale Mills, Ser. 95, F.R.W.D. NR 3.70 9/07/95 1,500 1,500,000
New England Deaconess Proj., Ser. 93B, F.R.W.D. VMIG1 3.15 9/06/95 300 300,000
New England Pwr. Co., Ser. 93A, T.E.C.P. VMIG1 3.80 12/06/95 2,200 2,200,000
Ocean Spray Cranberry, A.O.T. NR 4.30 10/15/95 1,700 1,700,000
Showa Womens Inst. Inc., Ser. 94, F.R.D.D. VMIG1 3.40 9/01/95 4,350 4,350,000
United Med. Corp., Ser. 92 F.R.W.D. P1 3.55 9/06/95 800 800,000
Mass. Ind. Fin. Agcy. Res. Rec. Rev., Ogden Haverhill
Proj., Ser. 92A, F.R.W.D. VMIG1 3.25 9/06/95 1,000 1,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-113
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Mass. Mun. Whsl. Elec. Co., Pwr. Supply Sys. Rev., Ser.
94C, F.R.W.D. VMIG1 3.50% 9/06/95 $ 1,500 $ 1,500,000
Mass. Port Auth. Rev., Multi Modal, Ser. 95B, F.R.D.D. VMIG1 3.35 9/01/95 3,300 3,300,000
Mass. Wtr. Res. Auth., T.E.C.P. P1 3.55 9/27/95 1,100 1,100,000
Mass. Wtr. Res. Auth., T.E.C.P. P1 3.60 10/27/95 1,000 1,000,000
Peabody Mass., Ser. 95 Aa1 5.40 7/15/96 650 659,156
Puerto Rico Comnwlth.,
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+* 4.10 9/08/95 1,000 1,000,000
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+* 3.60 9/11/95 1,000 1,000,000
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+* 3.50 10/05/95 1,000 1,000,000
Puerto Rico Ind. Med. & Environ. Facs.,
Inter Amer. Proj., Ser. 88, T.E.C.P. VMIG1 3.65 10/06/95 300 300,000
Reynolds Metal Co. Proj., Ser. 83A, A.O.T. P1 3.75 9/01/96 2,000 1,995,140
Schering-Plough Corp., Ser. 83A, A.O.T. Aa3 4.35 12/01/95 2,000 1,998,070
Puerto Rico Public Bldgs. Auth. Rev., Ser. 34, F.R.W.D. A-1+* 3.60 9/07/95 1,000 1,000,000
Revere Hsg. Auth., Multifamily Mtge. Rev., Waters Edge
Proj., Ser. 91C, F.R.W.D. A-1* 3.90 9/01/95 1,990 1,990,000
St. Lucie Co., Ser. 93, T.E.C.P. VMIG1 3.65 10/30/95 1,500 1,500,000
-----------
Total Investments--102.4%
(amortized cost-$58,170,333(c)) 58,170,333
Liabilities in excess of other assets--(2.4)% (1,348,520)
-----------
Net Assets--100% $56,821,813
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.O.T.--Annual Optional Tender
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b)
F.R.W.D.--Floating Rate (Weekly) Demand Note (b)
Q.T.R.O.T.--Quarterly Tax & Reserve Optional Tender
S.E.M.O.T.--Semi-Monthly Tender Offer
T.E.C.P.--Tax-Exempt Commercial Paper
(b) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(c) The cost of securities for federal income tax purposes is substantially
the same as for financial reporting purposes.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
* Standard & Poor's rating.
NR--Not Rated by Moody's or Standard and Poor's ratings.
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-114
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value................................................ $58,170,333
Cash.......................................................................................................... 32,360
Receivable for investments sold............................................................................... 3,327,006
Interest receivable........................................................................................... 295,385
Receivable for Fund shares sold............................................................................... 120,839
Deferred expenses and other assets............................................................................ 11,723
-----------
Total assets............................................................................................... 61,957,646
-----------
Liabilities
Payable for investments purchased............................................................................. 3,979,646
Payable for Fund shares reacquired............................................................................ 1,076,102
Accrued expenses.............................................................................................. 44,569
Dividends payable............................................................................................. 24,245
Management fee payable........................................................................................ 6,256
Distribution fee payable...................................................................................... 3,415
Deferred Trustees' fees....................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 5,135,833
-----------
Net Assets.................................................................................................... $56,821,813
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value........................................................... $ 568,218
Paid-in capital in excess of par........................................................................... 56,253,595
-----------
Net assets, August 31, 1995................................................................................... $56,821,813
-----------
-----------
Net asset value, offering price and redemption price per share ($56,821,813 / 56,821,813 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)......................... $1.00
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-115
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 1,594,584
---------------
Expenses
Management fee, net of waiver of
$160,946.............................. 53,649
Distribution fee......................... 53,649
Custodian's fees and expenses............ 65,000
Transfer agent's fees and expenses....... 27,000
Reports to shareholders.................. 17,000
Registration fees........................ 15,000
Amortization of organization expenses.... 12,151
Audit fee................................ 10,500
Legal fees............................... 10,000
Trustees' fees........................... 3,200
Miscellaneous............................ 1,983
---------------
Total expenses........................ 269,132
Less: custodian fee credit.................. (23,554)
---------------
Net expenses.......................... 245,578
---------------
Net investment income....................... 1,349,006
---------------
Realized Loss on investments
Net realized loss on investment
transactions............................. (663)
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 1,348,343
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income........ $ 1,349,006 $ 789,061
Net realized loss on
investment transactions... (663) --
------------- -------------
Net increase in net assets
resulting from
operations................ 1,348,343 789,061
------------- -------------
Dividends to shareholders (Note
1)........................... (1,348,343) (789,061)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold...................... 209,358,640 147,907,523
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 1,276,924 757,067
Cost of shares reacquired.... (191,091,855) (147,994,192)
------------- -------------
Net increase in net assets
from Series share
transactions.............. 19,543,709 670,398
------------- -------------
Total increase.................. 19,543,709 670,398
Net Assets
Beginning of year............... 37,278,104 36,607,706
------------- -------------
End of year..................... $ 56,821,813 $ 37,278,104
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-116
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 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.
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.
Custody Fee Credits: The Series has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
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. For the fiscal
year ended August 31, 1995, PMF voluntarily waived 75% of its management fee.
The amount of fees waived for the fiscal year ended August 31, 1995 amounted to
$160,946 ($.003 per share; .375% 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.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $24,000 for the services of PMFS. As
of August 31, 1995, approximately $1,900 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also includes certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-117
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 5,
1991(a)
Year Ended August 31, through
------------------------------------------- August 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -----
<S> <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
Net investment income and realized gains(c)................. .031 .019 .021 .034 .003
Dividends and distributions to shareholders................. (.031) (.019) (.021) (.034) (.003)
------- ------- ------- ------- -----
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -----
------- ------- ------- ------- -----
TOTAL RETURN(d):............................................ 3.10% 1.89% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $56,822 $37,278 $36,608 $18,019 $6,365
Average net assets (000).................................... $42,919 $42,427 $32,246 $15,477 $3,200
Ratio to average net assets:(c)
Expenses, including distribution fee..................... .627% .620% .365% .125% .125%(b)
Expenses, excluding distribution fee..................... .502% .495% .240% .00% .00%(b)
Net investment income.................................... 3.14% 1.86% 2.11% 3.20% 4.46%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of management fee waiver and expense subsidy.
(d) Total return 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-118
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Massachusetts
Money Market Series, as of August 31, 1995, 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 four
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 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, 1995 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, 1995, the
results of its operations, the changes in its net assets, and its financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-119
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--96.7%
- ------------------------------------------------------------------------------------------------------------------------------
Adams Twnshp. Sch. Dist. Rev., Gen. Oblig., A.M.B.A.C. Aaa 6.60% 5/01/24 $ 1,000 $ 1,053,750
Arpt. Michigan Comm. Sch. Dist., A.M.B.A.C. Aaa 5.125 5/01/22 1,535 1,377,877
Breitung Twnshp. Sch. Dist. Rev., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 257,363
Canton Charter Twnshp. Bldg. Auth.,
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/11 450 398,214
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/12 450 393,610
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/13 500 432,205
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/14 500 430,530
Central Michigan Univ. Rev. A 7.00 10/01/10 700 (b) 789,509
Chippewa Valley Sch. Dist., F.G.I.C. Aaa 5.00 5/01/21 2,400 2,118,888
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A, F.S.A. Aaa 6.875 5/01/09 1,000 1,078,730
Detroit Wtr. Supply Sys. Rev.,
F.G.I.C. Aaa 4.75 7/01/19 1,000 843,610
F.G.I.C. Aaa 5.00 7/01/23 1,250 1,098,550
Detroit Sewage Disp. Rev., F.G.I.C. Aaa 5.70 7/01/23 2,000 1,895,860
Detroit St. Aid, Gen. Oblig. Baa 5.625 5/01/97 1,500 1,523,325
Dickinson Cnty., Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,013,800
Ferris St. Univ. Gen. Rev., A.M.B.A.C. Aaa 5.80 10/01/05 440 467,949
Grand Rapids San. Swr. Sys. Rev. A1 7.00 1/01/16 500 533,925
Guam Pwr. Auth. Rev., Ser. A BBB(e) 6.625 10/01/14 1,000 1,024,770
Holland Sch. Dist., A.M.B.A.C. Aaa Zero 5/01/15 2,400 732,648
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 1,487,500
Jackson Cnty., Hosp. Fin. Auth. Rev., Ser. A, F.G.I.C. Aaa 5.25 6/01/23 1,500 1,350,555
Kent Hosp. Fac. Fin. Auth. Rev., Blodgette Mem. Med. Ctr.,
Ser. A A 7.25 7/01/05 500 540,100
Lincoln Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 5.80 5/01/14 500 494,335
Michigan Higher Ed., Student Loan Auth. Rev., Ser. XIII-A,
M.B.I.A. Aaa 7.55 10/01/08 500 546,875
Michigan Pub. Pwr. Agcy. Rev.,
Belle River Proj., Ser. A A1 5.25 1/01/18 1,250 1,132,500
Belle River Proj. A1 5.00 1/01/19 1,000 870,670
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A Baa1 8.25 7/01/12 2,000 2,136,180
Henry Ford Hosp. Aaa 9.00 5/01/08 2,340 2,961,130
Hosp. Genesys Hlth. Sys. Baa 8.125 10/01/21 1,000 1,074,550
Hosp. Genesys Hlth. Sys. Baa 7.50 10/01/27 500 510,930
Hosp. Pontiac Osteopathic, Ser. A Baa1 6.00 2/01/24 900 785,583
McLaren Obligated Group, Ser. A Aaa 7.50 9/15/21 800(b) 935,104
Oakwood Hosp. Obligated Group, F.G.I.C. Aaa 6.95 7/01/02 1,000(b)(c) 1,123,260
Sisters of Mercy, Ser. H, M.B.I.A. Aaa 7.50 8/15/07 2,000 2,179,100
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-120
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan St. Hsg. Dev. Auth. Rev.,
Multifamily Mtge. Insured Hsg., Ser. A A+(e) 7.15% 4/01/10 $ 1,000 $ 1,057,640
Multifamily Mtge. Insured Hsg., Ser. A A+(e) 7.70 4/01/23 500 532,010
Sngl. Fam. Mtge., Ser. A AA(e) 7.70 12/01/16 370 397,361
Michigan St. Strategic Fund Ltd. Obligated Rev.,
Waste Mgmt. Inc. Proj. A1 6.625 12/01/12 2,000 2,066,000
Michigan St. Trunk Line Hwy.,
Ser. A, A.M.B.A.C. Aaa Zero 10/01/05 2,600 1,534,234
Ser. A, A.M.B.A.C. Aaa Zero 10/01/06 1,250 691,012
Michigan St. Univ. Rev., Ser. A A1 5.50 8/15/22 640 590,278
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., F.G.I.C. Aaa 7.65 9/01/20 2,000 2,248,940
Mt. Pleasant Wtr. Rev., Wtr. & Swr.,
M.B.I.A. Aaa 5.00 2/01/22 520 458,354
M.B.I.A. Aaa 4.00 2/01/23 550 401,715
M.B.I.A. Aaa 4.00 2/01/24 585 425,061
Oak Park, Gen. Oblig.,
A.M.B.A.C. Aaa 7.00 5/01/11 375(b) 429,128
A.M.B.A.C. Aaa 7.00 5/01/12 400(b) 457,736
Oakland Cnty., Leuders Drainage Dept., A.M.B.A.C. Aaa 5.50 5/01/09 350 348,971
Oakland Univ. Rev., Gen. Oblig., M.B.I.A. Aaa 5.75 5/15/26 1,400 1,358,644
Posen Cons. Sch. Dist., Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000 1,076,060
Puerto Rico Commonwlth. Hwy. Auth. Rev.,
Ser. Q Baa1 7.75 7/01/16 1,500(b) 1,742,595
M.B.I.A. Aaa 5.782 7/01/08 2,000 2,068,460
Puerto Rico Elec. Pwr. Auth. Rev., Ser. N Baa1 7.125 7/01/14 920 992,395
Puerto Rico Ind., Tourist, Edu., Med. & Envir. Ctrl. Facs.,
Hosp. Auxilio Mutuo Oblig. Grp. A, M.B.I.A. Aaa 6.25 7/01/24 1,000 1,021,880
Saginaw Valley St. Univ. Gen. Rev., M.B.I.A. Aaa 5.375 7/01/16 790 744,172
St. Clair Cnty., Wtr. Supply Sys. No. VII, IRA Township,
A.M.B.A.C. Aaa 5.25 7/01/15 1,000 901,820
Tri-Cnty. Area Schs., Gen. Oblig., F.G.I.C. Aaa 5.25 5/01/20 2,000 1,834,400
Univ. of Michigan Major Cap. Proj. Rev. Aa1 5.50 4/01/13 355 341,446
Univ. of Michigan Rev.,
Pkg. Sys. Rfdg. Aa 5.00 6/01/15 500 445,195
Virgin Islands Pub. Fin. Auth. Rev., Matching Loan Notes,
Ser. A NR 7.25 10/01/18 500 527,480
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 500 531,620
Warren Cons. Sch. Dist., Consolidated Sch. Dist., Ser. II,
F.G.I.C. Aaa 5.25 5/01/21 1,000 915,740
Wayne Cnty. Arpt. Rev., M.B.I.A. Aaa 6.125 12/01/24 500 502,565
Wayne Cnty. Bldg. Auth., Ser. A Baa 8.00 3/01/17 1,250(b) 1,491,013
Western Michigan Univ. Gen. Rev., F.G.I.C. Aaa 5.00 7/15/21 500 441,240
Wyandotte Elec. Rev., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,185,460
-----------
Total long-term investments (cost $63,241,333) 66,354,110
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-121
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--0.3%
Michigan Strategic Fund Poll. Ctrl. Rev., Consumers Pwr.
Proj., F.R.D.D., Ser. 88A
(cost $200,000) P-1 3.55% 9/01/95 $ 200 $ 200,000
-----------
Total Investments--97.0%
(cost $63,441,333; Note 4) 66,554,110
Other assets in excess of liabilities--3.0% 2,029,503
-----------
Net Assets--100% $68,583,613
-----------
-----------
</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(d).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Prerefunded issues are secured by escrowed cash and/or
direct U.S. guaranteed obligations.
(c) Pledged as initial margin on financial futures contracts.
(d) 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.
(e) 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-122
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $63,441,333)...................................................................... $66,554,110
Cash.......................................................................................................... 60,311
Interest receivable........................................................................................... 1,077,967
Receivable for investments sold............................................................................... 1,044,792
Receivable for Fund shares sold............................................................................... 16,297
Other assets.................................................................................................. 1,814
-----------
Total assets............................................................................................... 68,755,291
-----------
Liabilities
Accrued expenses.............................................................................................. 50,427
Dividends payable............................................................................................. 35,908
Management fee payable........................................................................................ 25,921
Payable for Fund shares reacquired............................................................................ 23,957
Distribution fee payable...................................................................................... 19,803
Due to broker-variation margin payable........................................................................ 14,062
Deferred trustee fees......................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 171,678
-----------
Net Assets.................................................................................................... $68,583,613
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 57,725
Paid-in capital in excess of par........................................................................... 64,831,781
-----------
64,889,506
Accumulated net realized gain on investments............................................................... 598,830
Net unrealized appreciation on investments................................................................. 3,095,277
-----------
Net assets, August 31, 1995................................................................................ $68,583,613
-----------
-----------
Class A:
Net asset value and redemption price per share
($27,024,496 / 2,273,555 shares of beneficial interest issued and outstanding).......................... $11.89
Maximum sales charge (3.0% of offering price).............................................................. .37
-----------
Maximum offering price to public........................................................................... $12.26
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($41,459,262 / 3,490,489 shares of beneficial interest issued and outstanding).......................... $11.88
-----------
-----------
Class C:
Net asset value, offering price and redemption price per share
($99,855 / 8,407 shares of beneficial interest issued and outstanding).................................. $11.88
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-123
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES MICHIGAN SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................. $ 4,423,046
---------------
Expenses
Management fee, net waiver of $22,911.... 323,133
Distribution fee--Class A................ 16,932
Distribution fee--Class B................ 261,080
Distribution fee--Class C................ 458
Custodian's fees and expenses............ 94,000
Reports to shareholders.................. 65,000
Transfer agent's fees and expenses....... 57,000
Registration fees........................ 42,000
Audit fee................................ 11,000
Legal fees............................... 10,000
Trustees' fees........................... 3,200
Miscellaneous............................ 7,168
---------------
Total expenses........................ 890,971
Less: custodian fee credit............... (2,591)
---------------
Net expenses.......................... 888,380
---------------
Net investment income....................... 3,534,666
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 1,174,983
Financial futures contract
transactions.......................... (329,952)
---------------
845,031
---------------
Net change in unrealized
appreciation/depreciation of:
Investments.............................. (146,487)
Financial futures contracts.............. 38,125
---------------
(108,362)
---------------
Net gain on investments..................... 736,669
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,271,335
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income.......... $ 3,534,666 $ 3,752,311
Net realized gain on investment
transactions................ 845,031 455,336
Net change in unrealized
appreciation/depreciation of
investments................. (108,362) (4,917,813)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 4,271,335 (710,166)
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (898,307) (237,966)
Class B..................... (2,633,512) (3,514,345)
Class C..................... (2,847) --
------------ ------------
(3,534,666) (3,752,311)
------------ ------------
Distributions from net realized
gains
Class A..................... (12,146) (25,697)
Class B..................... (177,027) (429,245)
Class C..................... (43) --
------------ ------------
(189,216) (454,942)
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 4,796,012 13,225,456
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 2,351,573 2,730,066
Cost of shares reacquired...... (13,930,082) (10,334,965)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (6,782,497) 5,620,557
------------ ------------
Total increase (decrease)......... (6,235,044) 703,138
Net Assets
Beginning of year................. 74,818,657 74,115,519
------------ ------------
End of year....................... $ 68,583,613 $ 74,818,657
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-124
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge it's
existing portfolio securities, or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
Securities Transactions and 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.
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
B-125
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $22,911
($0.004 per share for Class A, B and C shares; .03% of average net assets). The
Series' is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $8,100 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $127,100 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $39,000 for the services of
PMFS. As of August 31, 1995, approximately $3,100 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 Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $22,270,724 and
$30,476,270, respectively.
At August 31, 1995, the Fund sold 20 financial futures contracts on the
Municipal Bond Index and 10 on the U.S. Treasury Index both of which expire in
September, 1995. The value at disposition of such contracts is $3,420,313. The
value of such contracts on August 31, 1995 was $3,402,813, thereby resulting in
an unrealized loss of $17,500.
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,
1995, net unrealized appreciation for federal income tax purposes was $3,112,777
(gross unrealized appreciation--$3,601,842; gross unrealized
depreciation--$489,065).
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
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
- --------------------------------------------------------------------------------
B-126
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
beneficial interest for the fiscal years ended August 31, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 39,300 $ 455,090
Shares issued in reinvestment of
dividends
and distributions................. 47,423 558,002
Shares reacquired................... (207,127) (2,427,463)
---------- ------------
Net decrease in shares outstanding
before conversion................. (120,404) (1,414,371)
Shares issued upon conversion from
Class B........................... 1,993,537 23,087,478
---------- ------------
Net increase in shares
outstanding....................... 1,873,133 $ 21,673,107
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 125,287 $ 1,540,765
Shares issued in reinvestment of
dividends
and distributions................. 14,526 176,113
Shares reacquired................... (44,147) (531,472)
---------- ------------
Net increase in shares
outstanding....................... 95,666 $ 1,185,406
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 366,931 $ 4,247,921
Shares issued in reinvestment of
dividends
and distributions................. 155,664 1,790,735
Shares reacquired................... (1,004,534) (11,502,619)
---------- ------------
Net decrease in shares outstanding
before conversion................. (481,939) (5,463,963)
Shares reacquired upon conversion
into Class A...................... (1,995,260) (23,087,478)
---------- ------------
Net decrease in shares
outstanding....................... (2,477,199) $(28,551,441)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 953,569 $ 11,684,491
Shares issued in reinvestment of
dividends
and distributions................. 210,536 2,553,953
Shares reacquired................... (816,504) (9,803,493)
---------- ------------
Net increase in shares
outstanding....................... 347,601 $ 4,434,951
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 8,149 $ 93,001
Shares issued in reinvestment of
dividends
and distributions................. 241 2,836
---------- ------------
Net increase in shares
outstanding....................... 8,390 $ 95,837
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold......................... 17 $ 200
---------- ------------
Net increase in shares
outstanding....................... 17 $ 200
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-127
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......... $ 11.75 $12.51 $11.90 $11.30 $10.81
------- ------ ------ ------ ------
Income from investment operations
Net investment income...................... .64(a) .64 .67 .68 .67
Net realized and unrealized gain (loss) on
investment transactions.................. .17 (.69) .71 .60 .49
------- ------ ------ ------ ------
Total from investment operations........ .81 (.05) 1.38 1.28 1.16
------- ------ ------ ------ ------
Less distributions
Dividends from net investment income....... (.64) (.64) (.67) (.68) (.67)
Distributions from net realized gains...... (.03) (.07) (.10) -- --
------- ------ ------ ------ ------
Total distributions..................... (.67) (.71) (.77) (.68) (.67)
------- ------ ------ ------ ------
Net asset value, end of year............... $ 11.89 $11.75 $12.51 $11.90 $11.30
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):........................... 7.13% (0.38)% 11.95% 11.63% 11.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).............. $27,024 $4,706 $3,814 $1,618 $835
Average net assets (000)................... $16,932 $4,505 $2,285 $1,235 $694
Ratios to average net assets:
Expenses, including distribution fees... 1.02%(a) .91% .96% .98% 1.09%
Expenses, excluding distribution fees... .92%(a) .81% .86% .88% .99%
Net investment income................... 5.31%(a) 5.27% 5.51% 5.82% 6.09%
Portfolio turnover rate.................... 33% 12% 14% 30% 62%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment of dividends
and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-128
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- -------------------------
August 1,
Year 1994(d)
Year Ended August 31, Ended through
------------------------------------------------------- August 31, August 31,
1995 1994 1993 1992 1991 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- ---------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.75 $ 11.78
<CAPTION>
------- ------- ------- ------- ------- ---------- --------
Income from investment operations
Net investment income...................... .59(a) .59 .62 .63 .63 .56(a) .04
Net realized and unrealized gain (loss) on
investment transactions.................. .16 (.69) .71 .60 .49 .16 (.03)
<CAPTION>
------- ------- ------- ------- ------- ---------- -------
Total from investment operations........ .75 (.10) 1.33 1.23 1.12 .72 .01
<CAPTION>
------- ------- ------- ------- ------- ---------- -------
Less distributions
Dividends from net investment income....... (.59) (.59) (.62) (.63) (.63) (.56) (.04)
Distributions from net realized gains...... (.03) (.07) (.10) -- -- (.03) --
------- ------- ------- ------- ------- ---------- -------
Total distributions..................... (.62) (.66) (.72) (.63) (.63) (.59) (.04)
------- ------- ------- ------- ------- ---------- -------
Net asset value, end of period............. $ 11.88 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 11.88 $ 11.75
------- ------- ------- ------- ------- ---------- -------
------- ------- ------- ------- ------- ---------- -------
TOTAL RETURN(b):........................... 6.60% (0.78)% 11.51% 11.18% 10.60% 6.29% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $41,459 $70,112 $70,302 $56,095 $59,400 $100 $200(e)
Average net assets (000)................... $52,216 $72,095 $61,548 $52,137 $50,809 $61 $199(e)
Ratios to average net assets:
Expenses, including distribution fees... 1.37%(a) 1.31% 1.36% 1.38% 1.49% 1.68%(a) 2.15%(c)
Expenses, excluding distribution fees... .87%(a) .81% .86% .88% .99% .93%(a) 1.39%(c)
Net investment income................... 5.04%(a) 4.87% 5.11% 5.42% 5.66% 4.66%(a) 4.56%(c)
Portfolio turnover rate.................... 33% 12% 14% 30% 62% 33% 12%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Figures are actual and not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-129
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MICHIGAN SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Michigan Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Michigan
Series, as of August 31, 1995, 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, 1995 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, Michigan Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-130
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.5%
- ------------------------------------------------------------------------------------------------------------------------------
Atlantic City, Gen. Oblig., Ser. A BAA1 Zero 11/01/06 $ 1,490 $ 838,065
Atlantic City Mun. Utils. Auth. Rev., Wtr. System A-(c) 7.75% 5/01/17 2,000 (e) 2,298,580
Bergen Cnty., Utils. Auth.,
Wtr. Poll. Ctrl. Rev., F.G.I.C., Ser. B Aaa 5.75 12/15/05 1,000 1,069,630
Wtr. Poll. Ctrl. Rev., F.G.I.C., Ser. B Aaa Zero 12/15/08 7,250 3,598,973
Camden Cnty. Fin. Auth., F.S.A. Aaa Zero 2/15/03 1,600 1,119,312
Camden Cnty. Poll. Ctrl. Fin. Auth., Solid Waste Res.
Rec. Rev., Ser. B Ba 7.50 12/01/09 3,400 3,472,624
Cape May Cnty. Ind. Poll. Ctrl., Fin. Auth. Rev.,
M.B.I.A. Aaa 6.80 3/01/21 2,615 2,999,248
Cherry Hill Township Aa 5.90 6/01/05 1,000 1,060,140
Cherry Hill Township Aa 6.30 6/01/12 2,000 2,092,040
Cinnaminson Sewage Auth. Rev. A1 7.40 2/01/15 1,600 1,812,224
Delaware River Bay Auth., M.B.I.A. Aaa 5.00 1/01/17 2,250 2,028,555
Edison Twnshp., Gen. Oblig., A.M.B.A.C. Aaa 6.00 1/01/08 5,390 5,758,191
Egg Harbor Twnshp. Sch. Dist., F.S.A. Aaa 4.75 2/15/09 1,010 933,169
Egg Harbor Twnshp. Sch. Dist., Cert. of Part., M.B.I.A. Aaa 7.40 4/01/02 1,000(d)(e) 1,119,400
Essex Cnty. Impvt. Auth., A.M.B.A.C. Aaa 5.50 12/01/20 1,600 1,534,560
Essex Cnty. New Jersey Refunding Series A-1, A.M.B.A.C. Aaa 5.375 9/01/10 6,000 5,822,760
Evesham Mun. Utils. Auth. Rev., Ser. B, M.B.I.A. Aaa 7.00 7/01/10 2,000 2,180,400
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/03 500 570,650
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/04 500 573,885
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/05 500 576,075
Howell Twnshp. Mun. Utils. Auth. Rev., 2nd Ser. NR 8.60 1/01/14 750 (e) 849,683
Hudson Cnty. Impvt. Auth.,
Solid Waste Sys. Rev. BBB-(c) 7.10 1/01/20 2,050 2,047,356
Solid Waste Sys. Rev. A+(c) 6.10 7/01/20 1,500 1,510,485
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/04 1,020 1,160,760
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/05 940 1,072,784
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/10 1,600 1,803,824
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/11 1,600 1,801,760
Jersey City, Gen. Oblig., F.S.A., Ser. A Aaa 9.25 5/15/04 4,310 5,635,972
Jersey City, Hudson Cnty. Qualified Water Auth. Rev.,
F.S.A. Aaa 5.00 12/15/17 1,200 1,087,608
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-131
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Jersey City, Redev. Auth. Rev., Red Dixon Mill Apts.
Proj., F.N.M.A. AAA(c) 6.10% 5/01/12 $ 5,000 $ 5,127,400
Lakewood Twnshp., Gen., Oblig., F.G.I.C. Aaa 6.60 12/01/04 450 509,886
Lakewood Twnshp., Gen., Oblig., F.G.I.C. Aaa 6.60 12/01/05 445 505,342
Lenape Regl. High Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 7.625 1/01/12 400 487,368
Mercer Cnty. Impvt. Auth. Rev. Aa1 Zero 4/01/06 2,500 1,459,550
Mercer Cnty. Impvt. Auth. Rev. Aa1 Zero 4/01/07 2,725 1,490,003
Mercer Cnty. Impvt. Auth. Rev.,
West Windsor Twnshp. Police Proj. Aa 6.00 11/15/10 1,250 1,273,337
Middle Twnshp. Sch. Dist., F.G.I.C. Aaa 7.00 7/15/05 1,200 1,394,268
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/13 1,140 1,110,497
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/14 1,135 1,095,706
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/16 1,150 1,095,755
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/17 1,150 1,091,695
Monmouth Cnty. Impvt. Auth. Rev.,
Howell Twnshp. Brd. of Ed. Proj. Rev. AA(c) 6.45 7/01/08 2,000 2,161,780
Nat'l Auth. Rev. AA(c) 6.55 7/01/12 4,065 4,354,143
Water & Sewage Facs Rev., M.B.I.A. Aaa 5.00 2/01/13 1,600 1,459,120
Wtr. Treatment Fac., M.B.I.A. Aaa 6.875 8/01/12 750 841,200
Morris Cnty. Aaa 5.00 7/15/14 3,180 2,910,718
Morris Cnty. Aaa 5.00 7/15/15 3,180 2,878,472
Water Facs., F.G.I.C. NR 8.20 11/01/29 5,000 (f) 4,737,500
Middlesex Water Co., A.M.B.A.C. Aaa 5.25 10/01/23 2,900 2,620,759
New Jersey St. Bldg. Auth. Rev. Aa 5.00 6/15/17 1,000 881,410
New Jersey St. Bldg. Auth. Rev., Garden St. Svg. Bonds,
Ser. A Aa Zero 6/15/03 890 612,747
New Jersey St. Econ. Dev. Auth.,
Amer. Airlines Inc. Proj. Baa2 7.10 11/01/31 3,900 4,056,000
Jersey Central Pwr. & Light Aa 7.10 7/01/15 400 423,924
Nat'l. Assoc. of Accountants NR 7.50 7/01/01 1,050 1,105,356
Nat'l. Assoc. of Accountants NR 7.65 7/01/09 950 999,447
Peddie School Project AA-(c) 5.75 2/01/12 1,250 1,249,925
St Barnabas Reality Project M.B.I.A. Aaa 5.25 7/01/20 3,000 2,784,000
New Jersey St. Econ. Dist. Heating & Cool., Trigen
Trenton Proj., Ser. B BBB-(c) 6.20 12/01/07 2,725 2,840,077
New Jersey Econ. Dist. Heating & Cool., Trigen Trenton
Proj. BBB-(c) 6.20 12/01/10 600 602,628
New Jersey St. Edl. Facs. Fin. Auth. Rev.,
Princeton University Aaa 5.25 7/01/25 3,760 3,503,079
Princeton Inst. For Advanced Study, Ser. B Aaa 6.35 7/01/21 5,620 5,797,479
Seton Hall Univ. Proj., Ser. B, M.B.I.A. Aaa 6.25 7/01/07 680 726,254
Seton Hall Univ. Proj., Ser. D Baa1 7.00 7/01/21 2,000 2,115,620
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-132
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey St. Hlth. Care Facs. Fin. Auth. Rev.,
Atlantic City Med. Ctr., Ser. C A 6.80% 7/01/11 $ 3,900 $ 4,083,846
East Orange Gen. Hosp., Ser. B BBB+(c) 7.75 7/01/20 2,250 2,385,248
Helene Fuld Med. Ctr., Ser. C A(c) 8.00 7/01/08 2,700 2,998,350
Helene Fuld Med. Ctr., Ser. C A(c) 8.125 7/01/13 500 552,805
Intercare Hlth. Systems-JFK Ctr. A 7.50 7/01/07 1,000 1,092,570
Intercare Hlth. Systems-JFK Ctr. A 7.625 7/01/18 945 1,039,566
Jersey Shore Med. Ctr., A.M.B.A.C. Aaa 6.00 7/01/09 1,465 1,526,486
Jersey Shore Med. Ctr. Aaa 6.25 7/01/21 1,500 1,539,000
Kensington Cmnty. Med. Ctr., M.B.I.A. Aaa 7.00 7/01/20 3,450 3,790,791
Rahway Hospital, Ser. B Baa1 7.75 7/01/14 4,740 4,851,864
St. Peters Med. Ctr., M.B.I.A., Ser. E Aaa 6.50 7/01/07 1,725 (e) 1,922,978
Somerset Med. Ctr., F.G.I.C. Aaa 5.20 7/01/24 1,015 920,260
Warren Hosp. AA(c) 5.25 7/01/14 2,985 2,709,096
New Jersey St. Hsg. & Mtge. Fin. Agcy., M.B.I.A., Ser. D Aaa 7.70 10/01/29 4,810 5,084,218
New Jersey St. Hsg. & Mtge. Fin. Agcy., Tiffany Manor,
Ser. B A+(c) 6.75 11/01/11 2,190 2,268,840
New Jersey St. Hwy. Auth., Garden St. Pkwy. Gen. Rev. A1 6.20 1/01/10 3,035 3,224,839
New Jersey St. Trans. Trust Fund Auth.,
Trans. Sys., M.B.I.A. Aaa 5.00 6/15/15 4,000 3,669,920
Trans. Sys., M.B.I.A. Aaa 6.50 6/15/11 5,000 5,483,600
Trans. Sys., M.B.I.A. Aaa 5.50 6/15/15 5,000 4,830,000
New Jersey St. Tpke. Auth. Rev.,
Ser. C, M.B.I.A. Aaa 6.50 1/01/09 1,000 1,106,520
Ser. C, M.B.I.A. Aaa 6.50 1/01/16 14,835 16,157,392
Ser. A A 6.75 1/01/08 2,000 2,169,100
New Jersey St. Wastewater Treatment,
Trust Loan Rev. Aa 6.875 6/15/06 1,000 1,100,590
Trust Loan Rev., Ser. A Aa 6.00 7/01/09 1,000 1,032,010
North Brunswick Twnshp.,
Brd. of Ed., Gen. Oblig. Aa 6.80 6/15/06 350 401,377
Brd. of Ed., Gen. Oblig. Aa 6.80 6/15/07 350 399,854
Rict Hosp. Rev., Gen. Oblig. Aa 6.40 5/15/10 2,000 2,127,380
Passaic Valley New Jersey Water Comm. Water Supply Rev.,
F.G.I.C. Aaa 5.00 12/15/22 5,000 4,454,750
Paterson Cnty., F.S.A. Aaa 6.50 2/15/05 2,000 2,185,180
Pennsauken Twnshp., Brd. of Ed., Cert. of Part., B.I.G. Aaa 7.70 7/15/09 1,030 1,153,785
Port Auth. New York & New Jersey, Ser. 92 A1 5.00 7/15/23 2,000 1,730,660
Port Auth. New York & New Jersey A1 5.75 6/15/30 5,025 4,834,753
Port Auth. New York & New Jersey, A1 5.75 12/15/20 500 486,955
Ser. 96, F.G.I.C. Aaa 6.60 10/01/23 2,750 2,880,103
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-133
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Comnwlth.,
Gen. Oblig., M.B.I.A. Aaa 5.50% 7/01/08 $ 3,000 $ 3,091,770
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 10,250 11,896,662
Pub. Impvt. Ref., M.B.I.A. Aaa 7.00 7/01/10 1,000 (d) 1,160,650
Puerto Rico Elec. Pwr. Auth. Rev., Ref. Ser. S Baa1 6.125 7/01/08 2,300 2,422,199
Puerto Rico Hwy. Auth. Rev.,
Ser. Q AAA(c) 7.75 7/01/10 2,000(d)(e) 2,323,460
Ser. R Baa1 6.75 7/01/05 1,000 1,088,610
Ser. S AAA(c) 6.50 7/01/22 750 (e) 844,223
Puerto Rico Indus. Tourist Edl. Hosp. Auxilio Mutuo
Oblig.
Grp A, M.B.I.A. Aaa 6.25 7/01/24 3,000 3,065,640
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.363 1/25/07 7,875 (f) 7,845,469
Rutgers St. Univ. Rev.,
Ser. A A1 6.40 5/01/13 5,000 5,368,550
Ser. P A1 6.85 5/01/12 2,810 3,047,895
Salem Cnty. New Jersey Indus. Poll. Cntl. Fin. Auth.
Rev. Aaa 5.55 11/01/33 8,000 7,530,240
South Brunswick Twnshp.,
Wtr. & Swr. Utils., Gen. Impvt. NR 6.90 8/01/05 850 952,697
Wtr. & Swr. Utils., Gen. Impvt. NR 6.90 8/01/06 850 952,697
Union City New Jersey, Sch.Impvt., F.S.A. Aaa 6.375 11/01/08 1,545 1,685,502
Union Cnty. Utils. Auth.,
Solid Waste Rev., Ser. A A-(c) 7.10 6/15/06 1,255 1,302,941
Solid Waste Rev., Ser. A A-(c) 7.20 6/15/14 6,850 7,124,342
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund BBB(c) 7.70 10/01/04 2,750 3,013,505
Virgin Islands Territory, Hugo Ins. Claims Fund Prog.,
Ser. 91. NR 7.75 10/01/06 1,970 2,146,670
West Morris Regl. High Sch. Dist., Cert. of Part.,
B.I.G. Aaa 7.50 3/15/09 1,500 1,648,425
West New York & New Jersey,
Mun. Utils., Auth. Swr. Rev., F.G.I.C. Aaa Zero 12/15/06 3,540 2,009,339
Mun. Utils., Auth. Swr. Rev., F.G.I.C. Aaa Zero 12/15/12 1,410 534,503
Mun. Utils., Auth. Swr. Rev., F.G.I.C. Aaa Zero 12/15/13 2,910 1,035,524
------------
Total long-term investments (cost $279,205,394) 293,017,357
------------
SHORT-TERM INVESTMENTS--0.6%
New Jersey Eco. Dev. Auth., F.R.D.D.,
Dow Chemical, Ser. 84A P1 3.35 9/01/95 100 100,000
Dow Chemical, Ser. 84B P1 3.35 9/01/95 800 800,000
Port Auth. of New York & New Jersey, Spec. Oblig. Rev.,
Ser.1 F.R.D.D. VMIG1 3.45 9/01/95 600 600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-134
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Union Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev., Poll.
Ctrl. Rev.,
F.R.D.D., Ser. 94 P1 3.25% 9/01/95 $ 300 $ 300,000
------------
Total short-term investments (cost $1,800,000) 1,800,000
------------
Total Investments--99.1%
(cost $281,005,394; Note 4) 294,817,357
Other assets in excess of liabilities--0.9% 2,552,590
------------
Net Assets--100% $297,369,947
------------
------------
</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 (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
F.N.M.A.--Federal National Mortgage Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of
the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted.
(c) Standard & Poor's Rating.
(d) Pledged as initial margin on financial futures contracts.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(f) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
</TABLE>
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-135
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $281,005,394).................................................................... $294,817,357
Cash......................................................................................................... 94,799
Interest receivable.......................................................................................... 3,717,758
Receivable for Fund shares sold.............................................................................. 130,295
Deferred expenses and other assets........................................................................... 51,498
------------
Total assets.............................................................................................. 298,811,707
------------
Liabilities
Payable for Fund shares reacquired........................................................................... 1,074,124
Due to Distributors.......................................................................................... 109,328
Dividends payable............................................................................................ 154,410
Due to Manager............................................................................................... 81,517
Due to broker-variation margin payable....................................................................... 20,781
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 1,441,760
------------
Net Assets................................................................................................... $297,369,947
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 270,807
Paid-in capital in excess of par.......................................................................... 285,074,748
------------
285,345,555
Accumulated net realized loss on investments.............................................................. (1,747,102)
Net unrealized appreciation on investments................................................................ 13,771,494
------------
Net assets, August 31, 1995.................................................................................. $297,369,947
------------
------------
Class A:
Net asset value and redemption price per share
($49,665,933 / 4,523,163 shares of beneficial interest issued and outstanding)......................... $10.98
Maximum sales charge (3.0% of offering price)............................................................. .34
------------
Maximum offering price to public.......................................................................... $11.32
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($246,201,663 / 22,420,702 shares of beneficial interest issued and outstanding)....................... $10.98
------------
------------
Class C:
Net asset value, offering price and redemption price per share
($1,502,351 / 136,816 shares of beneficial interest issued and outstanding)............................ $10.98
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-136
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................... $19,123,944
---------------
Expenses
Management fee, net of waiver of
$483,073................................ 1,047,300
Distribution fee--Class A.................. 30,290
Distribution fee--Class B.................. 1,374,973
Distribution fee--Class C.................. 5,924
Transfer agent's fees and expenses......... 138,000
Custodian's fees and expenses.............. 110,000
Reports to shareholders.................... 63,000
Registration fees.......................... 19,000
Audit fee.................................. 11,000
Legal fees................................. 10,000
Insurance.................................. 9,500
Trustee's fees............................. 3,200
Miscellaneous.............................. 14,050
---------------
Total expenses.......................... 2,836,237
Less: Custodian fee credit................. (43,589)
---------------
Net expenses........................... 2,792,648
---------------
Net investment income......................... 16,331,296
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized (gain) loss on:
Investment transactions.................... 2,223,013
Financial futures contract transactions.... (911,541)
Options purchased.......................... (53,313)
---------------
1,258,159
---------------
Net change in unrealized appreciation on:
Investments................................ 1,994,868
Financial futures contracts................ 2,281
---------------
1,997,149
---------------
Net gain on investments....................... 3,255,308
---------------
Net Increase in Net Assets
Resulting from Operations..................... $19,586,604
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------------- ------------
<S> <C> <C>
Operations
Net investment income......... $ 16,331,296 $ 18,099,624
Net realized gain (loss) on
investment transactions.... 1,258,159 (1,294,945)
Net change in unrealized
appreciation/depreciation
of investments............. 1,997,149 (23,297,125)
------------- ------------
Net increase (decrease) in net
assets resulting from
operations................. 19,586,604 (6,492,446)
------------- ------------
Dividends and distributions (Note 1):
Dividends from net investment
income
Class A.................... (1,712,625) (831,601)
Class B.................... (14,579,222) (17,267,981)
Class C.................... (39,449) (42)
------------- ------------
(16,331,296) (18,099,624)
------------- ------------
Distributions from net
realized gains
Class A.................... -- (237,645)
Class B.................... -- (5,452,932)
------------- ------------
-- (5,690,577)
------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold....................... 18,110,094 41,819,711
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 9,760,545 14,387,672
Cost of shares reacquired..... (71,846,422) (55,213,009)
------------- ------------
Net increase (decrease) in net
assets from Series share
transactions............... (43,975,783) 994,374
------------- ------------
Total increase (decrease)........ (40,720,475) (29,288,273)
Net Assets
Beginning of year................ 338,090,422 367,378,695
------------- ------------
End of year...................... $ 297,369,947 $338,090,422
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-137
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of 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.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from securities or currencies based upon the type of option
written. The difference between the premium and the amount paid on effecting a
closing purchase transaction, including brokerage commissions, is also treated
as a realized gain, or if the premium received is less than the amount paid for
the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities or currencies purchased by the Fund. The Fund as writer of an option
may have no control over whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an unfavorable change
in the price of the security underlying the written option. There were no
written options outstanding at August 31, 1995.
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
- --------------------------------------------------------------------------------
B-138
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
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. For the four
months ended December 31, 1994, PMF waived 25% of its management fee. For the
eight months ended August 31, 1995, PMF waived 35% of its management fee. The
amount of fees waived for the fiscal year ended August 31, 1995, amounted to
$483,073 ($0.018 per share for Class A, B and C shares; 0.16% of average net
assets). The Series is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $16,200 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $665,390 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C (per Note 5) shareholders.
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the fiscal year ended August
31, 1995, the Series incurred fees of approximately $110,100 for the services of
PMFS. As of August 31, 1995, approximately $8,800 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. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995, were $110,077,138 and
$152,249,270, respectively.
At August 31, 1995 the Series sold 35 financial futures contracts on U.S.
Treasury Bonds which expire in September 1995. The value at disposition of such
contracts was $3,920,000. The value of such contracts on August 31, 1995 was
$3,960,469, thereby resulting in an unrealized loss of $40,469.
- --------------------------------------------------------------------------------
B-139
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
The cost basis of investments for federal income tax purposes at August 31,
1995, was $281,017,544 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes is $13,799,813 (gross unrealized
appreciation--$15,035,122; gross unrealized depreciation--$1,235,309).
For federal income tax purposes, the Fund has a capital loss carryforward as of
August 31, 1995 of approximately $1,724,478 which will expire in 2003.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until future net gains have been realized in excess of such
carryforward.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 146,305 $ 1,554,250
Shares issued in reinvestment
of dividends...................... 101,255 1,092,947
Shares reacquired................... (644,816) (6,937,778)
---------- ------------
Net decrease in shares outstanding
before conversion................. (397,256) (4,290,581)
Shares issued upon conversion from
Class B........................... 3,553,656 38,072,569
---------- ------------
Net increase in shares
outstanding....................... 3,156,400 $ 33,781,988
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 314,116 $ 3,550,381
Shares issued in reinvestment of
distributions..................... 62,184 699,684
Shares reacquired................... (329,592) (3,698,430)
---------- ------------
Net increase in shares
outstanding....................... 46,708 $ 551,635
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 1,439,537 $ 15,328,727
Shares issued in reinvestment
of dividends...................... 811,273 8,636,803
Shares reacquired................... (6,166,186) (64,879,456)
---------- ------------
Net decrease in shares outstanding
before conversion................. (3,915,376) (40,913,926)
Shares reacquired upon conversion
into Class A...................... (3,553,656) (38,072,569)
---------- ------------
Net decrease in shares
outstanding....................... (7,469,032) $(78,986,495)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 3,349,228 $ 38,030,222
Shares issued in reinvestment
of dividends and distributions.... 1,214,942 13,687,960
Shares reacquired................... (4,642,077) (51,514,579)
---------- ------------
Net decrease in shares
outstanding....................... (77,907) $ (203,603)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Six months ended August 31, 1995:
Shares sold......................... 114,493 $ 1,227,117
Shares issued in reinvestment
of dividends...................... 2,852 30,795
Shares reacquired................... (2,705) (29,188)
---------- ------------
Net increase in shares
outstanding....................... 114,640 $ 1,228,724
---------- ------------
---------- ------------
August 1, 1994* through August 31,
1994:
Shares sold......................... 22,173 $ 239,108
Shares issued in reinvestment
of dividends...................... 3 28
Shares reacquired................... -- --
---------- ------------
Net increase in shares
outstanding....................... 22,176 $ 239,136
---------- ------------
---------- ------------
- ---------------
* Commencement of offering Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-140
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended August 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $10.16
------- ------- ------- ------- ------
Income from investment operations
Net investment income(a)................. .61 .61 .64 .67 .69
Net realized and unrealized gain (loss)
on investment transactions............ .17 (.75) .71 .51 .59
------- ------- ------- ------- ------
Total from investment operations...... .78 (.14) 1.35 1.18 1.28
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income..... (.61) (.61) (.64) (.67) (.69)
Distributions from net realized gains on
investment transactions............... -- (.18) (.12) (.09) (.02)
------- ------- ------- ------- ------
Total distributions................... (.61) (.79) (.76) (.76) (.71)
------- ------- ------- ------- ------
Net asset value, end of year............. $ 10.98 $ 10.81 $ 11.74 $ 11.15 $10.73
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(b):......................... 7.55% (1.27)% 12.57% 11.35% 12.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............ $49,666 $14,774 $15,501 $11,941 $8,041
Average net assets (000)................. $30,290 $15,334 $13,444 $ 9,759 $5,637
Ratios to average net assets:(a)
Expenses, including distribution
fees............................... .55% .58% .61% .48% .29%
Expenses, excluding distribution
fees............................... .45% .48% .51% .38% .19%
Net investment income................. 5.65% 5.42% 5.63% 6.14% 6.58%
Portfolio turnover rate.................. 37% 34% 32% 38% 116%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management and/or distribution fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-141
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ----------
------------------------------------------------------------ Year
Year Ended August 31, Ended
------------------------------------------------------------ August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $10.81
-------- -------- -------- -------- -------- -----
Income from investment operations
Net investment income(a)................. .57 .56 .59 .63 .65 .54
Net realized and unrealized gain (loss)
on investment transactions............ .17 (.75) .71 .51 .59 .17
-------- -------- -------- -------- -------- -----
Total from investment operations...... .74 (.19) 1.30 1.14 1.24 .71
-------- -------- -------- -------- -------- -----
Less distributions
Dividends from net investment income..... (.57) (.56) (.59) (.63) (.65) (.54)
Distributions from net realized gains on
investment transactions............... -- (.18) (.12) (.09) (.02) --
-------- -------- -------- -------- -------- ------
Total distributions................... (.57) (.74) (.71) (.72) (.67) (.54)
-------- -------- -------- -------- -------- ------
Net asset value, end of period........... $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $10.98
-------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- ------
TOTAL RETURN(b):......................... 7.12% (1.67)% 12.12% 10.93% 12.52% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $246,202 $323,077 $351,878 $295,781 $244,322 $1,502
Average net assets (000)................. $274,995 $343,941 $316,372 $269,318 $208,893 $ 790
Ratios to average net assets:(a)
Expenses, including distribution
fees............................... .95% .98% 1.01% .88% .69% 1.20%
Expenses, excluding distribution
fees............................... .45% .48% .51% .38% .19% .45%
Net investment income................. 5.30% 5.02% 5.23% 5.74% 6.18% 4.99%
Portfolio turnover rate.................. 37% 34% 32% 38% 116% 37%
<CAPTION>
August 1,
through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $10.83
-----
Income from investment operations
Net investment income(a)................. .04
Net realized and unrealized gain (loss)
on investment transactions............ (.02)
-----
Total from investment operations...... .02
-----
Less distributions
Dividends from net investment income..... (.04)
Distributions from net realized gains on
investment transactions............... --
-----
Total distributions................... (.04)
-----
Net asset value, end of period........... $10.81
-----
-----
TOTAL RETURN(b):......................... 0.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $ 240
Average net assets (000)................. $ 11
Ratios to average net assets:(a)
Expenses, including distribution
fees............................... 1.29%(c)
Expenses, excluding distribution
fees............................... .54%(c)
Net investment income................. 5.06%(c)
Portfolio turnover rate.................. 34%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management and/or distribution fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-142
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW JERSEY SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, New Jersey
Series, as of August 31, 1995, 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, 1995 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, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-143
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Atlantic Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D. VMIG1 3.50% 9/06/95 $ 1,300 $ 1,300,000
Burlington County, B.A.N. NR 5.00 11/30/95 6,000 6,004,228
East Brunswick Twnshp., B.A.N. NR 5.75 1/03/96 7,000 7,015,838
Gloucester Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev.,
Mobil Corp. Proj., F.R.W.D. P-1 3.20 9/06/95 4,610 4,610,000
Monsanto Co. Proj., Ser. 92, F.R.W.D. P-1 3.45 9/06/95 3,120 3,120,000
Hudson Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D. A-1(c) 3.55 9/07/95 4,445 4,445,000
Jersey City, Ser. 94, B.A.N. NR 4.75 9/29/95 5,000 5,001,654
Maplewood Twnshp., B.A.N. NR 5.25 10/17/95 5,318 5,321,720
New Jersey St. Econ. Dev. Auth.,
Applewood Ctr. for Aging, Ser.89, F.R.W.D. A-1(c) 3.60 9/07/95 7,350 7,350,000
Catholic Cmnty. Svcs Proj., Ser. 93, F.R.W.D. VMIG1 3.45 9/07/95 6,000 6,000,000
Catholic Cmnty. Svcs Proj., Ser. 95, F.R.W.D. VMIG1 3.45 9/07/95 1,250 1,250,000
Chambers Cogeneration Ltd., Ser. 91, T.E.C.P. VMIG1 3.65 9/21/95 3,000 3,000,000
Chambers Cogeneration Ltd., Ser. 91, T.E.C.P. VMIG1 3.95 10/19/95 4,400 4,400,000
Dow Chemical, Ser. 84A, F.R.D.D. P1 3.35 9/01/95 7,000 7,000,000
East Meadow Corp., Ser. 86A, F.R.W.D. VMIG1 3.75 9/06/95 2,675 2,675,000
Econ. Growth Bds., Ser. 94B, F.R.W.D. A-1+(c) 3.60 9/07/95 2,000 2,000,000
Fellowship Village Proj., Ser. 95, F.R.W.D. VMIG1 3.55 9/07/95 7,000 7,000,000
Franciscan Oaks Proj., Ser. 92B, F.R.W.D. A-1+(c) 3.40 9/06/95 1,600 1,600,000
General Motors Proj., F.R.W.D. VMIG2 3.60 9/06/95 7,350 7,350,000
Hillcrest Health Svc. Sys. Proj., Ser. 95, F.R.W.D. P1 3.60 9/06/95 8,000 8,000,000
Hoffman La-Roche Inc. Proj., Ser. 93, F.R.D.D. Aaa 3.35 9/01/95 5,000 5,000,000
Kent Place, Ser. 92L, F.R.W.D. VMIG1 3.55 9/07/95 1,940 1,940,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.95 10/19/95 1,500 1,500,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.60 10/27/95 2,600 2,600,000
Marriot Corp. Proj., Ser. 84, F.R.W.D. P1 3.15 9/06/95 6,700 6,700,000
Michael Shalit Proj., Ser. 93, F.R.D.D. Aa3 3.35 9/01/95 1,800 1,800,000
North Plainfield Hldg., Ser. 92, A.O.T. VMIG1 4.15 9/01/96 3,880 3,880,000
Ocean Spray Cranberry Inc. Proj., Ser. 87, S.A.O.T. A+(c) 4.00 7/01/96 5,455 5,455,000
Office Court Assoc. Proj., F.R.W.D. A-1+(c) 3.60 9/05/95 1,850 1,850,000
Peddie Sch. Proj., Ser. 94B, F.R.W.D. A-1(c) 3.65 9/07/95 3,000 3,000,000
RJB Associates LTD., F.R.W.D. Aa3 3.65 9/07/95 1,580 1,580,000
Russ Berrie & Co., Ser. 83, F.R.W.D. A-1(c) 3.35 9/06/95 200 200,000
New Jersey St. Hsg. Fin. Agcy., Ser. 92A, Q.T.P.O.T. AA+(c) 3.75 11/01/95 3,000 3,000,000
New Jersey St. Tpke. Auth. Rev., Ser. 91D, F.R.W.D. VMIG1 3.05 9/06/95 12,000 12,000,000
Newark Healthcare Facs. Rev., Ser. 95A, F.R.W.D. A-1(c) 3.50 9/07/95 2,965 2,965,000
Passaic County, B.A.N. NR 5.00 4/05/96 4,000 4,013,613
Port Auth. of New York & New Jersey, F.R.W.D.,
Ser. 93-2 NR 3.627 9/05/95 8,000 8,000,000
KIAC Partners, Ser. 93-2 VMIG1 3.40 9/06/95 2,900 2,900,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-144
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Comnwlth. Hwy. & Trans. Auth. Rev., F.R.W.D. VMIG1 3.20% 9/06/95 $ 200 $ 200,000
Puerto Rico Comnwlth.,
Gov't Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 6,800 6,800,000
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+(c) 4.10 9/08/95 2,500 2,500,000
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fin. Auth.
Rev.,
Inter American Proj., Ser. 88, T.E.C.P. VMIG1 3.65 9/08/95 2,800 2,800,000
Rockaway Twnshp., B.A.N. NR 3.92 7/31/96 4,899 4,900,174
------------
Total Investments--98.7%
(amortized cost $180,027,227(d)) 180,027,227
Other assets in excess of liabilities--1.3% 2,425,565
------------
Net Assets--100% $182,452,792
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
Q.T.P.O.T.--Quarterly Third Party Optional Tender.
S.A.O.T.--Semi-Annual Optional Tender.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of such
securities are considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's rating.
(d) 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-145
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $180,027,227
Cash......................................................................................................... 51,515
Receivable for investments sold.............................................................................. 4,115,000
Receivable for Series shares sold............................................................................ 2,080,414
Interest receivable.......................................................................................... 1,625,300
Deferred expenses and other assets........................................................................... 5,891
------------
Total assets.............................................................................................. 187,905,347
------------
Liabilities
Payable for investments purchased............................................................................ 3,880,000
Payable for Series shares reacquired......................................................................... 1,392,918
Dividends payable............................................................................................ 64,568
Management fee payable....................................................................................... 60,373
Accrued expenses and other liabilities....................................................................... 42,241
Distribution fee payable..................................................................................... 10,855
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 5,452,555
------------
Net Assets................................................................................................... $182,452,792
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 1,824,528
Paid-in capital in excess of par.......................................................................... 180,628,264
------------
Net assets, August 31, 1995.................................................................................. $182,452,792
------------
------------
Net asset value, offering price and redemption price per share ($182,452,792 / 182,452,792 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)........................ $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-146
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest and discount earned............. $ 6,375,246
---------------
Expenses
Management fee, net of waiver of
$214,029.............................. 642,087
Distribution fee......................... 214,029
Transfer agent's fees and expenses....... 90,000
Custodian's fees and expenses............ 50,000
Registration fees........................ 28,000
Reports to shareholders.................. 24,000
Legal fees............................... 13,000
Audit fee................................ 10,500
Deferred organization expenses........... 6,440
Insurance expense........................ 5,000
Trustees' fees........................... 3,000
Miscellaneous............................ 7,889
---------------
Total expenses........................ 1,093,945
Less: custodian fee credit............... (47,681)
---------------
Net expenses.......................... 1,046,264
---------------
Net investment income....................... 5,328,982
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 5,328,982
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income........ $ 5,328,982 $ 3,169,992
------------- -------------
Net increase in net assets
resulting from
operations................ 5,328,982 3,169,992
------------- -------------
Dividends to shareholders....... (5,328,982) (3,169,992)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
subscribed................ 621,173,812 556,557,575
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 5,178,490 3,057,774
Cost of shares reacquired.... (602,179,432) (564,422,228)
------------- -------------
Net increase (decrease) in
net assets from Series
share transactions........ 24,172,870 (4,806,879)
------------- -------------
Total increase (decrease)....... 24,172,870 (4,806,879)
Net Assets
Beginning of year............... 158,279,922 163,086,801
------------- -------------
End of year..................... $ 182,452,792 $ 158,279,922
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-147
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 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.
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 year ended August 31, 1995, PMF waived 25% of its management fee. The amount
of such fees waived for the year ended August 31, 1995 amounted to $214,029
($.001 per share; .125% 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-148
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $82,000 for the services of PMFS. As
of August 31, 1995, 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-149
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
<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(c).......................... .03 .02 .02 .04
Dividends and distributions.............................................. (.03) (.02) (.02) (.04)
-------- -------- -------- --------
Net asset value, end of period........................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(d):......................................................... 3.15% 1.90% 2.31% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $182,453 $158,280 $163,087 $164,092
Average net assets (000)................................................. $171,223 $169,123 $170,103 $155,915
Ratios to average net assets(c):
Expenses, including distribution fee.................................. .64% .68% .64% .32%
Expenses, excluding distribution fee.................................. .51% .55% .51% .19%
Net investment income................................................. 3.11% 1.87% 2.02% 3.33%
<CAPTION>
December 3,
1990(a)
Through
August 31,
1991
-----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 1.00
Net investment income and net realized gains(c).......................... .03
Dividends and distributions.............................................. (.03)
-----------
Net asset value, end of period........................................... $ 1.00
-----------
-----------
TOTAL RETURN(d):......................................................... 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 117,460
Average net assets (000)................................................. $ 89,273
Ratios to average net assets(c):
Expenses, including distribution fee.................................. .13%(b)
Expenses, excluding distribution fee.................................. .00%(b)
Net investment income................................................. 4.48%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of management fee waiver and/or expense subsidy.
(d) Total return includes reinvestment of dividends and distributions. Total
returns for periods of less than one year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-150
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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, including
the portfolio of investments, of Prudential Municipal Series Fund, New Jersey
Money Market Series, as of August 31, 1995, 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 four
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, 1995 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 of August 31, 1995, the results
of its operations, the changes in its net assets, and its financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-151
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--91.7%
- ------------------------------------------------------------------------------------------------------------------------------
Babylon Ind. Dev. Agcy. Res. Rec. Rev.,
Babylon Cmnty. Waste Mgmt. Facs., Ser. A Baa1 7.875% 7/01/06 $ 3,520(d) $ 4,015,792
Ogden Martin Sys. Inc., Ser. B Baa1 8.50 1/01/19 495 557,464
Ogden Martin Sys. Inc., Ser. C Baa1 8.50 1/01/19 3,450 3,885,356
City of New Rochelle Ind. Dev. Agcy.,
Coll. of New Rochelle BBB-(c) 6.625 7/01/12 500 508,785
Coll. of New Rochelle BBB-(c) 6.75 7/01/22 2,000 2,038,340
Dutchess Cnty. Res. Rec. Agcy. Rev.,
Solid Waste Mgmt., Ser. A, F.G.I.C. Aaa 7.50 1/01/09 1,150 1,284,481
Great Neck No. Wtr. Auth., Wtr. Sys. Rev., Ser. A A1 7.00 1/01/18 1,750(d) 1,958,390
Hempstead Town, Ser. B, F.G.I.C. Aaa 5.625 2/01/15 3,400 3,311,702
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,745 2,021,705
Jefferson Cnty. Ind. Dev. Agcy., Solid Waste Disp. Rev. Baa1 7.20 12/01/20 1,500 1,591,530
Metro. Trans. Auth. Facs. Rev.,
Commuter Facs., Ser. 7 Baa1 Zero 7/01/08 4,030 1,903,692
Commuter Facs., Ser. 7 Baa1 Zero 7/01/09 4,445 1,948,910
Commuter Facs., Ser. N, F.G.I.C. Aaa Zero 7/01/12 5,575 2,146,877
Commuter Facs., Ser. N, F.G.I.C. Aaa Zero 7/01/13 4,000 1,445,360
Trans. Facs., Ser. O Baa1 5.75 7/01/08 2,500 2,472,975
Trans. Facs., Ser. O Baa1 5.75 7/01/13 1,975 1,908,620
Nassau Cnty. Ind. Dev. Agcy. Rev., Hofstra Univ. Proj. A 8.25 7/01/03 2,500 (d) 2,773,925
New York City, Gen. Oblig.,
Ser. A Baa1 7.75 3/15/03 3,500 3,850,490
Ser. B Baa1 8.00 6/01/99 1,900 2,082,970
Ser. B Baa1 7.50 2/01/01 4,000 4,370,080
Ser. D Baa1 8.00 8/01/03 2,500 2,802,700
Ser. D Baa1 7.70 2/01/09 3,040 3,349,654
Ser. F Baa1 8.20 11/15/03 3,000 3,457,830
New York City Ind. Dev. Agcy., Spec. Fac. Rev.,
American Airlines Proj. Baa2 6.90 8/01/24 6,000 6,194,520
Term. One Group Assoc. Proj. A 6.00 1/01/15 3,000 2,899,860
Term. One Group Assoc. Proj. A 6.00 1/01/19 5,000 4,787,950
U.S.T.A. National Tennis Center Proj., F.S.A. Aaa 6.375 11/15/14 1,000 1,040,090
Y.M.C.A. Of Greater N.Y. Proj. NR 8.00 8/01/16 1,350 1,444,514
New York City Mun. Wtr. Fin. Auth. Rev.,
Wtr. & Swr. Sys., Ser. A, M.B.I.A. Aaa 7.25 6/15/15 3,000 3,405,270
Wtr. & Swr. Sys., Ser. C Aaa 7.375 6/15/13 4,000 (d) 4,635,200
New York St. Dorm. Auth. Rev., City Univ. Sys. Cons.,
Ser. A Baa1 8.125 7/01/07 3,435 3,831,742
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-152
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York St. Dorm. Auth. Rev., City Univ. Sys. Cons.,
(cont'd)
Ser. A Baa1 5.75% 7/01/13 $ 2,500 $ 2,398,875
Ser. C, F.G.I.C. Aaa 7.50 7/01/10 3,500 4,199,230
Ser. D Baa1 8.75 7/01/02 5,000 6,067,000
Ser. D Baa1 7.00 7/01/09 1,880 2,069,711
Coll. & Univ. Ed., M.B.I.A. Aaa Zero 7/01/04 2,255 1,437,811
Episcopal Hlth. Svcs., G.N.M.A. AAA(c) 7.55 8/01/29 3,000 3,266,730
Insured Mount Sinai Med. Sch., Ser. A, M.B.I.A. Aaa 5.00 7/01/13 2,945 2,648,762
Long Island Med. Ctr.,
Ser. A, F.H.A. Aa 7.625 8/15/08 2,595 2,812,746
Ser. A, F.H.A. Aa 7.75 8/15/27 4,100 4,455,839
Menorah Campus, F.H.A. AA(c) 7.40 2/01/31 2,990 3,323,176
Spec. Act. Sch. Districts, F.G.I.C. Aaa 7.00 7/01/13 3,050 3,322,426
St. Univ. Edl. Facs., Ser. A, A.M.B.A.C. Baa1 5.25 5/15/15 5,000 4,494,850
New York St. Energy Resh. & Dev. Auth. Rev.,
Brooklyn Union Gas Co., M.B.I.A. Aaa 6.75 2/01/24 2,000 2,105,020
Brooklyn Union Gas Co., Ser. D, M.B.I.A. Aaa 7.225 7/08/26 2,000 (e) 1,720,000
Con. Edison Co. Aa3 7.50 7/01/25 6,735 7,268,142
Con. Edison Co. Aa3 7.50 1/01/26 4,775 5,158,767
New York St. Environ. Facs. Corp.,
Occidental Pet. Corp. Proj. Baa3 5.70 9/01/28 2,000 1,778,720
Poll. Ctrl. Rev., St. Wtr. Revolving Fund, Ser. B Aa 7.50 3/15/11 1,300 1,432,691
Poll. Ctrl. Rev., St. Wtr. Revolving Fund, Ser. E Aa 6.50 6/15/14 1,000 1,059,960
New York St. Hsg. Fin. Agcy. Rev., Ser. A,
Multifamily Hsg. Aa 7.05 8/15/24 1,000 1,048,600
St. Univ. Constr. Aaa 8.10 11/01/10 1,000 (d) 1,137,720
St. Univ. Constr. Aaa 8.00 5/01/11 3,600 4,375,980
Svc. Contract Aaa 7.375 9/15/21 2,000 (d) 2,346,220
New York St. Local Gov't. Assistance Corp.,
Ser. B A 5.375 4/01/16 5,000 4,627,500
Ser. B A 6.25 4/01/21 2,000 2,015,700
Ser. C A Zero 4/01/14 10,000 3,327,200
Ser. E A 6.00 4/01/14 4,000 4,035,520
Ser. E A 5.25 4/01/16 4,500 4,118,670
New York St. Med. Care Facs. Fin. Agcy. Rev.,
Booth, Silvercrest & Kings Brook Hosp., Ser. A, F.H.A. Aa 7.60 2/15/29 2,750 3,030,720
Ellis & Ira Davenport Hosp., Ser. B, F.H.A. Aa 8.00 2/15/28 1,495 1,658,942
F.U.C. Insured Mtge., Ser. A, A.M.B.A.C. Aaa 6.50 8/15/29 3,000 3,122,850
Good Samaritan Hosp., Ser. A, F.H.A. Aa 7.625 2/15/23 3,500 3,804,780
Hosp. & Nursing Home, Ser. A, F.H.A. Aaa 7.70 2/15/25 1,000 (d) 1,162,790
Hosp. & Nursing Home, Ser. C, F.H.A. Aa 8.625 2/15/06 1,430 1,464,677
Long Island Coll. Hosp., Ser. A, F.H.A. AAA(c) 8.50 1/15/22 4,000 4,151,080
Long Island Coll. Hosp., Ser. B, F.H.A. Aa 8.00 2/15/08 3,000 3,330,810
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-153
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York St. Med. Care Facs. Fin. Agcy. Rev., Mental Hlth. Svcs.,
F.G.I.C. Aaa 5.375% 2/15/14 $ 5,000 $ 4,739,250
F.G.I.C. Aaa 5.25 2/15/19 6,250 5,663,687
M.B.I.A. Aaa 6.00 8/15/02 3,000 3,229,020
Ser. A Aaa 7.50 8/15/07 2,185 (d) 2,537,812
Ser. A Baa1 7.50 8/15/07 815 883,721
Ser. A Baa1 7.75 8/15/11 135 148,001
Ser. A Aaa 7.50 2/15/21 3,135 (d) 3,641,208
St. Francis Hosp., Proj. A, F.G.I.C. Aaa 7.60 11/01/08 2,350 2,629,321
New York St. Mtge. Agcy. Rev.,
Homeowner Mtge. Aa 5.375 10/01/17 2,000 1,800,620
Homeowner Mtge. Aa 8.05 10/01/21 3,110 3,314,576
New York St. Mun. Bond Bank Agcy., Spec. Proj. Rev., Ser.
A A+(c) 6.75 3/15/11 3,000 3,186,870
New York St. Thrwy. Auth. Svc. Contract Rev.,
Local Highway & Bridge Baa1 5.875 4/01/14 1,485 1,427,337
New York St. Urban Dev. Corp. Rev.,
Correctional Cap. Facs., Ser. 5 Baa1 6.00 1/01/04 4,415 4,527,936
Correctional Cap. Facs. Baa1 Zero 1/01/08 10,000 4,834,800
Correctional Cap. Facs. Baa1 5.25 1/01/21 2,960 2,562,146
Niagara Falls Bridge Comn., Toll Bridge Sys. Rev.,
F.G.I.C. Aaa 5.25 10/01/21 2,350 2,150,673
Port Auth. of New York & New Jersey, Ser. 70 A1 7.25 8/01/25 1,000 1,077,610
Suffolk Cnty. Ind. Dev. Agcy., Southwest Swr. Sys. Rev.,
F.G.I.C. Aaa 6.00 2/01/07 1,000 1,068,170
Suffolk Cnty. Wtr. Auth., Waterworks Rev., M.B.I.A. Aaa 6.00 6/01/09 5,160 5,467,536
Triborough Bridge & Tunl. Auth. Rev.,
Ser. A, M.B.I.A. Aaa 6.00 1/01/10 2,000 2,102,140
Ser. A Aa 5.00 1/01/15 5,000 4,468,800
Ser. M Aaa 7.50 1/01/15 2,035 (d) 2,228,122
Puerto Rico Comnwlth., Gen. Oblig.,
A.M.B.A.C. Aaa 7.00 7/01/10 6,500 7,544,225
A.M.B.A.C. Aaa 5.25 7/01/18 1,000 923,650
A.M.B.A.C. Aaa 5.00 7/01/21 5,000 4,430,750
Pub. Impvt. Ref. Aaa 7.00 7/01/10 1,250 1,450,812
Puerto Rico Hsg. Fin. Auth. Rev., Single Family Baa 5.25 12/01/06 2,000 1,914,600
Puerto Rico Hwy. & Trans. Auth.,
Hwy. Rev. Ser. W Baa1 5.50 7/01/13 3,000 2,849,370
Hwy. Rev. Ser. W, F.S.A. Aaa 5.25 7/01/20 2,215 2,031,044
Hwy. Rev. Ser. X Baa1 5.50 7/01/19 3,450 3,199,530
Hwy. Rev. Ser. X, F.S.A. Aaa 5.00 7/01/22 2,940 2,599,842
Puerto Rico Pub. Bldgs. Auth. Rev. Gtd. Gov't. Facs.,
Ser. A, A.M.B.A.C. Aaa 6.25 7/01/15 850 902,938
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.617 1/25/07 7,875 7,845,469
Ser. I, M.B.I.A. Aaa 5.449 1/16/15 1,000 953,940
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-154
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund BBB(c) 7.70% 10/01/04 $ 2,500 $ 2,739,550
Hwy. Trans. Trust Fund, Ser. A NR 7.25 10/01/18 2,550 2,690,148
------------
Total long-term investments (cost $280,229,855) 299,472,213
------------
SHORT-TERM INVESTMENTS--7.5%
Babylon Ind. Dev. Agcy. Res. Rec. Rev., Ser. 89, F.R.D.D. A1+(c) 3.50 9/01/95 1,000 1,000,000
New York City, Gen. Oblig.,
Ser. 94A-4, F.R.D.D. VMIG1 3.45 9/01/95 400 400,000
Ser. A, F.R.D.D. VMIG1 3.45 9/01/95 2,200 2,200,000
New York City Hsg. Dev. Corp., E.17th St. Property,
Ser. 93A, F.R.D.D. A-1(c) 3.50 9/01/95 4,300 4,300,000
New York St. Dorm. Auth. Rev.,
St. Francis Center at the Knolls, F.R.D.D. VMIG1 3.45 9/01/95 2,600 2,600,000
New York St. Energy Resch. & Dev. Auth. Rev., F.R.D.D.,
Energy & Gas, Ser. 94B VMIG1 3.15 9/01/95 300 300,000
Niagara Mohawk Pwr. Corp., Ser. 85A A1+(c) 3.50 9/01/95 4,800 4,800,000
Niagara Mohawk Pwr. Corp., Ser. 85B P1 3.45 9/01/95 800 800,000
Niagara Mohawk Pwr. Corp., Ser. 86A P1 3.55 9/01/95 8,000 8,000,000
------------
Total short-term investments (cost $24,400,000) 24,400,000
------------
Total Investments--99.2%
(cost $304,629,855; Note 4) 323,872,213
Other assets in excess of liabilities--0.8% 2,694,687
------------
Net Assets--100% $326,566,900
------------
------------
</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 (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity date of such security is considered to be the later of the next date
on which the security can be redeemed at par or the next date on which the rate of interest is adjusted.
(c) Standard & Poor's rating.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
</TABLE>
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-155
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $304,629,855).................................................................... $323,872,213
Interest receivable.......................................................................................... 3,417,340
Receivable for Series shares sold............................................................................ 65,397
Receivable for investments sold.............................................................................. 36,174
Prepaid expenses and other assets............................................................................ 9,660
------------
Total assets.............................................................................................. 327,400,784
------------
Liabilities
Payable for Series shares reacquired......................................................................... 369,813
Dividends payable............................................................................................ 191,114
Management fee payable....................................................................................... 123,502
Distribution fee payable..................................................................................... 82,783
Accrued expenses and other liabilities....................................................................... 65,072
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 833,884
------------
Net Assets................................................................................................... $326,566,900
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 274,187
Paid-in capital in excess of par.......................................................................... 308,048,008
------------
308,322,195
Accumulated net realized loss on investments.............................................................. (997,653)
Net unrealized appreciation on investments................................................................ 19,242,358
------------
Net assets, August 31, 1995.................................................................................. $326,566,900
------------
------------
Class A:
Net asset value and redemption price per share
($163,024,630 / 13,689,565 shares of beneficial interest issued and outstanding)....................... $11.91
Maximum sales charge (3.0% of offering price)............................................................. .37
Maximum offering price to public.......................................................................... $12.28
Class B:
Net asset value, offering price and redemption price per share
($163,012,854 / 13,684,725 shares of beneficial interest issued and outstanding)....................... $11.91
Class C:
Net asset value, offering price and redemption price per share
($529,416 / 44,444 shares of beneficial interest issued and outstanding)............................... $11.91
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-156
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest and discount earned............. $ 20,849,233
---------------
Expenses
Management fee (net of fee waiver of
$108,361)............................. 1,518,552
Distribution fee--Class A................ 95,024
Distribution fee--Class B................ 1,150,164
Distribution fee--Class C................ 2,439
Transfer agent's fees and expenses....... 183,000
Custodian's fees and expenses............ 115,000
Registration fees........................ 65,000
Legal fees............................... 40,000
Reports to shareholders.................. 33,000
Audit fee................................ 11,000
Trustees' fees........................... 3,200
Miscellaneous............................ 15,340
---------------
Total expenses........................ 3,231,719
Less: custodian fee credit............... (15,291)
---------------
Net expenses.......................... 3,216,428
---------------
Net investment income....................... 17,632,805
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions.................. 3,593
Financial futures transactions........... (428,642)
---------------
(425,049)
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 5,028,670
Financial futures contracts.............. (4,844)
---------------
5,023,826
---------------
Net gain on investments..................... 4,598,777
---------------
Net Increase in Net Assets Resulting
from Operations............................. $ 22,231,582
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------ ------
<S> <C> <C>
Operations
Net investment income.......... $ 17,632,805 $ 18,454,581
Net realized loss on investment
transactions................ (425,049) (16,054)
Net change in unrealized
appreciation (depreciation)
of investments.............. 5,023,826 (25,211,565)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 22,231,582 (6,773,038)
------------ ------------
Dividends from net investment
income (Note 1)
Class A........................ (5,367,852) (734,832)
Class B........................ (12,248,452) (17,719,575)
Class C........................ (16,501) (174)
------------ ------------
(17,632,805) (18,454,581)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 18,761,553 41,684,512
Net asset value of shares
issued in reinvestment of
dividends................... 10,361,213 11,015,273
Cost of shares reacquired...... (52,939,335) (52,115,672)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (23,816,569) 584,113
------------ ------------
Total decrease.................... (19,217,792) (24,643,506)
Net Assets
Beginning of year................. 345,784,692 370,428,198
------------ ------------
End of year....................... $326,566,900 $345,784,692
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-157
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
There were no futures contracts outstanding at August 31, 1995.
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-158
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $108,361
($0.004 per share; 0.03% of average daily net assets). The Series is not
required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $39,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $360,200 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $134,000 for the services of
PMFS. As of August 31, 1995, 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.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $176,874,532 and
$219,612,500, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1995
was $304,658,055 and, accordingly, net unrealized appreciation investments for
federal income tax purposes was $19,214,158 (gross unrealized
appreciation--$19,976,506, gross unrealized depreciation--$762,348).
For federal income tax purposes, the Series had a capital loss carryforward as
of August 31, 1995 of approximately $1,041,800, of which $15,700 expires in 1999
and $1,026,100 expires in 2003. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward.
The Series elected to treat net capital losses of approximately $531,600
incurred in the ten month period ended August 31, 1994 as having occurred in the
current fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C
- --------------------------------------------------------------------------------
B-159
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
shares are sold with a contingent deferred sales charge of 1% during the first
year. Class B shares automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. A special exchange privilege is
also available for shareholders who qualified to purchase Class A shares at net
asset value.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years ended August 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31 1995:
Shares sold....................... 277,184 $ 3,225,910
Shares issued in reinvestment of
dividends....................... 267,148 3,155,429
Shares reacquired................. (1,006,903) (11,817,623)
----------- -------------
Net decrease in shares outstanding
before conversion............... (462,571) (5,436,284)
Shares issued upon conversion from
Class B......................... 12,985,377 149,561,617
----------- -------------
Net increase in shares
outstanding..................... 12,522,806 $ 144,125,333
----------- -------------
----------- -------------
Year ended August 31, 1994:
Shares sold....................... 568,443 $ 6,979,928
Shares issued in reinvestment of
dividends....................... 34,634 419,800
Shares reacquired................. (379,015) (4,536,278)
----------- -------------
Net increase in shares
outstanding..................... 224,062 $ 2,863,450
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold....................... 1,310,430 $ 15,158,331
Shares issued in reinvestment of
dividends....................... 627,938 7,192,642
Shares reacquired................. (3,612,951) (41,102,851)
----------- -------------
Net decrease in shares outstanding
before conversion............... (1,674,583) (18,751,878)
Shares reacquired upon conversion
into Class A.................... (12,985,377) (149,561,617)
----------- -------------
Net decrease in shares
outstanding..................... (14,659,960) $(168,313,495)
----------- -------------
----------- -------------
Year ended August 31, 1994:
Shares sold....................... 2,819,758 $ 34,553,962
Shares issued in reinvestment of
dividends....................... 873,809 10,595,424
Shares reacquired................. (3,939,794) (47,570,423)
----------- -------------
Net decrease in shares
outstanding..................... (246,227) $ (2,421,037)
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold....................... 32,796 $ 377,312
Shares issued in reinvestment of
dividends....................... 1,131 13,142
Shares reacquired................. (1,612) (18,861)
----------- -------------
Net increase in shares
outstanding..................... 32,315 $ 371,593
----------- -------------
----------- -------------
August 1, 1994(a) through
August 31, 1994:
Shares sold....................... 12,897 $ 150,622
Shares issued in reinvestment of
dividends....................... 4 49
Shares reacquired................. (772) (8,971)
----------- -------------
Net increase in shares
outstanding..................... 12,129 $ 141,700
----------- -------------
----------- -------------
- ---------------
(a) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-160
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended August 31,
------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............. $ 11.71 $ 12.54 $ 11.75 $11.08 $10.62
-------- ------- ------- ------ ------
Income from investment operations
Net investment income.......................... .66(a) .67 .70 .71 .72
Net realized and unrealized gain (loss) on
investment transactions..................... .20 (.83) .79 .67 .46
-------- ------- ------- ------ ------
Total from investment operations............ .86 (.16) 1.49 1.38 1.18
Less dividends
Dividends from net investment income........... (.66) (.67) (.70) (.71) (.72)
-------- ------- ------- ------ ------
Net asset value, end of year................... $ 11.91 $ 11.71 $ 12.54 $11.75 $11.08
-------- ------- ------- ------ ------
-------- ------- ------- ------ ------
TOTAL RETURN(b):............................... 7.70% (1.38)% 13.06% 12.73% 11.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................. $163,025 $13,661 $11,821 $6,057 $2,729
Average net assets (000)....................... $ 95,024 $13,454 $ 8,755 $4,024 $1,579
Ratios to average net assets:
Expenses, including distribution fees....... .69%(a) .74% .74% .74% .71%
Expenses, excluding distribution fees....... .59%(a) .64% .64% .64% .61%
Net investment income....................... 5.65%(a) 5.46% 5.78% 6.19% 6.61%
Portfolio turnover rate........................ 57% 49% 44% 45% 78%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes reinvestment of dividends.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-161
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
------------------------------------------------------------ Year
Year Ended August 31, Ended
------------------------------------------------------------ August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 11.71 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $11.71
-------- -------- -------- -------- -------- -------
Income from investment operations
Net investment income.......................... .61(a) .62 .65 .66 .67 .58(a)
Net realized and unrealized gain (loss) on
investment transactions...................... .20 (.83) .79 .67 .46 .20
-------- -------- -------- -------- -------- -------
Total from investment operations............ .81 (.21) 1.44 1.33 1.13 .78
Less dividends
Dividends from net investment income........... (.61) (.62) (.65) (.66) (.67) (.58)
-------- -------- -------- -------- -------- -------
Net asset value, end of period................. $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $11.91
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
TOTAL RETURN(b):............................... 7.27% (1.77)% 12.61% 12.32% 10.96% 7.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $163,013 $331,982 $358,607 $316,472 $293,942 $ 529
Average net assets (000)....................... $230,033 $350,564 $330,823 $303,016 $295,285 $ 325
Ratios to average net assets:
Expenses, including distribution fees....... 1.11%(a) 1.14% 1.14% 1.14% 1.11% 1.36%(a)
Expenses, excluding distribution fees....... .61%(a) .64% .64% .64% .61% .61%(a)
Net investment income....................... 5.30%(a) 5.06% 5.38% 5.79% 6.21% 5.05%(a)
Portfolio turnover rate........................ 57% 49% 44% 45% 78% 57%
<CAPTION>
August 1,
Through
August 31,
1994
<S> <C>
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $11.74
-----
Income from investment operations
Net investment income.......................... .04
Net realized and unrealized gain (loss) on
investment transactions...................... (.03)
-----
Total from investment operations............ .01
Less dividends
Dividends from net investment income........... (.04)
-----
Net asset value, end of period................. $11.71
-----
-----
TOTAL RETURN(b):............................... 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $ 142
Average net assets (000)....................... $ 42
Ratios to average net assets:
Expenses, including distribution fees....... 1.62%(c)
Expenses, excluding distribution fees....... .87%(c)
Net investment income....................... 5.17%(c)
Portfolio turnover rate........................ 49%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-162
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW YORK SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, New York
Series, as of August 31, 1995, 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, 1995 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, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-163
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Albany City Sch. Dist., Ser. 95, B.A.N. NR 4.50% 5/03/96 $ 2,000 $ 2,002,175
Amherst Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co., Ser.
85, S.O.T. A-1+(c) 4.35 11/01/95 3,100 3,100,000
Babylon, Gen. Oblig., Ser. 94B, F.R.W.D., A.M.B.A.C. VMIG1 3.20 9/06/95 4,700 4,700,000
Babylon Ind. Dev. Agcy. Rev., Res. Rec. Rev., Ser. 89,
F.R.D.D. A-1+(c) 3.50 9/01/95 6,500 6,500,000
Battery Park Auth. Rev., Ser. 90, F.R.W.D. A-1(c) 3.80 9/06/95 5,000 5,000,000
Commack Union Free Sch. Dist., Ser. 95, T.A.N. NR 4.25 6/28/96 2,500 2,509,916
East Islip Union Free Sch. Dist., Ser. 95, T.A.N. NR 4.50 6/28/96 7,110 7,144,911
Farmingdale Union Free Sch. Dist., Ser. 95, T.A.N. NR 4.25 6/27/96 3,675 3,684,313
Franklinville Central Sch. Dist., Ser 93, F.R.W.D. NR 3.75 9/07/95 4,250 4,250,000
Guilderland Ind. Dev. Agcy. Rev., Northeastern Ind'l.
Park, Ser. 93A, F.R.W.D. P-1 3.50 9/06/95 1,500 1,500,000
Monroe Cnty. Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co.,
Ser. 84, S.O.T. A-1+(c) 3.85 9/01/95 7,000 7,000,000
Mt. Pleasant Ind. Dev. Agcy. Rev., Poll. Ctrl. Rev., Gen.
Motors Corp. Proj., F.R.W.D. VMIG2 3.70 9/06/95 6,095 6,095,000
Nassau Cnty., Gen. Oblig., Ser. 95B, R.A.N. SP-1(c) 4.25 3/15/96 4,000 4,010,443
Nassau Cnty., Ser. 95F, B.A.N. MIG1 4.50 3/15/96 4,980 4,994,346
New York City, Gen. Oblig.,
Ser. 94A-4, F.R.D.D. VMIG1 3.45 9/01/95 1,800 1,800,000
Ser. 95, F.R.D.D., M.B.I.A. VMIG1 3.40 9/01/95 800 800,000
Ser. 95, T.A.N. MIG1 4.50 2/15/96 8,000 8,030,247
Ser. 95B-9, T.E.C.P. VMIG1 3.70 10/03/95 2,900 2,900,000
Ser. 95F-3, F.R.W.D. VMIG1 3.60 9/06/95 6,300 6,300,000
Ser. 95F-5, F.R.W.D. VMIG1 3.55 9/06/95 700 700,000
New York City Hsg. Dev. Corp.,
E.17th St. Property, Ser. 93A, F.R.D.D. A-1(c) 3.50 9/01/95 4,600 4,600,000
James Tower Proj., Ser. 94A, F.R.W.D. A-1(c) 3.40 9/06/95 4,200 4,200,000
Related E. 96th St. Proj., Ser. 90A, F.R.W.D. VMIG1 3.50 9/07/95 13,500 13,500,000
New York City Ind. Dev. Agcy. Rev.,
Japan Airlines, Ser. 91, F.R.D.D. A-1+(c) 3.65 9/01/95 15,200 15,200,000
Viola Bakeries, Ser. 90, F.R.W.D. VMIG1 3.60 9/06/95 2,650 2,650,000
New York City Mun. Water Fin. Auth., Water & Sew. Rev.,
Ser. 9-3, T.E.C.P. VMIG1 3.55 9/20/95 3,000 3,000,000
Ser. 9-3, T.E.C.P. P-1 3.75 10/13/95 1,500 1,500,000
Ser. 9-3, T.E.C.P. P-1 3.80 12/15/95 4,000 4,000,000
New York City Unltd. Tax Rev., JPM Putters, Ser. 33,
F.R.W.D., M.B.I.A. VMIG1 3.55 9/07/95 3,100 3,100,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-164
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York St., Gen. Oblig., Ser. P, T.E.C.P. P-1 3.75% 10/05/95 $ 4,800 $ 4,800,000
New York St. Dorm. Auth. Rev.,
Mem. Sloan Kettering, Ser. 89A, T.E.C.P. VMIG1 3.10 9/21/95 4,500 4,500,000
Miriam Osborn Memorial Home, F.R.W.D. VMIG1 3.30 9/06/95 4,700 4,700,000
Rockefeller Univ., Ser. 91A, F.R.W.D. Aaa 3.76 9/06/95 13,600 13,600,000
St. Francis Center at the Knolls, F.R.D.D. VMIG1 3.45 9/01/95 4,000 4,000,000
New York St. Energy Res. & Dev. Auth.,
Long Island Ltg. Co. Proj.,
Ser. 85B, A.M.T. VMIG1 4.70 3/01/96 7,500 7,500,000
Ser. 95A, F.R.W.D. VMIG1 3.30 9/06/95 5,000 5,000,000
New York St. Elec. & Gas Co., Ser. 84A, A.M.T. A-1+(c) 4.60 12/01/95 4,000 4,000,000
Niagara Mohawk Pwr. Corp.,
Ser. 85B, F.R.D.D. P-1 3.45 9/01/95 500 500,000
Ser. 85C, F.R.D.D. P-1 3.45 9/01/95 2,600 2,600,000
Ser. 86A, F.R.D.D. P-1 3.55 9/01/95 9,500 9,500,000
Pollution Control Rev.,
Ser. 85A, A.O.T. A-1+(c) 4.65 3/15/96 2,000 2,000,000
Ser. 85B, A.O.T. Aaa 4.10 10/15/95 3,250 3,250,000
New York St. Hsg. Fin. Auth., Liberty View Apts.,
Ser. 85A, F.R.W.D. VMIG1 3.60 9/06/95 5,400 5,400,000
New York St. Job Dev. Auth., F.R.M.D.,
Ser. 84D VMIG1 3.70 9/01/95 1,655 1,655,000
Ser. 84E VMIG1 3.70 9/01/95 3,900 3,900,000
Ser. 84F VMIG1 3.70 9/01/95 1,525 1,525,000
Ser. 86C VMIG1 3.80 9/01/95 1,185 1,185,000
New York St. Local Gov't. Assistance Corp.,
Ser. 95E, F.R.W.D. VMIG1 3.50 9/06/95 3,000 3,000,000
Ser. 95F, F.R.W.D. VMIG1 3.35 9/06/95 12,400 12,400,000
New York St. Power Auth. Rev., S.M.T. MIG1 3.85 9/01/95 10,000 10,000,000
New York St. Thruway Auth. Rev., Ser. C, F.R.W.D.,
F.G.I.C. NR 3.70 9/07/95 7,000 7,000,000
New York St. Urban Dev. Corp. Rev.,
Ser. 86 Aaa 8.00 1/01/96 2,500 2,540,609
Ser. B Aaa 8.00 1/01/96 5,000 5,156,148
Niagara Cnty. Ind. Dev. Agcy. Rev., Gen. Abrasive
Treibacher,
Ser. 91, F.R.W.D. P-1 3.65 9/06/95 4,600 4,600,000
Oswego Cnty. Ind. Dev. Agcy. Rev., Philip Morris Co., Ser.
92, F.R.W.D. P-1 3.65 9/06/95 6,300 6,300,000
Oyster Bay, Gen. Oblig.,
Ser. 94, B.A.N. NR 4.85 12/08/95 2,000 1,999,370
Ser. 94, B.A.N. NR 5.00 12/08/95 3,000 3,000,597
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-165
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Port Auth. of New York & New Jersey, Kiac Partners,
Ser. 3-2, F.R.W.D. VMIG1 3.40% 9/06/95 $ 6,200 $ 6,200,000
Ser. 3-3, F.R.W.D. VMIG1 3.40 9/06/95 4,500 4,500,000
Spec. Oblig. Rev.,
Ser.1, F.R.D.D. VMIG1 3.45 9/01/95 2,500 2,500,000
Ser. 93-1, F.R.W.D. NR 3.627 9/05/95 12,000 12,000,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 95,
T.E.C.P. A-1+(c) 3.60 9/11/95 7,700 7,700,000
Rockland Cnty., Ser. 95, B.A.N NR 5.50 3/08/96 2,000 2,009,239
Sayville Union Free Sch. Dist., Ser. 95, T.A.N. MIG1 4.25 6/27/96 6,500 6,526,710
St. Lawrence Cnty. Ind. Dev. Agcy. Rev.,
Clarkson Univ. Proj., Ser. 90, F.R.W.D. VMIG1 3.80 9/07/95 2,700 2,700,000
Reynolds Metals, F.R.D.D. P-1 3.35 9/01/95 1,000 1,000,000
Reynolds Metals, Ser. 95, F.R.W.D. VMIG1 3.50 9/06/95 3,000 3,000,000
United Nations Dev. Corp. Rev., Phase 2 & 3 Sr. Lien Aaa 7.875 7/01/96 4,000 4,204,061
Westchester Cnty., T.A.N. NR 5.00 12/14/95 7,000 7,009,650
Yates Cnty. Ind. Dev. Agcy. Rev., Clearplass Containers
Inc.,
Ser. 92A, F.R.W.D. A-1(c) 3.75 9/07/95 1,455 1,455,000
------------
Total Investments--102.0%
(amortized cost--$331,187,735(d)) 331,187,735
Liabilities in excess of other assets--(2.0)% (6,490,118)
------------
Net Assets--100% $324,697,617
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Annual Mandatory Tender (b).
A.O.T.--Annual Optional Tender (b).
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.M.D.--Floating Rate (Monthly) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
M.B.I.A.--Municipal Bond Insurance Association.
R.A.N.--Revenue Anticipation Note.
S.M.T.--Semi-Annual Mandatory Tender (b).
S.O.T.--Semi-Annual Optional Tender (b).
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of such
securities is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's rating.
(d) 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-166
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $331,187,735
Receivable for investments sold.............................................................................. 14,312,795
Receivable for Series shares sold............................................................................ 2,544,647
Interest receivable.......................................................................................... 2,064,757
Deferred expenses and other assets........................................................................... 7,167
------------
Total assets.............................................................................................. 350,117,101
------------
Liabilities
Payable for investments purchased............................................................................ 17,000,000
Payable for Series shares reacquired......................................................................... 8,009,423
Accrued expenses and other liabilities....................................................................... 143,748
Management fee payable....................................................................................... 137,878
Dividends payable............................................................................................ 111,421
Distribution fee payable..................................................................................... 15,414
Deferred trustee fees........................................................................................ 1,600
------------
Total liabilities......................................................................................... 25,419,484
------------
Net Assets................................................................................................... $324,697,617
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 3,246,976
Paid-in capital in excess of par.......................................................................... 321,450,641
------------
Net assets, August 31, 1995.................................................................................. $324,697,617
------------
------------
Net asset value, offering price and redemption price per share ($324,697,617 / 324,697,617
shares of beneficial interest issued and outstanding; unlimited number of shares authorized).............. $1.00
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-167
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................... $ 10,956,553
---------------
Expenses
Management fee............................. 1,463,815
Distribution fee........................... 365,954
Transfer agent's fees and expenses......... 137,000
Custodian's fees and expenses.............. 80,000
Reports to shareholders.................... 40,000
Registration fees.......................... 16,000
Audit fee.................................. 10,500
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 11,886
---------------
Total expenses.......................... 2,138,355
Less: custodian fee credit................. (35,560)
---------------
Net expenses............................ 2,102,795
---------------
Net investment income......................... 8,853,758
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 8,853,758
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income....... $ 8,853,758 $ 4,997,969
--------------- -------------
Net increase in net assets
resulting from
operations............... 8,853,758 4,997,969
--------------- -------------
Dividends to shareholders...... (8,853,758) (4,997,969)
--------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold..................... 1,099,424,608 956,452,031
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................ 8,564,122 4,807,678
Cost of shares reacquired... (1,052,364,310) (978,490,262)
--------------- -------------
Net increase (decrease) in
net assets from Series
share transactions....... 55,624,420 (17,230,553)
--------------- -------------
Total increase (decrease)...... 55,624,420 (17,230,553)
Net Assets
Beginning of year.............. 269,073,197 286,303,750
--------------- -------------
End of year.................... $ 324,697,617 $ 269,073,197
--------------- -------------
--------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-168
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 are 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 Series 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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $126,000 for the services of PMFS. As
of August 31, 1995, approximately $10,000 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-169
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains................................ .03 .02 .02 .03
Dividends and distributions to shareholders................................. (.03) (.02) (.02) (.03)
-------- -------- -------- --------
Net asset value, end of year................................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(a):............................................................ 3.06% 1.80% 1.80% 2.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................... $324,698 $269,073 $286,304 $249,785
Average net assets (000).................................................... $292,763 $280,492 $275,640 $248,557
Ratios to average net assets:
Expenses, including distribution fee...................................... .73% .77% .75% .76%
Expenses, excluding distribution fee...................................... .61% .64% .63% .63%
Net investment income..................................................... 3.02% 1.78% 1.75% 2.83%
<CAPTION>
1991
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................................... $ 1.00
Net investment income and net realized gains................................ .04
Dividends and distributions to shareholders................................. (.04)
--------
Net asset value, end of year................................................ $ 1.00
--------
--------
TOTAL RETURN(a):............................................................ 4.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................... $236,361
Average net assets (000).................................................... $245,494
Ratios to average net assets:
Expenses, including distribution fee...................................... .79%
Expenses, excluding distribution fee...................................... .66%
Net investment income..................................................... 4.23%
</TABLE>
- ---------------
(a) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-170
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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, including
the portfolio of investments, of Prudential Municipal Series Fund, New York
Money Market Series, as of August 31, 1995, 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, 1995 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, 1995, the results of
its operations, the changes in its net assets, and its financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-171
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--93.7%
- ------------------------------------------------------------------------------------------------------------------------------
Buncombe Cnty., Pub. Impvt. Bonds, Aa 6.90% 3/01/09 $ 1,000 (d) $ 1,101,560
City of Greensboro Enterprise Sys. Rev., Comb Ser. A A1 5.30 6/01/15 1,000 932,660
Charlotte, Cert. of Part.,
Conv. Fac. Proj., A.M.B.A.C. Aaa Zero 12/01/09 3,000 1,330,050
Conv. Fac. Proj., A.M.B.A.C. Aaa 5.00 12/01/21 4,000 3,561,040
Charlotte Mecklenberg Hosp., Hlth. Care Sys. Rev., Aa 6.25 1/01/20 750 763,553
Charlotte Wtr. & Swr., Aaa 6.20 6/01/17 1,500 1,546,530
Charlotte Wtr. & Swr., Aaa 5.90 2/01/19 1,000 1,019,110
Cleveland Cnty., Ser. 1993, F.G.I.C. Aaa 5.10 6/01/07 2,500 2,493,225
Concord Util. Sys. Rev., M.B.I.A. Aaa 5.50 12/01/14 1,000 978,990
Dare Cnty., Util. Sys. Rev., M.B.I.A. Aaa 5.75 6/01/14 500 495,415
Davidson Cnty. Aa 5.40 6/01/14 800 768,936
Durham Cnty., Pub. Impvt., Aaa 4.60 5/01/04 2,000 1,974,540
Fayetteville, Cert. of Part., San. Swr. & Pub. Impvt.,
A.M.B.A.C. Aaa 6.875 12/01/08 1,750 1,891,925
Gastonia, Gen. Oblig., Wtr. Sys. & St. Impvt., F.G.I.C. Aaa 5.25 4/01/09 1,625 1,597,066
Guilford Cnty., Pub. Impvt., Aa1 5.40 4/01/09 500 505,735
Lincoln Cnty. Gen. Oblig., Ref., F.G.I.C. Aaa 5.10 6/01/09 1,170 1,136,140
Martin Cnty. Ind. Facs. & Poll. Ctrl. Fin. Auth. Rev.,
Weyerhaueser Co. Proj., A2 8.50 6/15/99 200 228,156
Mecklenberg Cnty., Pub. Impvt., Aaa 5.00 4/01/08 1,000 988,000
New Hanover Cnty. Hosp. Rev., Regl. Med. Ctr. Proj.,
A.M.B.A.C. Aaa 4.75 10/01/23 1,600 1,328,048
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev., A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,018,470
Pwr. Sys. Rev., E.T.M. Aaa 6.50 1/01/18 1,995 2,200,326
Pwr. Sys. Rev., A 6.50 1/01/18 1,005 1,004,879
Pwr. Sys. Rev., Aaa 6.00 1/01/26 650 (d) 676,351
Pwr. Sys. Rev., Ser. A A 6.40 1/01/21 1,000 987,530
Pwr. Sys. Rev., Ser. A, A.M.B.A.C. Aaa 7.625 1/01/22 1,000 (d) 1,097,660
No. Carolina Gen. Oblig. Cap. Impvt., Ser. A Aaa 4.70 2/01/10 1,200 1,104,108
No. Carolina Hsg. Fin. Agcy., Sngl. Fam. Mtge. Rev., Ser. G Aa 7.80 3/01/21 790 843,309
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-172
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
No. Carolina Med. Care Comn., Hlth. Care Facs. Rev.,
Stanley Mem. Hosp. Proj., Baa1 7.80% 10/01/19 $ 650 $ 686,719
No. Carolina Med. Care Comn., Hosp. Rev.,
Alamance Hlth. Serv. Inc., F.S.A. Aaa 5.50 8/15/24 2,000 1,876,340
Annie Pen Mem. Hosp. Proj., Baa 7.50 8/15/21 1,000 1,028,880
Baptist Hosp. Proj., Aa 6.00 6/01/22 1,000 981,600
Carolina Medicorp Proj., Aa 6.00 5/01/21 1,500 1,500,555
Rex Hosp. Proj., A1 6.25 6/01/17 1,750 1,797,985
Scotland Mem. Hosp., Ser. 88 Baa 8.625 10/01/11 1,000 (d) 1,140,180
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev., A 5.25 1/01/09 1,000 955,580
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.00 1/01/10 1,250 1,302,475
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.72 1/01/12 2,000 (e) 1,810,000
Northern Hosp. Dist. Surry Cnty. Hlth. Care Facs. Rev.,
No. Carolina Hosp., Ba1 7.875 10/01/21 1,500 1,568,085
Piedmont Triad Arpt. Auth., M.B.I.A. Aaa 5.00 7/01/16 1,000 895,540
Puerto Rico Comnwlth.,
Ser. A, M.B.I.A. Aaa 6.25 7/01/10 1,240 1,301,603
Gen. Oblig., M.B.I.A. Aaa 5.50 7/01/13 1,750 1,701,438
Gen. Oblig., F.S.A. Aaa 7.723 7/01/20 1,300 (e) 1,272,375
Pub. Impt., M.B.I.A. Aaa 5.375 7/01/22 1,520 1,420,744
Puerto Rico Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev.,
Ser. 1-B, G.N.M.A. Aaa 7.65 10/15/22 665 708,943
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Facs.,
Upjohn Co. Proj., Aa3 7.50 12/01/23 500 554,905
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.617 1/25/07 1,000 (e) 996,250
Robeson Cnty., Aaa 7.80 6/01/09 500 d)(f) 557,655
Union Cnty. Wtr. & Swr., Solid Waste Rev., A1 6.50 4/01/07 850 912,653
Univ. of Puerto Rico Sys. Rev., Ser. M, M.B.I.A. Aaa 5.25 6/01/25 1,000 914,470
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund, Ser. A, NR 7.25 10/01/18 700 738,472
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91, NR 7.75 10/01/06 440 479,459
Wake Cnty. Hosp. Rev., M.B.I.A. Aaa 5.125 10/01/26 1,500 1,340,085
Winston Salem, Sngl. Fam. Mtge. Rev., A1 8.00 9/01/07 445 466,169
-----------
Total long-term investments (cost $60,882,863) 62,482,472
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-173
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--5.2%
Halifax Cnty. Ind. Facs. & Poll. Ctrl.,
Westmoreland L.G. & E. Partners, Ser. 93, F.R.D.D. A-1(c) 3.65% 9/01/95 $ 2,600 $ 2,600,000
Westmoreland-Hadson Roano, Ser. 91, F.R.D.D. CPS1 3.70 9/01/95 600 600,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 300 300,000
-----------
Total short-term investments (cost $3,500,000) 3,500,000
-----------
Total Investments--98.9%
(cost $64,382,863) 65,982,472
Other assets in excess of liabilities--1.1% 708,959
-----------
Net Assets--100% $66,691,431
-----------
-----------
</TABLE>
- ---------------
(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.R.D.D.--Flating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity date of these
securities are considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
(f) Entire principal amount 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-174
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $64,382,863)...................................................................... $65,982,472
Interest receivable........................................................................................... 973,437
Deferred expenses and other assets............................................................................ 2,390
-----------
Total assets............................................................................................... 66,958,299
-----------
Liabilities
Bank overdraft................................................................................................ 35,206
Payable for Fund shares reacquired............................................................................ 107,106
Dividends payable............................................................................................. 34,673
Due to Manager................................................................................................ 25,233
Accrued expenses.............................................................................................. 23,472
Due to broker-variation margin................................................................................ 20,313
Due to Distributors........................................................................................... 19,265
Deferred Trustees' fees....................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 266,868
-----------
Net Assets.................................................................................................... $66,691,431
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 59,607
Paid-in capital in excess of par........................................................................... 64,482,173
-----------
64,541,780
Accumulated net realized gain on investments............................................................... 497,855
Net unrealized appreciation on investments................................................................. 1,651,796
-----------
Net assets, August 31, 1995................................................................................... $66,691,431
-----------
-----------
Class A:
Net asset value and redemption price per share
($26,518,740 / 2,370,820 shares of beneficial interest issued and outstanding).......................... $11.19
Maximum sales charge (3% of offering price)................................................................ .35
-----------
Maximum offering price to public........................................................................... $11.54
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($40,119,072 / 3,585,058 shares of beneficial interest issued and outstanding).......................... $11.19
-----------
-----------
Class C:
Net asset value, offering price and redemption price per share
($53,619 / 4,791 shares of beneficial interest issued and outstanding).................................. $11.19
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-175
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................. $ 4,291,640
---------------
Expenses
Management fee, net waiver of $22,350.... 313,847
Distribution fee--Class A................ 15,244
Distribution fee--Class B................ 259,815
Distribution fee--Class C................ 241
Custodian's fees and expenses............ 90,000
Reports to shareholders.................. 56,000
Transfer agent's fees and expenses....... 42,000
Registration fees........................ 36,000
Audit fee................................ 11,000
Legal fees............................... 10,000
Trustee's Fees........................... 3,200
Miscellaneous............................ 11,614
---------------
Total expenses........................ 848,961
Less: custodian fee credit............... (8,596)
---------------
Net expenses.......................... 840,365
---------------
Net investment income....................... 3,451,275
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 914,738
Financial futures contract
transactions.......................... (239,013)
---------------
675,725
---------------
Net change in unrealized
appreciation/depreciation on:
Investments.............................. (172,563)
Financial futures contract............... 42,188
---------------
(130,375)
---------------
Net gain on investments..................... 545,350
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 3,996,625
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income........... $ 3,451,275 $ 3,711,296
Net realized gain on investment
transactions................. 675,725 276,064
Net change in unrealized
appreciation/depreciation of
investments.................. (130,375) (5,436,522)
----------- ------------
Net increase (decrease) in net
assets resulting from
operations................... 3,996,625 (1,449,162)
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A...................... (800,554) (109,844)
Class B...................... (2,649,245) (3,601,431)
Class C...................... (1,476) (21)
----------- ------------
(3,451,275) (3,711,296)
----------- ------------
Distributions from net realized
gains
Class A...................... -- (33,123)
Class B...................... -- (1,379,190)
----------- ------------
-- (1,412,313)
----------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares sold... 4,576,741 9,251,532
Net asset value of shares issued
in reinvestment of dividends
and distributions............ 1,814,783 2,641,848
Cost of shares reacquired....... (11,959,150) (10,898,454)
----------- ------------
Net increase (decrease) in net
assets from Series share
transactions................. (5,567,626) 994,926
----------- ------------
Total decrease..................... (5,022,276) (5,577,845)
Net Assets
Beginning of year.................. 71,713,707 77,291,552
----------- ------------
End of year........................ $66,691,431 $ 71,713,707
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-176
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of 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.
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.
- --------------------------------------------------------------------------------
B-177
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $22,350
($0.004 per share for Class A, B and C shares; .033% of average net assets). The
Series is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $12,600 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $97,900 and $100 in contingent deferred sales charges imposed upon
certain redemptions by Class B and Class C shareholders, respectively.
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended August 31,
1995, the Series incurred fees of approximately $28,400 for the services of
PMFS. As of August 31, 1995, 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 Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995 were $18,001,985 and
$27,107,030, 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,
1995, net unrealized appreciation for federal income tax purposes was $1,599,609
(gross unrealized appreciation--$2,305,476; gross unrealized
depreciation--$705,867).
As of August 31, 1995, the Series sold 500 financial futures contracts on the
Municipal Bond Index expiring in September 1995. The value at disposition of
such contracts is $5,774,062. The value of such contracts on August 31, 1995 was
$5,721,875, thereby resulting in an unrealized gain of $52,187.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the
- --------------------------------------------------------------------------------
B-178
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
first year. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase.
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, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 101,495 $ 1,107,658
Shares issued in reinvestment of
dividends......................... 40,041 444,345
Shares reacquired................... (219,838) (2,440,629)
---------- ------------
Net decrease in shares outstanding
before conversion................. (78,302) (888,626)
Shares issued upon conversion from
Class B........................... 2,245,102 24,527,190
---------- ------------
Net increase in shares
outstanding....................... 2,166,800 $ 23,638,564
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 81,115 $ 947,875
Shares issued in reinvestment of
dividends and distributions....... 8,558 98,262
Shares reacquired................... (33,172) (382,692)
---------- ------------
Net increase in shares
outstanding....................... 56,501 $ 663,445
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 313,714 $ 3,421,366
Shares issued in reinvestment of
dividends......................... 126,657 1,369,272
Shares reacquired................... (889,076) (9,511,942)
---------- ------------
Net decrease in shares outstanding
before conversion................. (448,705) (4,721,304)
Shares reacquired upon conversion
into Class A...................... (2,245,029) (24,527,190)
---------- ------------
Net decrease in shares
outstanding....................... (2,693,734) $(29,248,494)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 711,751 $ 8,293,464
Shares issued in reinvestment of
dividends and distributions....... 220,668 2,543,573
Shares reacquired................... (920,864) (10,515,762)
---------- ------------
Net increase in shares
outstanding....................... 11,555 $ 321,275
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 4,353 $ 47,717
Shares issued in reinvestment of
dividends......................... 105 1,166
Shares reacquired................... (592) (6,579)
---------- ------------
Net increase in shares
outstanding....................... 3,866 $ 42,304
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold......................... 924 $ 10,193
Shares issued in reinvestment of
dividends......................... 1 13
---------- ------------
Net increase in shares
outstanding....................... 925 $ 10,206
---------- ------------
---------- ------------
- ------------------
* Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-179
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.06 $12.04 $11.37 $10.86 $10.45
------- ------ ------ ------ ------
Income from investment operations
Net investment income......................... .60(a) .61 .65 .67 .67
Net realized and unrealized gain (loss) on
investment transactions..................... .13 (.76) .67 .51 .41
------- ------ ------ ------ ------
Total from investment operations............ .73 (.15) 1.32 1.18 1.08
------- ------ ------ ------ ------
Less distributions
Dividends from net investment income.......... (.60) (.61) (.65) (.67) (.67)
Distributions from net realized gains......... -- (.22) -- -- --
------- ------ ------ ------ ------
Total distributions......................... (.60) (.83) (.65) (.67) (.67)
------- ------ ------ ------ ------
Net asset value, end of year.................. $ 11.19 $11.06 $12.04 $11.37 $10.86
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):.............................. 6.86% (1.35)% 11.99% 11.12% 10.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $26,519 $2,256 $1,777 $ 917 $ 362
Average net assets (000)...................... $15,244 $2,067 $1,316 $ 612 $ 246
Ratios to average net assets:
Expenses, including distribution fees....... .98%(a) .88% .87% .91% .99%
Expenses, excluding distribution fees....... .88%(a) .78% .77% .81% .89%
Net investment income....................... 5.25%(a) 5.31% 5.55% 5.90% 6.24%
Portfolio turnover rate....................... 28% 17% 38% 36% 27%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-180
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- ----------
Year
Year Ended August 31, Ended
------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $11.06
------- ------- ------- ------- ------- -----
Income from investment operations
Net investment income......................... .55(a) .56 .60 .62 .63 .52(a)
Net realized and unrealized gain (loss) on
investment transactions..................... .13 (.77) .68 .51 .41 .13
------- ------- ------- ------- ------- -----
Total from investment operations............ .68 (.21) 1.28 1.13 1.04 .65
------- ------- ------- ------- ------- -----
Less distributions
Dividends from net investment income.......... (.55) (.56) (.60) (.62) (.63) (.52)
Distributions from net realized gains......... -- (.22) -- -- -- --
------- ------- ------- ------- ------- -----
Total distributions......................... (.55) (.78) (.60) (.62) (.63) (.52)
------- ------- ------- ------- ------- -----
Net asset value, end of period................ $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 10.86 $11.19
------- ------- ------- ------- ------- -----
------- ------- ------- ------- ------- -----
TOTAL RETURN(b):.............................. 6.44% (1.82)% 11.62% 10.64% 10.17% 6.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $40,119 $69,448 $75,515 $63,573 $59,875 $ 53
Average net assets (000)...................... $51,963 $73,606 $67,997 $60,751 $59,071 $ 32
Ratios to average net assets:
Expenses, including distribution fees....... 1.34%(a) 1.28% 1.27% 1.31% 1.39% 1.63%(a)
Expenses, excluding distribution fees....... .84%(a) .78% .77% .81% .89% .88%(a)
Net investment income....................... 5.10%(a) 4.89% 5.18% 5.58% 5.88% 4.59%(a)
Portfolio turnover rate....................... 28% 17% 38% 36% 27% 28%
<CAPTION>
<S> <C>
August 1,
1994(d)
through
August 31,
1994
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $11.09
-----
Income from investment operations
Net investment income......................... .04(c)
Net realized and unrealized gain (loss) on
investment transactions..................... (.03)
-----
Total from investment operations............ .01
-----
Less distributions
Dividends from net investment income.......... (.04)
Distributions from net realized gains......... --
-----
Total distributions......................... (.04)
-----
Net asset value, end of period................ $11.06
-----
-----
TOTAL RETURN(b):.............................. .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 10
Average net assets (000)...................... $ 5
Ratios to average net assets:
Expenses, including distribution fees....... 1.67%(c)
Expenses, excluding distribution fees....... .92%(c)
Net investment income....................... 5.06%(c)
Portfolio turnover rate....................... 17%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C Shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-181
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, North Carolina Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, North
Carolina Series, as of August 31, 1995, 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, 1995 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, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-182
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--95.5%
- ------------------------------------------------------------------------------------------------------------------------------
Akron, Bath & Copley Twnshps., Hosp. Dist. Rev., Summa
Health, Systems Proj., Ser. A A 5.75% 11/15/08 $ 3,465 $ 3,488,527
Akron, Gen. Oblig. A 10.50 12/01/04 200 281,188
Akron, Gen. Oblig., F.S.A. Aaa 4.50 12/01/12 645 544,309
Allen Cnty. Wtr. & Swr. Dist., A.M.B.A.C. Aaa 7.80 12/01/08 1,000(d)(f) 1,128,600
Bellefontaine City Sch. Dist.,
A.M.B.A.C. Aaa Zero 12/01/06 495 279,358
A.M.B.A.C. Aaa Zero 12/01/07 485 256,143
A.M.B.A.C. Aaa Zero 12/01/08 485 239,396
A.M.B.A.C. Aaa Zero 12/01/09 390 179,252
A.M.B.A.C. Aaa Zero 12/01/10 390 166,491
A.M.B.A.C. Aaa Zero 12/01/11 465 186,256
Berea City Sch. Dist., A.M.B.A.C. Aaa 5.00 12/15/17 4,375 3,939,863
Canton, Water Works Sys., Gen. Oblig. Aaa 5.85 12/01/15 700 706,020
Carroll Cnty. Econ. Dev. Rev., Great Trail Lake Ctr.,
F.H.A. NR 11.75 8/01/14 680 781,211
Cleveland City Sch. Dist., Gen. Oblig.,
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/05 490 301,879
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/06 400 231,556
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/07 315 170,752
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 12/01/08 550 271,480
Columbus Citation Hsg. Dev. Corp., Mtge. Rev., F.H.A. AA(b) 7.625 1/01/22 1,885 (d) 2,324,375
Columbus, Gen. Oblig., Mun. Arpt. No. 32 Aaa 7.15 7/15/06 435 476,495
Cuyahoga Cnty. Hosp. Rev., Meridia Health Sys. A1 6.25 8/15/24 1,500 1,503,690
Dayton, Gen. Oblig., M.B.I.A Aaa 7.00 12/01/07 480 559,406
Dublin City Sch. Dist., Franklin, Delaware & Union Co.,
A.M.B.A.C. Aaa Zero 12/01/05 1,000 600,970
East Cleveland Rev., Local Gov't. Fund Notes NR 7.90 12/01/97 860 924,672
Franklin Cnty. Hosp. Rev.,
Doctors Hosp. Rev. A 5.875 12/01/13 1,550 1,462,921
Doctors Hosp. Rev. A 5.875 12/01/23 3,000 2,762,100
Holy Cross Hlth. Sys., Ser. B, A.M.B.A.C. Aaa 7.65 6/01/10 2,500 (d) 2,877,125
Franklin Cnty. Pub. Impvt., Ser. 93 Aaa 5.375 12/01/20 1,690 1,590,949
Gahanna Jefferson City Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 445 204,531
Greene Cnty. Swr. Sys. Rev., A.M.B.A.C. Aaa Zero 12/01/08 450 222,120
Guam Pwr. Auth. Rev., Ser. A BBB(b) 6.75 10/01/24 3,110 3,175,434
Hamilton Cnty. Gas Sys. Rev., Ser. A, M.B.I.A. Aaa 4.75 10/15/23 3,250 2,749,565
Hilliard Ohio Sch. Dist.,
Cap. Apprec. Impvt., Ser. A Aaa Zero 12/01/09 2,855 1,312,215
Cap. Apprec. Impvt., Ser. A Aaa Zero 12/01/10 2,855 1,218,800
Kings Cnty. Local Sch. Dist., F.G.I.C. Aaa 5.50 12/01/21 5,230 5,019,231
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-183
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Logan Hocking Local Sch. Dist., Hocking, Perry & Vinton
Co.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 $ 650 $ 298,753
Lucas Cnty. Hosp. Rev.,
Toledo Hosp., Impvt. & Ref., M.B.I.A. Aaa 5.00% 11/15/13 2,000 1,796,460
Toledo Hosp., Impvt. & Ref., M.B.I.A. Aaa 5.00 11/15/22 4,250 3,713,820
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/05 1,000 608,480
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/07 500 267,525
Mount Vernon City Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 585,845
Newark Ltd. Tax Gen. Oblig., Wtr. Impvt., A.M.B.A.C. Aaa Zero 12/01/06 805 454,310
Ohio Mun. Elec. Generation Agcy., A.M.B.A.C. Aaa 5.375 2/15/24 2,000 1,850,780
Ohio St. Air Quality Dev. Auth. Rev., Poll. Ctrl.,
Edison Proj., Ser. A, F.G.I.C Aaa 7.45 3/01/16 3,750 4,137,787
Cleveland Co., Proj., F.G.I.C. Aaa 8.00 12/01/13 2,500 2,953,200
Ohio St. Bldg. Auth.,
Columbus St. Bldg. Proj., Ser. A A 7.75 10/01/07 750 (d) 841,492
Das Data Ctr. Proj. Aaa 6.00 10/01/08 615 657,620
St. Correctional Facs. A 5.90 10/01/07 2,450 2,593,276
St. Correctional Facs., Ser. A Aaa 8.00 8/01/06 600 (d) 664,014
St. Correctional Facs., Ser. A Aaa 8.00 8/01/08 500 (d) 553,345
Workers Comp. - W. Green Bldg. A A 4.75 4/01/14 2,740 2,359,304
Ohio St. Higher Edl. Fac. Comn. Rev. Aa 7.70 10/01/18 965 (d) 1,044,892
Ohio St. Higher Edl. Fac. Comn. Rev.,
Case Western Resv. Univ., Ser. A Aa 7.70 10/01/18 35 37,898
Case Western Resv. Univ., Ser. B Aa 6.50 10/01/20 750 818,895
Oberlin Coll. NR 7.375 10/01/14 1,000 (d) 1,127,770
Ohio St. Mtge. Rev., Ser. A, F.H.A. AAA(b) 8.15 8/01/17 3,500 3,817,345
Ohio St. Poll. Ctrl. Rev., Standard Oil Co. AA-(b) 6.75 12/01/15 1,350 1,547,181
Ohio St. Wtr. Dev. Auth. Rev., Ser. I Aaa 7.50 12/01/08 1,200 (d) 1,326,108
Ottawa Cnty. San. Sew. Sys. Rev., Danbury Proj.,
A.M.B.A.C. Aaa 7.375 10/01/14 1,000 (d) 1,131,190
Oxford Hosp. Facs. Rev., 1st Mtge., McCullough Hyde Mem. NR 8.00 5/01/17 1,445 1,490,532
Pickerington Local Sch. Dist.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/08 890 439,304
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 935 429,745
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/13 525 185,246
Puerto Rico Comnwlth., Aqueduct & Swr. Auth. Rev., Ser. A Baa 7.875 7/01/17 1,000 1,113,750
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev. Baa1 5.50 7/01/15 5,000 4,700,800
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev., Ser. W Baa1 5.25 7/01/20 1,005 897,535
Puerto Rico Comnwlth., Reg. Linked Bonds, M.B.I.A. Aaa 5.782 7/01/08 2,000 (e) 2,068,460
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O Baa1 5.00 7/01/12 1,720 1,539,142
Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth.
Facs., Ser. J Baa1 Zero 7/01/06 3,000 1,668,390
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-184
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Rural Lorain Cnty. Wtr. Auth. Res. Rev., A.M.B.A.C. Aaa 7.70% 10/01/08 $ 2,000 (d) $ 2,241,100
Scioto Cnty. Hosp. Fac. Rev., Portsmouth Proj., Ser. B,
M.B.I.A. Aaa 7.625 5/15/08 2,290 2,528,687
Sugarcreek Local Sch. Dist., F.G.I.C. Aaa Zero 12/01/08 500 243,010
Summit Cnty. Ind. Dev. Rev., Century Products, Gerber
Foods A2 7.75 11/01/05 3,250 3,445,163
Trumbull Cnty.,
Cap. Apprec. Aaa Zero 12/01/08 1,250 617,000
Cap. Apprec. Aaa Zero 12/01/09 1,250 574,525
Tuscarawas Cnty. Hosp. Fac. Rev., Union Hosp. Proj., Ser.
A Baa 6.50 10/01/21 200 186,716
Univ. of Puerto Rico Revs., Ref. Ser. M, M.B.I.A. Aaa 5.25 6/01/25 1,545 1,412,856
Univ. of Puerto Rico Revs., Cap. Apprec. Ref. Ser. N,
M.B.I.A., Aaa Zero 6/01/13 4,245 1,557,236
Univ. of Toledo, Gen. Receipts, M.B.I.A. Aaa 7.70 6/01/18 1,000 (d) 1,110,240
Virgin Islands Pub. Fin. Auth. Rev., Ser. A NR 7.25 10/01/18 1,000 1,054,960
Virgin Islands Terr., Hugo Ins. Claims Fund Prog., Ser. 91 NR 7.75 10/01/06 440 479,459
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 1,000 1,063,240
Woodmore Indpt. Sch. Dist., Gen. Oblig.,
A.M.B.A.C. Aaa Zero 12/01/05 490 294,475
A.M.B.A.C. Aaa Zero 12/01/06 480 270,893
------------
Total long-term investments (cost $102,265,313) 108,936,634
------------
SHORT-TERM INVESTMENTS--3.3%
Cuyahoga Cnty., Univ. Hosp. of Cleveland, Ser. 85,
F.R.D.D.
(cost $3,800,000) VMIG1 3.55 9/01/95 3,800 3,800,000
------------
Total Investments--98.8%
(cost $106,065,313; Note 4) 112,736,634
Other assets in excess of liabilities--1.2% 1,326,563
------------
Net Assets--100% $114,063,197
------------
------------
</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 (c).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) Standard & Poor's rating.
(c) For purposes of amortized cost valuation, the maturity date of such securities 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.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year
end.
(f) Pledged as initial margin on financial futures contracts.
</TABLE>
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-185
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $106,065,313).................................................................... $112,736,634
Interest receivable.......................................................................................... 1,729,925
Receivable for Series shares sold............................................................................ 4,846
Deferred expenses and other assets........................................................................... 3,072
------------
Total assets.............................................................................................. 114,474,477
------------
Liabilities
Payable for Series shares reacquired......................................................................... 139,123
Accrued expenses and other liabilities....................................................................... 102,276
Dividends payable............................................................................................ 58,627
Management fee payable....................................................................................... 43,272
Due to broker-variation margin............................................................................... 35,406
Distribution fee payable..................................................................................... 30,976
Deferred trustee's fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 411,280
------------
Net Assets................................................................................................... $114,063,197
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 95,644
Paid-in capital in excess of par.......................................................................... 107,058,560
------------
107,154,204
Accumulated net realized gain on investments.............................................................. 329,547
Net unrealized appreciation on investments................................................................ 6,579,446
------------
Net assets, August 31, 1995............................................................................... $114,063,197
------------
------------
Class A:
Net asset value and redemption price per share
($51,132,450 / 4,289,011 shares of beneficial interest issued and outstanding)......................... $11.92
Maximum sales charge (3.0% of offering price)............................................................. .37
Maximum offering price to public.......................................................................... $12.29
Class B:
Net asset value, offering price and redemption price per share
($62,804,534 / 5,264,771 shares of beneficial interest issued and outstanding)......................... $11.93
Class C:
Net asset value, offering price and redemption price per share
($126,213 / 10,580 shares of beneficial interest issued and outstanding)............................... $11.93
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-186
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
-----------------
<S> <C>
Income
Interest................................... $ 7,429,419
---------------
Expenses
Management fee, net of waiver of $38,218... 538,657
Distribution fee--Class A.................. 29,904
Distribution fee--Class B.................. 427,051
Distribution fee--Class C.................. 458
Custodian's fees and expenses.............. 89,000
Transfer agent's fees and expenses......... 76,000
Reports to shareholders.................... 75,000
Registration fees.......................... 40,000
Audit fee.................................. 11,000
Legal fee.................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 819
---------------
Total expenses.......................... 1,301,089
Less: custodian fee credit................. (8,848)
---------------
Net expenses............................ 1,292,241
---------------
Net investment income......................... 6,137,178
---------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,393,375
Financial futures transactions............. (586,229)
---------------
807,146
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................ 917,581
Financial futures contracts................ (49,375)
---------------
868,206
---------------
Net gain on investments....................... 1,675,352
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 7,812,530
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
----- ------
<S> <C> <C>
Operations
Net investment income.......... $ 6,137,178 $ 6,388,587
Net realized gain on investment
transactions................ 807,146 800,646
Net change in unrealized
appreciation (depreciation)
of investments.............. 868,206 (7,741,847)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 7,812,530 (552,614)
------------ ------------
Dividends to shareholders from net
investment income (Note 1)
Class A........................ (1,643,462) (258,026)
Class B........................ (4,490,813) (6,130,561)
Class C........................ (2,903) --
------------ ------------
(6,137,178) (6,388,587)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 6,780,605 16,655,835
Net asset value of shares
issued in reinvestment of
dividends................... 3,526,725 3,713,106
Cost of shares reacquired...... (20,943,985) (16,986,967)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (10,636,655) 3,381,974
------------ ------------
Total decrease.................... (8,961,303) (3,559,227)
Net Assets
Beginning of year................. 123,024,500 126,583,727
------------ ------------
End of year....................... $114,063,197 $123,024,500
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-187
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and 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
- --------------------------------------------------------------------------------
B-188
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $38,218
($0.004 per share; 0.03% of average daily net assets). The Series is not
required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $14,300 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $165,700 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders.
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 With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995 the Series incurred fees of approximately $53,000 for the services of
PMFS. As of August 31, 1995, 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 Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $42,529,053 and
$57,876,505, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1995
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation of investments for federal income tax purposes was
$6,671,321 (gross unrealized appreciation--$7,261,271; gross unrealized
depreciation--$589,950).
The Series utilized its capital loss carryforward of approximately $279,400 to
offset the Series net taxable gains realized and recognized in the fiscal year
ended August 31, 1995.
At August 31, 1995 the Series sold 17 financial futures contracts on the
Municipal Bond Index and sold 48 financial futures contracts on U.S. Treasury
Bonds both of which expire in September 1995. The value at sale of such
contracts was $7,285,063. The value of such contracts on August 31, 1995 was
$7,376,938, thereby resulting in an unrealized loss of $91,875.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
automatically convert to Class A shares on a
- --------------------------------------------------------------------------------
B-189
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value.
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, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 66,566 $ 777,944
Shares issued in reinvestment of
dividends......................... 76,044 896,433
Shares reacquired................... (429,023) (5,024,610)
---------- ------------
Net increase in shares outstanding
before conversion................. (286,413) (3,350,233)
Shares issued upon conversion from
Class B........................... 4,170,236 48,050,779
---------- ------------
Net decrease in shares
outstanding....................... 3,883,823 $ 44,700,546
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 163,929 $ 1,993,081
Shares issued in reinvestment of
dividends......................... 12,343 148,632
Shares reacquired................... (146,584) (1,788,120)
---------- ------------
Net increase in shares
outstanding....................... 29,688 $ 353,593
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 508,275 $ 5,874,263
Shares issued in reinvestment of
dividends......................... 228,476 2,627,480
Shares reacquired................... (1,391,757) (15,906,486)
---------- ------------
Net decrease in shares outstanding
before conversion................. (655,006) (7,404,743)
Shares reacquired upon conversion
into Class A...................... (4,166,740) (48,050,779)
---------- ------------
Net decrease in shares
outstanding....................... (4,821,746) $(55,455,522)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 1,210,935 $ 14,657,554
Shares issued in reinvestment of
dividends......................... 295,981 3,564,474
Shares reacquired................... (1,270,756) (15,198,847)
---------- ------------
Net increase in shares
outstanding....................... 236,160 $ 3,023,181
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 11,057 $ 128,398
Shares issued in reinvestment of
dividends......................... 237 2,812
Shares reacquired................... (1,160) (12,889)
---------- ------------
Net increase in shares
outstanding....................... 10,134 $ 118,321
---------- ------------
---------- ------------
August 1, 1994(a) through
August 31, 1994:
Shares sold......................... 446 $ 5,203
---------- ------------
---------- ------------
- ---------------
(a) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-190
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.72 $12.38 $11.69 $11.17 $10.71
------- ------ ------ ------ ------
Income from investment operations
Net investment income......................... .65(a) .66 .69 .70 .70
Net realized and unrealized gain (loss) on
investment transactions..................... .20 (.66) .69 .52 .46
------- ------ ------ ------ ------
Total from investment operations............ .85 -- 1.38 1.22 1.16
------- ------ ------ ------ ------
Less dividends
Dividends from net investment income.......... (.65) (.66) (.69) (.70) (.70)
------- ------ ------ ------ ------
Net asset value, end of year.................. $ 11.92 $11.72 $12.38 $11.69 $11.17
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):.............................. 7.59% (0.01)% 12.12% 11.26% 11.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $51,132 $4,749 $4,647 $2,095 $ 923
Average net assets (000)...................... $29,904 $4,733 $2,904 $1,289 $ 615
Ratios to average net assets:
Expenses, including distribution fees...... .83%(a) .84% .84% .81% .93%
Expenses, excluding distribution fees...... .73%(a) .74% .74% .71% .83%
Net investment income...................... 5.50%(a) 5.45% 5.73% 6.34% 6.34%
Portfolio turnover rate....................... 38% 20% 28% 37% 37%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes reinvestment of dividends.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-191
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ----------
----------------------------------------------------------- Year
Year Ended August 31, Ended
----------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 11.73
------- -------- -------- -------- -------- ----------
Income from investment operations
Net investment income......................... .60(a) .61 .65 .65 .65 .57(a)
Net realized and unrealized gain (loss) on
investment transactions..................... .20 (.65) .68 .52 .47 .20
------- -------- -------- -------- -------- ----------
Total from investment operations............ .80 (.04) 1.33 1.17 1.12 .77
------- -------- -------- -------- -------- ----------
Less dividends
Dividends from net investment income.......... (.60) (.61) (.65) (.65) (.65) (.57)
------- -------- -------- -------- -------- ----------
Net asset value, end of period................ $ 11.93 $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 11.93
------- -------- -------- -------- -------- ----------
------- -------- -------- -------- -------- ----------
TOTAL RETURN(b):.............................. 7.16% (0.33)% 11.58% 10.79% 10.74% 6.89%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $62,805 $118,270 $121,937 $102,199 $ 92,572 $ 126
Average net assets (000)...................... $85,410 $121,365 $110,053 $ 96,178 $ 90,437 $ 61
Ratios to average net assets:
Expenses, including distribution fees...... 1.22%(a) 1.24% 1.24% 1.21% 1.33% 1.49%(a)
Expenses, excluding distribution fees...... .72%(a) .74% .74% .71% .83% .74%(a)
Net investment income...................... 5.27%(a) 5.05% 5.33% 5.73% 5.94% 4.76%(a)
Portfolio turnover rate....................... 38% 20% 28% 37% 37% 38%
<CAPTION>
August 1,
Through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $11.75
-----
Income from investment operations
Net investment income......................... .05
Net realized and unrealized gain (loss) on
investment transactions..................... (.02)
-----
Total from investment operations............ .03
-----
Less dividends
Dividends from net investment income.......... (.05)
-----
Net asset value, end of period................ $11.73
-----
-----
TOTAL RETURN(b):.............................. 0.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $5
Average net assets (000)...................... $2
Ratios to average net assets:
Expenses, including distribution fees...... 2.28%(c)
Expenses, excluding distribution fees...... 1.53%(c)
Net investment income...................... 4.73%(c)
Portfolio turnover rate....................... 20%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-192
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report OHIO SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Ohio Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Ohio Series,
as of August 31, 1995, 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, 1995 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, Ohio Series, as of August 31, 1995, the results of its operations,
the changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-193
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--99.2%
- ------------------------------------------------------------------------------------------------------------------------------
Allegheny Cnty. Arpt. Rev.,
Greater Pittsburgh Int'l. Arpt., Ser. A, F.S.A. Aaa 6.60% 1/01/04 $ 1,000 $ 1,089,080
Greater Pittsburgh Int'l. Arpt., F.S.A. Aaa 5.625 1/01/23 1,230 1,154,171
Allegheny Cnty. Higher Ed. Bldg. Auth. Rev.,
Robert Morris Coll., M.B.I.A. Aaa 7.00 6/15/08 1,000 1,089,450
Allegheny Cnty. Hosp. Dev. Auth. Rev.,
Allegheny Gen. Hosp., Ser. S, M.B.I.A. Aaa 6.25 9/01/20 1,750 1,779,540
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/14 2,000 647,220
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/16 2,000 568,020
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/18 2,000 499,620
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/19 4,000 935,440
Presbyterian Univ. Hosp., Ser. C, M.B.I.A. Aaa 7.625 7/01/15 1,100 1,219,108
West Penn. Hosp. Hlth. Ctr. NR 8.50 1/01/20 2,000 2,211,780
Allegheny Cnty. Ind. Dev. Auth. Rev., USX Proj., Ser. A Baa3 6.70 12/01/20 4,500 4,554,315
Allegheny Cnty. Residential Fin. Auth., Mtge. Rev.,
G.N.M.A.,
Ser. F Aaa 9.00 6/01/17 375 407,831
Ser. Q Aaa 7.40 12/01/22 970 1,032,051
Allegheny Cnty. San. Auth. Swr. Rev., F.G.I.C., Aaa Zero 12/01/05 2,620 1,544,909
Ser. A Aaa Zero 6/01/06 1,640 930,667
Allegheny Cnty., Ser. C-37, M.B.I.A. Aaa 7.30 12/01/10 1,500(c) 1,696,530
Allentown Wtr. Impvt., A.M.B.A.C. Aaa 5.65 7/15/10 1,430 1,445,687
Beaver Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Ohio Edison Proj., Ser. A, F.G.I.C. Aaa 7.75 9/01/24 1,150 1,291,600
Berks Cnty. Ind. Dev. Auth. Rev., Lutheran Home Proj. NR 6.875 1/01/23 1,500 1,459,305
Berks Cnty. Mun. Auth. Hosp. Rev.,
Reading Hosp. Med. Ctr. Proj. M.B.I.A. Aaa 5.70 10/01/14 1,250 1,228,538
Bethlehem Auth. Wtr. Rev., M.B.I.A. Aaa 5.20 11/15/21 3,000 2,728,710
Boyertown Area Sch. Dist., Ser. B, A.M.B.A.C. Aaa 5.25 2/01/17 2,000 1,856,700
Bucks Cnty. Wtr. & Swr. Auth. Rev.,
Neshaminy Interceptor Swr. Sys., F.G.I.C. Aaa Zero 12/01/15 2,175 651,804
Butler Cnty. Hosp. Auth. Rev., North Hills, Passavant
Hosp.,
Ser. A, C.G.I.C. AAA(b) 7.00 6/01/22 1,000 1,088,130
Chester Cnty., Gen. Oblig., Ser. B Aa 5.625 11/15/16 2,090 2,020,946
Chester Upland Sch. Auth., Sch. Rev. A(b) 6.375 9/01/21 1,000 1,017,180
Dauphin Cnty. Gen. Auth. Rev., B.I.G Aaa 7.40 1/01/06 1,000 1,060,570
Delaware Cnty., Gen. Oblig. Aa 5.50 10/01/15 3,000 2,866,470
Delaware Cnty. Auth. Rev.,
Crozer Chester Med. Ctr., Ser. A,B,C; M.B.I.A. Aaa 7.15 12/15/05 2,550 2,908,836
Villanova Univ., M.B.I.A. Aaa 5.50 8/01/23 3,000 2,840,460
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-194
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Recovery Proj.,
Ser. A A1 8.10% 12/01/13 $ 2,000 $ 2,099,700
Delaware River Jt. Toll Bridge Comm. Rev., F.G.I.C. Aaa 6.00 7/01/18 5,500 5,526,950
Doylestown Hosp. Auth. Rev., Pine Run Retirement, Ser. A NR 7.20 7/01/23 3,180 3,141,904
Emmaus Gen. Auth. Rev., Local Gov't. Bond, B.I.G.
Ser. B Aaa 8.00 5/15/18 1,000(e) 1,108,450
Ser. C Aaa 7.90 5/15/18 1,250 1,381,100
Ser. E Aaa 7.90 5/15/18 2,000 2,209,760
Ser. F Aaa 7.90 5/15/18 1,600 1,767,808
Erie Higher Ed. Bldg. Auth., College Rev.,
Mercyhurst Coll. Proj. BBB(b) 7.85 9/15/19 1,000(c) 1,130,700
Mercyhurst Coll. Proj., Ser. B BBB(b) 5.75 3/15/23 3,250 2,798,932
Harrisburg Auth. Lease Rev., Green Cnty. Prison Proj.,
F.G.I.C. Aaa 6.625 6/01/13 1,500 1,645,800
Harrisburg Redev. Auth. Rev., Cap. Impvt., Ser. A,
F.G.I.C. Aaa 7.875 11/02/16 900 970,200
Lancaster Cnty. Solid Waste Mgmt. Auth. Rev.,
Res. Rec. Sys. Landfill Rev. A1 7.875 12/15/09 500 514,595
Res. Rec. Sys. Landfill Rev. A1 7.75 12/15/04 750 775,800
Res. Rec. Sys. Rev. A1 8.375 12/15/04 1,000 1,061,060
Langhorne Manor Boro. Higher Ed. & Hlth. Auth Rev.,
Lower Bucks Hosp. Ba1 7.35 7/01/22 3,275 3,120,322
Latrobe Ind. Dev. Auth. Coll. Rev.,
St. Vincent Coll. Proj. Baa1 6.75 5/01/14 1,800 1,838,178
St. Vincent Coll. Proj. Baa1 6.75 5/01/24 1,500 1,520,280
Lehigh Cnty. Gen. Purpose Auth. Revs.,
Horizon Hlth. Sys. Inc., Ser. A NR 8.25 7/01/13 500 550,575
St. Lukes Hosp. of Bethlehem Proj., A.M.B.A.C. Aaa 5.30 11/15/06 750 761,978
St. Lukes Hosp. of Bethlehem Proj., A.M.B.A.C. Aaa 5.30 11/15/07 1,000 1,004,380
Lower Pottsgrove Township Auth. Swr. Rev.,
Montgomery Cnty., A.M.B.A.C.,
Ser. A Aaa Zero 11/01/13 1,155 397,389
Ser. A Aaa Zero 11/01/15 1,185 356,887
Luzerne Cnty. Ind. Dev. Auth. Exmpt. Facs. Rev., Gas &
Water,
Ser. B Baa3 7.125 12/01/22 6,000 6,139,560
Montgomery Cnty. Higher Ed. & Hlth. Auth. Hosp. Rev.,
Jeanes Hlth. Sys. Proj. BBB(b) 8.625 7/01/07 4,000(c) 4,764,000
Montgomery Cnty. Ind. Dev. Auth. Rev., Poll. Ctrl.,
Philadelphia Elec. Co., Ser. A Baa1 7.60 4/01/21 1,000 1,080,830
Res. Recovery AA-(b) 7.50 1/01/12 2,000 2,147,420
Montgomery Cnty. Redev. Auth., Multi-family Hsg., Ser. A NR 6.50 7/01/25 2,000 1,913,680
Northampton Cnty. Higher Ed. Auth. Rev.,
Lehigh Univ., M.B.I.A. Aaa 7.10 11/15/09 1,500 1,658,025
Moravian Coll. BBB-(b) 8.20 6/01/11 2,095 2,493,699
Moravian Coll., A.M.B.A.C. Aaa 6.25 7/01/11 2,195 2,350,472
Northeastern Hosp. & Ed. Auth. Coll. Rev., Kings Coll.
Proj., Ser. B BBB(b) 6.00 7/15/18 3,235 3,084,087
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-195
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Northumberland Cnty. Ind. Dev. Auth. Rev., Roaring Creek
Wtr. NR 6.375% 10/15/23 $ 1,000 $ 929,270
Pennsylvania Econ. Dev. Auth.,
Macmillan Ltd. Partnership Proj. Baa2 7.60 12/01/20 3,000 3,240,990
Wastewater Treatment Rev., Sun Co. R & M Proj., Ser. A Baa1 7.60 12/01/24 4,500 4,899,015
Pennsylvania Hsg. Fin. Agcy.,
Sngl. Fam. Mtge. Aa 7.80 10/01/20 2,930 3,122,940
Sngl. Fam. Mtge. Aa 7.604 4/01/25 1,050(d) 977,813
Sngl. Fam. Mtge., Ser. X Aa 8.10 10/01/10 780 830,583
Sngl. Fam. Mtge., Ser. X Aa 8.15 4/01/24 420 432,474
Pennsylvania Intergovernmental Cooperation Auth.,
Spec.Tax Rev., M.B.I.A. Aaa 5.60 6/15/15 4,000 3,856,040
Pennsylvania St. Cert. of Part., F.S.A. Aaa 6.25 11/01/06 1,900 2,039,954
Pennsylvania St. Higher Edl. Facs. Auth. Rev.,
Allegheny Coll. BBB+(b) 6.00 11/01/22 2,000 1,863,380
Hahnemann Univ. Proj., M.B.I.A. Aaa 7.20 7/01/09 1,500 1,652,880
La Salle Univ., M.B.I.A. Aaa 7.70 5/01/10 1,100 1,215,456
Med. Coll. of Penn., Ser. A Baa 8.375 3/01/11 355 384,458
Med. Coll. of Penn., Ser. A Baa 7.50 3/01/14 2,350 2,403,956
St. Sys, Ser. J, A.M.B.A.C. Aaa 5.625 6/15/19 1,520 1,459,245
Thomas Jefferson Univ. AAA(b) 8.00 1/01/18 1,250(c) 1,379,750
Pennsylvania St. Ind. Dev. Auth., Econ. Rev., A.M.B.A.C. Aaa 5.50 1/01/14 4,250 4,065,295
Pennsylvania St. Tpke. Comn. Rev.,
Ser. D, F.G.I.C. Aaa 7.625 12/01/17 1,375(c) 1,544,579
Ser. K Aaa 7.50 12/01/19 4,650(c) 5,301,418
Philadelphia Arpt. Rev., Philadelphia Arpt. Sys. Baa 9.00 6/15/15 2,000 2,068,200
Philadelphia Gas Wks. Rev.,
Ser. 13 Baa1 7.70 6/15/11 215 251,337
Ser. 13 Baa1 7.20 6/15/98 500 532,670
Ser. 13 Baa1 7.30 6/15/99 625 676,231
Ser. 13 Aaa 7.70 6/15/21 3,430(c) 4,025,037
Philadelphia Hosps. & Higher Ed. Fac. Auth. Rev.,
Childrens' Hosp. Proj., Ser. A Aa 5.00 2/15/21 2,000 1,715,100
Childrens' Seashore House, Ser. A A-(b) 7.00 8/15/12 1,000 1,052,200
Childrens' Seashore House, Ser. A A-(b) 7.00 8/15/17 1,000 1,052,200
Grad. Hlth. Systems Baa1 7.25 7/01/18 2,750 2,854,802
Grad. Hlth. Systems, Ser. A Baa1 6.25 7/01/18 1,000 922,460
Philadelphia Ind. Dev. Rev.,
Inst. for Cancer Research Proj., Ser. B AA-(b) 7.25 7/01/10 5,770 6,230,504
Nat'l. Brd. of Med. Examiners Proj. A+(b) 6.75 5/01/12 5,000 5,253,450
Philadelphia Mun. Auth. Rev., F.G.I.C. Aaa 5.625 11/15/14 2,000 1,937,080
Philadelphia Mun. Auth. Rev., F.G.I.C. Aaa 5.625 11/15/18 1,500 1,440,750
Philadelphia Pkg. Auth. Rev., Arpt. Pkg., A.M.B.A.C. Aaa 7.375 9/01/18 2,200 2,435,092
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-196
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Philadelphia Redev. Auth. Rev.,
Home Impvt. Loan, Ser. A A 7.40% 6/01/08 $ 350 $ 376,162
Home Impvt. Loan, Ser. A A 7.375 6/01/03 355 371,167
Philadelphia Sch. Dist., Gen. Oblig., Ser. A, M.B.I.A. Aaa 5.85 7/01/09 1,710 1,765,729
Philadelphia Wtr. & Swr. Rev., M.B.I.A. Aaa 6.25 8/01/08 2,000 2,175,960
Philadelphia Wtr. & Swr. Rev., M.B.I.A. Aaa 5.25 6/15/23 2,775 2,519,228
Philadelphia Wtr. & Swr. Rev., M.B.I.A.,
Ser. 15 Aaa Zero 10/01/02 7,900 5,616,347
Ser. 15 Aaa 6.875 10/01/06 700 764,498
Pittsburgh Stadium Auth. Rev., F.G.I.C. Aaa 7.50 10/15/01 500 529,915
Pittsburgh Urban Redev. Auth., Mtge. Rev., Ser. B A1 8.30 4/01/17 795 858,179
Pittsburgh Wtr. & Swr., Ser. A. F.G.I.C. Aaa 5.60 9/01/22 3,000 2,886,990
Pottsgrove Sch. Dist., Gen. Oblig., Ser. A, A.M.B.A.C. Aaa 5.30 10/15/14 2,000 1,885,220
Pottstown Boro. Auth., Swr. Rev., F.G.I.C. Aaa Zero 11/01/03 1,200 802,992
Puerto Rico Comnwlth.,
Gen. Oblig., M.B.I.A. Aaa 5.40 7/01/07 1,500 1,548,930
Gen. Oblig., M.B.I.A. Aaa 5.50 7/01/08 3,340 3,442,171
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 4,030 4,677,419
Gen. Oblig., M.B.I.A. Aaa 7.00 7/01/10 720 835,668
Gen. Oblig., F.S.A. Aaa 7.682 7/01/20 4,250(d) 4,159,688
Gen. Oblig. AAA(b) 7.70 7/01/20 5,250(c) 6,087,742
Puerto Rico Elec. Pwr. Auth., Pwr. Rev., Ser. S Baa1 7.00 7/01/06 1,800 2,030,526
Puerto Rico Hsg. Bank & Fin. Agcy. Baa 5.125 12/01/05 750 720,173
Puerto Rico Hsg. Bank & Fin. Agcy. Baa 5.25 12/01/06 2,000 1,914,600
Sayre Hlth. Care Facs. Auth. Rev., A.M.B.A.C.,
Cap. Asset Fin. Prog. C Aaa 7.70 12/01/13 500 565,695
Cap. Asset Fin. Prog. C Aaa 7.625 12/01/15 1,000 1,127,700
Scranton Pkg. Auth. Rev. A+(b) 8.125 9/15/14 1,600 1,777,840
Scranton-Lackawanna Hlth. & Welfare Auth. Rev.,
Univ. Of Scranton Proj., Ser. C A-(b) 7.50 6/15/06 1,000(c) 1,141,670
Univ. Of Scranton Proj., Ser. C A-(b) 6.50 3/01/15 2,250 2,288,138
So. Fork Mun. Auth. Hosp. Rev., Lee Hosp. Proj., Ser. A A-(b) 5.50 7/01/23 2,500 2,143,000
Swarthmore Boro. Gen. Auth. Rev., Pennsylvania Coll. Rev. A-(b) 7.25 9/15/10 600(c) 676,980
Unity Township Mun. Auth., Gtd. Swr. Rev., A.M.B.A.C.,
Capital Appreciation Aaa Zero 11/01/11 1,035 405,554
Capital Appreciation Aaa Zero 11/01/12 1,035 380,166
Capital Appreciation Aaa Zero 11/01/13 1,035 356,102
Venango Cnty. Gen. Oblig., Ser. B, F.G.I.C. Aaa 5.25 7/15/18 2,265 2,097,345
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund BBB(b) 7.70 10/01/04 1,000 1,095,820
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 1,950 2,057,172
Virgin Islands Terr., Hugo Ins. Claims Fund Prog., Ser. 91 NR 7.75 10/01/06 1,055 1,149,612
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-197
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Washington Cnty. Auth. Lease Rev., Mun. Fac., Shadyside
Hosp., Ser. C-1D, A.M.B.A.C. Aaa 7.45% 12/15/18 $ 2,900(c) $ 3,338,944
Washington Cnty. Hosp. Auth. Rev., Monongahela Valley
Hosp. A 6.75 12/01/08 2,750 2,810,225
York Cnty. Solid Waste & Refuse Auth. Ind. Dev. Rev., Res.
Rec. Proj., Ser. C AA-(b) 8.20 12/01/14 1,000 1,103,990
------------
Total long-term investments (cost $237,031,397) 251,671,055
SHORT-TERM INVESTMENT--0.4%
Schuylkill Cnty. Ind. Dev. Auth., Westwood Energy Pty.,
Ser. 85, F.R.D.D. (cost $900,000) P1 3.60 9/01/95 900 900,000
------------
Total Investments--99.6%
(cost $237,931,397; Note 4) 252,571,055
Other assets in excess of liabilities--0.4% 1,094,434
------------
Net Assets--100% $253,665,489
------------
------------
</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).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at the period end.
(e) Pledged as initial margin on financial futures contracts.
(f) For purposes of amortized cost valuation, the maturity date of these
securities are considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-198
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $237,931,397).................................................................... $252,571,055
Cash......................................................................................................... 72,184
Interest receivable.......................................................................................... 3,846,415
Receivable for investments sold.............................................................................. 1,346,313
Receivable for Series shares sold............................................................................ 66,608
Deferred expenses and other assets........................................................................... 10,420
------------
Total assets.............................................................................................. 257,912,995
------------
Liabilities
Payable for investments purchased............................................................................ 3,480,977
Payable for Series shares reacquired......................................................................... 371,999
Dividends payable............................................................................................ 134,934
Management fee payable....................................................................................... 95,759
Distribution fee payable..................................................................................... 89,757
Accrued expenses............................................................................................. 62,324
Due to broker-variation margin............................................................................... 10,156
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 4,247,506
------------
Net Assets................................................................................................... $253,665,489
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 240,517
Paid-in capital in excess of par.......................................................................... 240,634,533
------------
240,875,050
Accumulated net realized loss on investments.............................................................. (1,792,188)
Net unrealized appreciation on investments................................................................ 14,582,627
------------
Net assets, August 31, 1995.................................................................................. $253,665,489
------------
------------
Class A:
Net asset value and redemption price per share
($50,696,456 / 4,806,652 shares of beneficial interest issued and outstanding)......................... $10.55
Maximum sales charge (3.0% of offering price)............................................................. .33
Maximum offering price to public.......................................................................... $10.88
Class B:
Net asset value, offering price and redemption price per share
($202,633,238 / 19,213,229 shares of beneficial interest issued and outstanding)....................... $10.55
Class C:
Net asset value, offering price and redemption price per share
($335,795 / 31,838 shares of beneficial interest issued and outstanding)............................... $10.55
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-199
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES PENNSYLVANIA SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................... $16,725,737
---------------
Expenses
Management fee, net of waiver of $84,187... 1,182,799
Distribution fee--Class A.................. 30,092
Distribution fee--Class B.................. 1,115,411
Distribution fee--Class C.................. 1,672
Transfer agent's fees and expenses......... 187,000
Reports to shareholders.................... 156,000
Custodian's fees and expenses.............. 109,000
Registration fees.......................... 36,000
Audit fee.................................. 11,000
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 30,887
---------------
Total expenses.......................... 2,873,061
Less custodian fee credit.................. (17,396)
---------------
Net expenses............................ 2,855,665
---------------
Net investment income......................... 13,870,072
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 504,596
Financial futures contracts................ (1,012,601)
---------------
(508,005)
---------------
Net change in unrealized appreciation on:
Investments................................ 2,796,532
Financial futures contracts................ 82,281
---------------
2,878,813
---------------
Net gain on investments....................... 2,370,808
---------------
Net Increase in Net Assets
Resulting from Operations..................... $16,240,880
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income.......... $ 13,870,072 $ 14,193,314
Net realized loss on investment
transactions................ (508,005) (7,799)
Net change in unrealized
appreciation/depreciation of
investments................. 2,878,813 (17,783,224)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 16,240,880 (3,597,709)
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A..................... (1,734,468) (569,122)
Class B..................... (12,124,140) (13,624,192)
Class C..................... (11,464) --
------------ ------------
(13,870,072) (14,193,314)
------------ ------------
Distributions to shareholders
from net realized gain on
investment transactions
Class A..................... -- (97,328)
Class B..................... -- (2,598,620)
------------ ------------
-- (2,695,948)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 19,260,042 46,954,314
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 7,902,987 9,903,212
Cost of shares reacquired...... (44,342,507) (40,990,785)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (17,179,478) 15,866,741
------------ ------------
Total decrease.................... (14,808,670) (4,620,230)
Net Assets
Beginning of year................. 268,474,159 273,094,389
------------ ------------
End of year....................... $253,665,489 $268,474,159
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-200
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
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
seventeen 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
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. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures. The Series invests in financial futures
contracts in order to hedge its existing portfolio securities or securities the
Series intends to purchase against fluctuations in value caused by changes in
prevailing interest rates. Should interest rates move unexpectedly, the Series
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts, interest
rates and the underlying hedged assets.
Securities Transactions and 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: The Series accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
During the fiscal year the Series decreased paid-in capital and decreased
accumulated net realized losses by $15,560 compared to amounts previously
reported through August 31, 1994. Current year 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
- --------------------------------------------------------------------------------
B-201
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
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. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $84,187
($0.004 per share for Class A, B and C shares: .03% of average net assets). The
Series is not required to reimburse PMF for such waiver.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $32,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $427,000 and $600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
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 with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $129,000 for the services of
PMFS. As of August 31, 1995, 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 Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995 were $47,151,056 and
$59,872,361, respectively.
The cost basis of investments for federal income tax purposes was $237,963,978
and, accordingly, as of August 31, 1995 net unrealized appreciation of
investments for federal income tax purposes is $14,607,077 (gross unrealized
appreciation--$16,370,301; gross unrealized depreciation--$1,763,224).
At August 31, 1995 the Series sold 25 financial futures contracts on the
Municipal Bond Index expiring September 1995. The value at disposition of such
contracts was $2,803,906. The value of such contracts on August 31, 1995 was
$2,860,937 thereby resulting in an unrealized loss of $57,031.
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1995 of approximately $1,452,000 which expires in 2003.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
- --------------------------------------------------------------------------------
B-202
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
The Series will elect to treat net capital losses of approximately $231,500
incurred in the ten month period ended August 31, 1995 as being incurred in the
next fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series offers both Class A, Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 3%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
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, 1995 and August 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 299,314 $ 3,060,202
Shares issued in reinvestment of
dividends........................ 94,611 981,883
Shares reacquired.................. (429,242) (4,432,346)
---------- ------------
Net decrease in shares outstanding
before conversion................ (35,317) (390,261)
Shares issued upon conversion from
Class B.......................... 3,820,038 39,180,753
---------- ------------
Net increase in shares
outstanding...................... 3,784,721 $ 38,790,492
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 319,034 $ 3,481,332
Shares issued in reinvestment of
dividends and distributions...... 36,716 396,391
Shares reacquired.................. (167,304) (1,791,755)
---------- ------------
Net increase in shares
outstanding...................... 188,446 $ 2,085,968
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995
Shares sold........................ 1,556,154 $ 15,906,587
Shares issued in reinvestment of
dividends........................ 676,394 6,911,570
Shares reacquired.................. (3,929,313) (39,845,757)
---------- ------------
Net decrease in shares outstanding
before conversion................ (1,696,765) (17,027,600)
Shares reacquired upon conversion
into Class A..................... (3,820,038) (39,180,753)
---------- ------------
Net decrease in shares
outstanding...................... (5,516,803) $(56,208,353)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 3,979,725 $ 43,382,782
Shares issued in reinvestment of
dividends and distributions...... 879,774 9,506,821
Shares reacquired.................. (3,665,816) (39,199,030)
---------- ------------
Net increase in shares
outstanding...................... 1,193,683 $ 13,690,573
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 28,444 $ 293,253
Shares issued in reinvestment of
dividends........................ 926 9,534
Shares reacquired.................. (6,201) (64,404)
---------- ------------
Net increase in shares
outstanding...................... 23,169 $ 238,383
---------- ------------
---------- ------------
August 1, 1994(a) through
August 31, 1994:
Shares sold........................ 8,669 $ 90,200
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-203
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended August 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------ ------ ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 10.42 $ 11.21 $10.55 $ 9.96 $ 9.60
------- ------- ------ ------ ------
Income from investment operations
Net investment income......................... .60(a) .59 .62 .62 .62(a)
Net realized and unrealized gain (loss) on
investment transactions.................... .13 (.68) .70 .59 .39
------- ------- ------ ------ ------
Total from investment operations........... .73 (.09) 1.32 1.21 1.01
------- ------- ------ ------ ------
Less distributions
Dividends from net investment income.......... (.60) (.59) (.62) (.62) (.62)
Distributions from net realized gains......... -- (.11) (.04) -- (.03)
------- ------- ------ ------ ------
Total distributions........................ (.60) (.70) (.66) (.62) (.65)
------- ------- ------ ------ ------
Net asset value, end of year.................. $ 10.55 $ 10.42 $11.21 $10.55 $ 9.96
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):.............................. 7.35% (.82)% 12.86% 12.44% 10.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $50,696 $10,651 $9,342 $5,908 $3,521
Average net assets (000)...................... $30,092 $10,315 $7,354 $4,439 $2,366
Ratios to average net assets:
Expenses, including distribution fees...... .80%(a) .75% .78% .81% .83%(a)
Expenses, excluding distribution fees...... .70%(a) .65% .68% .71% .74%(a)
Net investment income...................... 5.76%(a) 5.52% 5.69% 5.99% 6.32%(a)
Portfolio turnover rate....................... 19% 22% 13% 25% 62%
</TABLE>
- ---------------
(a) Net of expense subsidy/management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment dividends
and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-204
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ----------
------------------------------------------------------------ Year
Year Ended August 31, Ended
------------------------------------------------------------ August 31,
1995 1994 1993 1992 1991 1995
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $10.42
-------- -------- -------- -------- -------- ------
Income from investment operations
Net investment income......................... .56(a) .55 .57 .58 .58(a) .53(a)
Net realized and unrealized gain (loss) on
investment transactions.................... .13 (.68) .71 .58 .39 .13
-------- -------- -------- -------- -------- ------
Total from investment operations........... .69 (.13) 1.28 1.16 .97 .66
-------- -------- -------- -------- -------- ------
Less distributions
Dividends from net investment income.......... (.56) (.55) (.57) (.58) (.58) (.53)
Distributions from net realized gains......... -- (.11) (.04) -- (.03) --
-------- -------- -------- -------- -------- -----
Total distributions........................ (.56) (.66) (.61) (.58) (.61) (.53)
-------- -------- -------- -------- -------- ------
Net asset value, end of period................ $ 10.55 $ 10.42 $ 11.21 $ 10.54 $ 9.96 $10.55
-------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- ------
TOTAL RETURN(b):.............................. 6.92% (1.22)% 12.54% 11.92% 10.39% 6.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $202,633 $257,732 $263,752 $206,028 $170,162 $ 336
Average net assets (000)...................... $223,082 $266,594 $229,955 $186,113 $146,591 $ 223
Ratios to average net assets:
Expenses, including distribution fees...... 1.17%(a) 1.15% 1.18% 1.21% 1.23%(a) 1.44%(a)
Expenses, excluding distribution fees...... .67%(a) .65% .68% .71% .74%(a) .69%(a)
Net investment income...................... 5.44%(a) 5.11% 5.29% 5.59% 5.94%(a) 5.14%(a)
Portfolio turnover rate....................... 19% 22% 13% 25% 62% 19%
<CAPTION>
August 1,
Through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $10.44
-----
Income from investment operations
Net investment income......................... .04
Net realized and unrealized gain (loss) on
investment transactions.................... (.02)
-----
Total from investment operations........... .02
-----
Less distributions
Dividends from net investment income.......... (.04)
Distributions from net realized gains......... --
-----
Total distributions........................ (.04)
-----
Net asset value, end of period................ $10.42
-----
-----
TOTAL RETURN(b):.............................. .14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 90
Average net assets (000)...................... $ 1
Ratios to average net assets:
Expenses, including distribution fees...... 2.00%(c)
Expenses, excluding distribution fees...... 1.25%(c)
Net investment income...................... 8.51%(c)
Portfolio turnover rate....................... 22%
</TABLE>
- ---------------
(a) Net of expense subsidy/management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment dividends
and distributions. Total returns for periods of less than a full year are
not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-205
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Pennsylvania Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Pennsylvania
Series, as of August 31, 1995, 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, 1995 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, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-206
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a stratgegy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart show the long-term performance of various asset classes and the
rate of inflation.
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in each Prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
(1)
LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)
LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)
LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
(5)
SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of a long-term U.S. Treasury Bond from 1926-1994. Yield represents that of
an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-3
